U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission file number 0-27354
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Impax Laboratories, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 65-0403311
- ------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30831 Huntwood Avenue - Hayward, California 94544
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(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code (215) 289-2220
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- ----
The number of shares outstanding of the registrant's common stock as of
July 22, 2002 was approximately 47,759,581.
- ------------- ----------
IMPAX LABORATORIES, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
PART I. FINANCIAL INFORMATION
PAGE
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Item 1. Financial Statements:
Balance Sheets as of June 30, 2002, and December 31, 2001........................................... 3
Statements of Operations for the Three Months and Six Months Ended June 30, 2002 and 2001........... 4
Statement of Cash Flows for the Six Months Ended June 30, 2002 and 2001............................. 5
Notes to Financial Statements....................................................................... 6
Item 2. Management's Discussions and Analysis of Financial Condition and Results of Operations.................... 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk................................................. 12
PART II. OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings......................................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders....................................................... 15
Item 6. Exhibits and Reports on Form 8-K.......................................................................... 16
Signatures .................................................................................................... 16
PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
IMPAX LABORATORIES, INC.
BALANCE SHEETS
(unaudited)
(in thousands, except share and per share data)
June 30, December 31,
2002 2001
------ ------
ASSETS
Current assets:
Cash and cash equivalents $ 20,486 $ 15,044
Short-term investments 7,914 20,422
Accounts receivable, net 4,561 3,523
Inventory 4,688 3,488
Prepaid expenses and other assets 1,447 1,506
-------- --------
Total current assets 39,096 43,983
Property, plant and equipment, net 31,398 24,334
Investments and other assets 578 574
Goodwill, net 27,574 27,574
Intangibles, net 955 1,147
-------- --------
Total assets $ 99,601 $ 97,612
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 232 $ 232
Accounts payable 4,304 3,996
Accrued expenses 4,977 3,575
Deferred revenues - current 66 0
-------- --------
Total current liabilities 9,579 7,803
Refundable deposit 23,752 22,876
Long-term debt 6,752 6,868
Deferred revenues 2,684 117
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42,767 37,664
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Mandatorily redeemable convertible Preferred Stock:
Series 2 mandatorily redeemable convertible Preferred Stock, $0.01 par
value 75,000 shares outstanding at June 30, 2002,
and December 31, 2001, redeemable at $100 per share 7,500 7,500
-------- --------
7,500 7,500
-------- --------
Stockholders' equity:
Redeemable convertible Preferred Stock -- --
Common stock, $0.01 par value, 75,000,000 shares authorized and
47,750,632 and 46,680,047 shares issued and outstanding
at June 30, 2002, and December 31, 2001, respectively 477 466
Additional paid-in capital 131,015 122,957
Unearned compensation (497) (673)
Accumulated deficit (81,661) (70,302)
-------- --------
Total stockholders' equity 49,334 52,448
-------- --------
Total liabilities and stockholders' equity $ 99,601 $ 97,612
======== ========
The accompanying notes are an integral part of these financial statements.
IMPAX LABORATORIES, INC.
STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands, except share and per share data)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -------------------------
2002 2001 2002 2001
------ ------ ------ ------
Net sales $ 5,145 $ 1,136 $ 8,577 $ 2,908
Cost of sales 3,982 1,992 7,121 4,268
------- ------- ------- -------
Gross margin (loss) 1,163 (856) 1,456 (1,360)
Research and development 4,476 2,415 7,366 5,010
Less: Teva reimbursements (138) -- (304) --
------- ------- ------- -------
Research and development, net 4,338 2,415 7,062 5,010
Selling 646 806 1,304 1,123
General and administrative* 1,939 2,236 4,109 4,395
Other operating income (expense), net 21 39 (9) 64
------- ------- ------- -------
Net loss from operations (5,739) (6,274) (11,028) (11,824)
Interest income 167 161 402 423
Interest expense** (366) (37) (733) (87)
------- ------- -------- --------
Net loss $(5,938) (6,150) $(11,359) $(11,488)
======= ======= ======== ========
Net loss per share (basic and diluted) $ (0.13) $ (0.15) $ (0.24) $ (0.31)
======= ======= ======== ========
Weighted average common shares outstanding 47,306,741 41,138,673 47,061,223 37,565,128
========== ========== ========== ==========
* Includes amortization of goodwill of $876,000 in the quarter ended June 30,
2001 and $1,752,000 in the six months ended June 30, 2001. There was no
amortization of goodwill in 2002.
** The total interest expense of $366K for the quarter ended June 30, 2002,
which was reduced by $222K in capitalized interest, included interest of
$438K on the refundable deposit from TEVA. The total interest of $733K for
the six months ended June 30, 2002, which was reduced by $394K in capitalized
interest, included interest of $876K on the refundable deposit from TEVA.
The accompanying notes are an integral part of these financial statements.
IMPAX LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Six Months Ended
June 30,
2002 2001
------ ------
Cash flows from operating activities:
Net loss $(11,359) $(11,488)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 1,032 3,057
Non-cash compensation charge (warrants and options) 176 260
Change in assets and liabilities:
Accounts receivable (1,038) (964)
Inventory (1,200) 74
Prepaid expenses and other assets 55 (314)
Accounts payable and other liabilities 4,083 (75)
-------- --------
Net cash used in operating activities (8,251) (9,450)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (6,768) (4,285)
Sale and maturities of short-term investments 12,508 7,780
-------- --------
Net cash provided by investing activities 5,740 3,495
-------- --------
Cash flows from financing activities:
Notes payable repayments -- (1,538)
Additions to long-term debt borrowings -- 24,470
Repayment of long-term debt (116) (71)
Proceeds from sale of common stock 7,500 17,325
Proceeds from issuance of common stock (upon exercise of
stock options and warrants) 569 327
-------- --------
Net cash provided by financing activities 7,953 40,513
-------- --------
Net increase in cash and cash equivalents 5,442 34,588
-------- --------
Cash and cash equivalents, beginning of the period $ 15,044 $ 11,448
-------- --------
Cash and cash equivalents, end of the period $ 20,486 $ 46,006
======== ========
Cash paid for interest $ 251 $ 87
======== ========
The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS
Six Months Ended
June 30, 2002 and June 30, 2001
Note 1. The financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations; however, the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
financial statements be read in conjunction with the financial statements and
the notes thereto included in the Company's latest annual report on Form 10-K.
The results of operations for the six months ended June 30, 2002, are not
necessarily indicative of the results of operations expected for the year ending
December 31, 2002.
Impax Laboratories, Inc.'s ("IMPAX", "we" "us" or "the Company") main business
is the development, manufacturing and marketing of specialty prescription
pharmaceutical products utilizing its own formulation expertise and unique drug
delivery technologies. The Company is currently marketing twenty-four products,
has seventeen applications under review with the Food and Drug Administration
(FDA), ten of these filings being made under Paragraph IV of the Hatch-Waxman
Amendments, and four of these seventeen ANDAs have received tentative approval
from the FDA. The Company has approximately eighteen additional products under
development.
We have experienced, and expect to continue to experience, operating losses and
negative cash flow from operations and our future profitability is uncertain. We
do not know whether or when our business will ever be profitable or generate
positive cash flow, and our ability to become profitable or obtain positive cash
flow is uncertain. We have generated minimal revenues to date and have
experienced operating losses and negative cash flow from operations since our
inception. As of June 30, 2002, our accumulated deficit was $81,661,000 and we
had outstanding indebtedness in an aggregate principal amount of $30,736,000. To
remain operational, we must, among other things:
o continue to obtain sufficient capital to fund our operations;
o obtain from the FDA approval for our products;
o prevail in patent infringement litigations in which we are involved;
o successfully launch our new products; and
o comply with the many complex governmental regulations that deal with
virtually every aspect of our business activities.
We expect to incur significant operating expenses, particularly research and
development and sales and marketing expenses, for the foreseeable future in
order to execute our business plan. We, therefore, anticipate that such
operating expenses, as well as planned capital expenditures, will constitute a
material use of our cash resources.
Although our existing cash, cash equivalents, and short-term investments are
expected to decline during 2002, we believe that our existing balances will be
sufficient to meet our operational plan for at least the next twelve months. We
may, however, seek additional financing in order to primarily fund our business
plan in the brand name pharmaceutical area. We are currently negotiating a $25
million revolving line of credit to partially fund our working capital
requirements. However, we may be unable to finalize the revolving line of credit
on terms acceptable to us, or at all.
To date, the Company has funded its research and development and other operating
activities through equity and debt financings.
Note 2. The major highlights of the six months ended June 30, 2002, operational
activity included the following:
o In February 2002, the FDA tentatively approved the Company's ANDA for a
generic version of Tricor(R) (Fenofibrate), Micronized. Tricor(R) is
marketed by Abbott Laboratories ("Abbott"). The tentative approval covers
67mg, 134mg, and 200mg capsules. Final approval is contingent upon the
earlier of (1) the settlement of pending patent infringement litigation
brought by Abbott against IMPAX, or (2) the expiration of the 30 month stay
process under the Hatch-Waxman Amendments, and the expiration of any
generic marketing exclusivity. Final approval is also dependent upon FDA's
evaluation of any new information it receives subsequent to this tentative
approval.
o In February 2002, the FDA accepted our filing of an ANDA for a generic
version of Allegra-D(R) (Fexofenadine HCl/Pseudoephedrine HCl) Extended
Release 60mg/120mg Tablets (IMPAX's eighth Paragraph IV filing). In March
2002, Aventis Pharmaceuticals Inc., which markets Allegra-D(R) for the
relief of symptoms associated with seasonal rhinitis in adults and children
12 years of age and older, filed a lawsuit against us in the United States
District Court in Delaware alleging patent infringement related to our
subject filing. U.S. sales of Allegra-D(R) Extended Release Tablets were
over $350 million in 2001.
o Also in February 2002, the FDA accepted our filing of an ANDA for a generic
version of Oxycontin(R) (Oxycodone HCl) Extended Release 80mg Tablets
(IMPAX's ninth Paragraph IV filing). Purdue Pharma markets Oxycontin(R) for
the management of moderate-to-severe pain. U.S. sales of Oxycontin(R)
Extended Release 80mg Tablets were over $400 million in 2001. In April
2002, Purdue Pharma L.P. filed a lawsuit against us alleging patent
infringement related to IMPAX's earlier filing of an ANDA for a generic
version of Oxycontin(R) (Oxycodone HCl) Extended Release 80mg Tablets.
o In March 2002 and June 2002, under the terms of a strategic alliance
announced in June 2001, we issued an aggregate of 883,068 shares of IMPAX
common stock to a subsidiary of Teva Pharmaceutical Industries Ltd.
("TEVA"), for net proceeds to the Company of approximately $7.5 million.
Together with the shares sold in 2001, TEVA purchased a total of 1,462,083
shares, or approximately 3% of total shares of common stock outstanding. A
Form S-3 Registration Statement registering these shares was filed with the
Securities and Exchange Commission (SEC) on July 23, 2002.
o Also in March 2002, the FDA approved our ANDA to market Fludrocortisone
Acetate Tablets, a generic version of Florinef(R), which is marketed by
Monarch Pharmaceuticals, a division of King Pharmaceuticals, as partial
replacement for primary and secondary adrenocortical insufficiency in
Addison's disease. Florinef(R) sales in 2001 were approximately $27
million. Our Global Pharmaceuticals division began marketing the product
immediately.
o While the Company submitted its first brand filing as an ANDA in April
2002, based on discussions with FDA regarding the file, it subsequently
withdrew the application and is planning to resubmit it as an NDA.
Additionally, good progress has been made in formulation development for
three other brand products with IND filings scheduled during the next 12
months for at least two of the three products.
o In May 2002, the FDA tentatively approved our ANDAs for generic versions of
Claritin-D(R)24-Hour (loratadine/ pseudoephedrine sulfate, 10mg/240mg)
Extended Release Tablets and Claritin-D(R)12-Hour (loratadine/
pseudoephedrine sulfate, 5mg/120mg) Extended Release Tablets. Both products
are marketed by Schering-Plough Corporation for the relief of symptoms of
seasonal allergic rhinitis (hay fever). Final approval is contingent upon
the earlier of (1) the resolution of pending patent-infringement litigation
brought by Schering-Plough against IMPAX, or (2) the expiration of the
30-month stay process under the Hatch-Waxman Amendments; and the expiration
of any generic marketing exclusivity for the Claritin-D(R) 24-Hour. Final
approval is also dependent upon FDA's evaluation of any new information
subsequent to these tentative approvals. In March 2002, Schering-Plough
announced that it filed with the FDA an application to switch all of the
prescription Claritin formulations to over-the-counter (OTC). If
Schering-Plough's application is approved by the FDA, we may not be able to
market our generic versions of the Claritin formulations as prescription
drugs.
o In June 2002, we signed a semi-exclusive Development, License and Supply
Agreement with Wyeth, acting through its Wyeth Consumer Healthcare
Division, relating to our generic versions of Claritin-D(R) 12-Hour
(loratadine/pseudoephedrine sulfate, 5mg/120mg) Extended Release Tablets
and Claritin-D(R) 24-Hour (loratadine/pseudoephedrine sulfate, 10mg/240mg)
Extended Release Tablets for the OTC market.
o Also in June 2002, we signed a non-exclusive Licensing, Contract
Manufacturing and Supply Agreement with Schering-Plough Corporation
relating to Claritin-D(R) 12-Hour (loratadine/pseudoephedrine sulfate)
Extended Release Tablets, 5mg/120mg for the OTC market. This agreement does
not resolve the ongoing patent litigation between Schering-Plough and IMPAX
to decide whether we may market our generic Claritin-D(R) 12-Hour product
or manufacture such a product for companies other than Schering-Plough
prior to the expiration of a Schering-Plough patent in 2004.
Note 3. The construction of the new manufacturing facility in Hayward,
California was completed this quarter. The total construction cost was
approximately $12,339,900, including capitalized interest cost of approximately
$595,000; approximately $1,136,000 of retention was paid in July 2002.
Note 4. In July 2002, we began marketing a new product, Minocycline
Hydrochloride Capsules, USP 75mg, a generic version of Dynacin(R), marketed by
Medicis Pharmaceutical Corporation, and we also reintroduced the Minocycline
Hydrochloride Capsules, USP 100mg, a generic version of Minocin(R), marketed by
Lederle Pharmaceutical Division of Wyeth Corporation. Both products are
antibiotics and are prescribed for the treatment of infectious diseases and as
adjunctive therapy in severe acne.
Note 5. In July 2002, the FDA tentatively approved our ANDA for a generic
version of Rilutek(R) (Riluzole) 50mg tablets. Aventis Pharmaceutical Products,
Inc. markets Rilutek(R) for the treatment of amyotrophic lateral sclerosis
(ALS), also known as Lou Gehrig's disease. According to IMS Health, U.S. sales
of Rilutek(R) were $35 million for the twelve months ended March 31, 2002.
Final approval is contingent upon the expiration of Orphan Drug Exclusivity on
December 12, 2002, as well as FDA's evaluation of any new information subsequent
to this tentative approval.
We filed a declaratory judgment complaint against Aventis in the United States
District Court for the District of Delaware to obtain a judicial declaration of
patent invalidity and/or non-infringement with respect to Patent No. 5,527,814,
which was recently listed by Aventis in the FDA "Orange Book".
Note 6. The Company adopted SFAS 142 effective January 1, 2002. The Company no
longer amortizes goodwill and will perform an annual impairment assessment of
goodwill. With the adoption of SFAS 142, the Company completed a transitional
impairment assessment of goodwill as of January 1, 2002 and there was no
impairment. The Company recorded $876,000 as goodwill amortization expense for
the three months ended June 30, 2001 and $1,752,000 for the six months ended
June 30, 2001, or the equivalent of $(0.02) and $(0.05) per (basic and diluted)
share, respectively. The Company's net loss and net loss per share,
respectively, would have been $5,274,000 and $(0.13) per (basic and diluted)
share for the three months ended June 30, 2001 and $9,736,000 and $(0.26) per
(basic and diluted) share for the six months ended June 30, 2001, had the
nonamortization provisions of SFAS 142 been effective at the beginning of fiscal
2001.
Note 7. The Company reports both basic earnings per share, which is based on the
weighted-average number of common shares outstanding, and diluted earnings per
share, which is based on the weighted-average number of common shares
outstanding and all dilutive potential common shares outstanding. Because the
Company had net losses in each of the years presented, only the weighted average
of common shares outstanding has been used to calculate both basic earnings per
share and diluted earnings per share, as inclusion of the potential common
shares would be anti-dilutive.
Mandatorily redeemable convertible stock of 1,500,000 shares of common stock (on
an as-converted basis), warrants to purchase 2,773,266 shares of common stock,
and stock options to purchase 4,396,190 shares of common stock were outstanding
at June 30, 2002, but were not included in the calculation of diluted earnings
per share, as their effect would be anti-dilutive.
Note 8. Our inventory consists of the following:
June 30, December 31,
2002 2001
----------- ----------
(in thousands)
Raw materials......................................................... $ 1,952 $ 2,004
Finished goods........................................................ 2,886 1,634
------- -------
4,838 3,638
Less: Reserve for obsolete inventory and net realizable value........ 150 150
------- -------
$ 4,688 $ 3,488
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information in this report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements are
based upon current expectations that involve risks and uncertainties. Any
statements contained herein that are not statements of historical facts may be
deemed to be forward-looking statements. For example, words such as "may,"
"will," "should," "estimates," "predicts" "potential," "continue," "strategy,"
"believes," "anticipates," "plans," "expects," "intends," and similar
expressions are intended to identify forward-looking statements. Our actual
results and the timing of certain events may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause or
contribute to such a discrepancy include, but are not limited to, risks and
uncertainties, including the difficulty of predicting FDA filings and approvals,
acceptance and demand for new pharmaceutical products, the impact of competitive
products and pricing, new product development and launch, reliance on key
strategic alliances, uncertainty of patent litigation filed against us,
availability of raw materials, the regulatory environment, fluctuations in
operating results and other risks detailed from time to time in the Company's
filings with the Securities and Exchange Commission.
Critical Accounting Policies
Accounting For and Recoverability of Goodwill
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"). The provisions of SFAS
142 are summarized in Note 6 to the interim consolidated financial statements.
The new criteria for recording intangible assets separate from goodwill did not
require us to reclassify any of our intangible assets. Our transitional
impairment test indicated that there was no impairment of goodwill upon adoption
of SFAS 142. Assuming the nonamortization provisions of SFAS 142 had been
effective at the beginning of fiscal 2001, the net loss for the three and six
months ended June 30, 2001 would have decreased by $876,000 and $1,752,000
respectively, representing the reduction in goodwill amortization.
Effective January 1, 2002, we evaluate the recoverability and measure the
possible impairment of our goodwill under SFAS 142. The impairment test is a
two-step process that begins with the estimation of the fair value of the
reporting unit. The first step screens for potential impairment, and the second
step measures the amount of the impairment, if any. Our estimate of fair value
considers publicly available information regarding the market capitalization of
our Company, as well as (i) publicly available information regarding comparable
publicly-traded companies in the generic pharmaceutical industry, (ii) the
financial projections and future prospects of our business, including its growth
opportunities and likely operational improvements, and (iii) comparable sales
prices, if available. As part of the first step to assess potential impairment,
we compare our estimate of fair value for the Company to the book value of our
consolidated net assets. If the book value of our consolidated net assets is
greater than our estimate of fair value, we would then proceed to the second
step to measure the impairment, if any. The second step compares the implied
fair value of goodwill with its carrying value. The implied fair value is
determined by allocating the fair value of the reporting unit to all of the
assets and liabilities of that unit as if the reporting unit had been acquired
in a business combination, and the fair value of the reporting unit was the
purchase price paid to acquire the reporting unit. The excess of the fair value
of the reporting unit over the amounts assigned to its assets and liabilities is
the implied fair value of goodwill. If the carrying amount of the reporting unit
goodwill is greater than its implied fair value, an impairment loss will be
recognized in the amount of the excess.
On a quarterly basis, we perform a review of our business to determine if events
or changes in circumstances have occurred which could have a material adverse
effect on the fair value of the Company and its goodwill. If such events or
changes in circumstances were deemed to have occurred, we would consult with one
or more valuation specialists in estimating the impact on our estimate of fair
value. We believe the estimation methods are reasonable and reflective of common
valuation practices.
General
We are a technology based, specialty pharmaceutical company applying formulation
and development expertise, as well as our drug delivery technology, to the
development of controlled-release and niche generics, in addition to the
development of branded products. We currently market twenty-four generic
products and have seventeen ANDA filings pending at the FDA that address more
than $9.0 billion in U.S. branded product sales in 2001. Ten of these filings
were made under Paragraph IV of the Hatch-Waxman Amendments and four of these
seventeen ANDAS have received tentative approval from the FDA. We have
approximately eighteen additional products under development.
Results of Operations
We have incurred net losses in each year since our inception. We had an
accumulated deficit of $81,661,000 at June 30, 2002.
THREE MONTHS ENDED JUNE 30, 2002, COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Overview
The net loss for the three months ended June 30, 2002, was $5,938,000 as
compared to $6,150,000 for the three months ended June 30, 2001, including
goodwill amortization expense of approximately $876,000. The increase in the net
loss of $664,000, excluding 2001 goodwill amortization expense, was primarily
due to higher research and development expenses and infrastructure costs related
to the new manufacturing facility in Hayward, California, and expansion of our
sales and marketing capabilities, partially offset by higher revenues.
Revenues
The net sales for the three months ended June 30, 2002, were $5,145,000 as
compared to $1,136,000 for the same period in 2001. The higher sales were
primarily due to the sale of two newly approved products: Terbutaline Sulfate
Tablets (launched in June 2001) and Fludrocortisone Acetate Tablets (launched in
March 2002).
Cost of Sales
The cost of sales for the three months ended June 30, 2002, was $3,982,000 as
compared to $1,992,000 for the same period in 2001. The overall increase in cost
of sales was primarily due to material costs as a result of increased net sales.
Gross Margin
Due primarily to higher net sales which offset the increase in the
infrastructure costs related to the new manufacturing facility in Hayward,
California, we realized a gross margin of $1,163,000 for the three months ended
June 30, 2002, as compared to a negative gross margin of $856,000 for the same
period in 2001.
Research and Development Expenses
The research and development expenses for the three months ended June 30, 2002,
were $4,476,000 less reimbursement of $138,000 by TEVA under the strategic
alliance agreement signed in June 2001, as compared to $2,415,000 for the same
period in 2001. The increase of approximately 85% over 2001 was primarily due to
higher personnel, material and biostudy costs.
Selling Expenses
The selling expenses for the three months ended June 30, 2002, were $646,000 as
compared to $806,000 for the same period in 2001. The decrease in selling
expenses as compared to 2001 was primarily due to a $200,000 expense related to
the TEVA agreement in 2001, partially offset by additional personnel,
advertising, and freight costs.
General and Administrative Expenses
The general and administrative expenses for the three months ended June 30,
2002, were $1,939,000 as compared to $2,236,000 for the same period in 2001,
including goodwill amortization expenses of approximately $876,000. The increase
in 2002 general and administrative expenses as compared to 2001, excluding 2001
goodwill amortization expense, was primarily due to higher personnel costs,
professional fees and insurance premiums.
Interest Income
Interest income for the three months ended June 30, 2002, was $167,000 as
compared to $161,000 for the same period in 2001, primarily due to higher cash
equivalents and short term investments, partially offset by lower interest
rates.
Interest Expense
Interest expense for the three months ended June 30, 2002, was $366,000 as
compared to $37,000 for the same period in 2001, primarily due to the $438,000
of interest accrued on the refundable deposit from TEVA and the interest payable
on the two Cathay Bank loans. The 2002 interest expense excludes $222,000 in
capitalized interest related to the construction of the San Antonio Street -
Hayward, California building.
Net Loss
The net loss for the three months ended June 30, 2002, was $5,938,000 as
compared to $6,150,000 for the same period in 2001, including goodwill
amortization expense of approximately $876,000. The increase in net loss of
$664,000, excluding 2001 goodwill amortization expense, was primarily due to
higher research and development and infrastructure costs related to the new
manufacturing facility in Hayward, California, partially offset by higher
revenues.
SIX MONTHS ENDED JUNE 30, 2002, COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Overview
The net loss for the six months ended June 20, 2002, was $11,359,000 as compared
to $11,488,000 for the six months ended June 30, 2001, including goodwill
amortization expense of approximately $1,752,000. The increase in the net loss
of $1,623,000, excluding 2001 goodwill amortization expense, was primarily due
to higher research and development expenses and infrastructure costs related to
the new manufacturing facility in Hayward, California, and expansion of our
sales and marketing capabilities, partially offset by higher revenues.
Revenues
The net sales for the six months ended June 30, 2002, were $8,577,000 as
compared to $2,908,000 for the same period in 2001. The higher sales were
primarily due to the sale of two newly approved products: Terbutaline Sulfate
Tablets (launched in June 2001) and Fludrocortisone Acetate Tablets (launched in
March 2002).
Cost of Sales
The cost of sales for the six months ended June 30, 2002, was $7,121,000 as
compared to $4,268,000 for the same period in 2001. The overall increase in cost
of sales was primarily due to material costs as a result of increased net sales.
Included in the cost of sales are startup costs of the new manufacturing
facility in Hayward, California, and fixed, unabsorbed costs of the excess plant
capacity in Philadelphia, Pennsylvania.
Gross Margin
Due primarily to higher net sales which offset the increase in the
infrastructure costs related to the new manufacturing facility in Hayward,
California, we realized a gross margin of $1,456,000 for the six months ended
June 30, 2002, as compared to a negative gross margin of $1,360,000 for the same
period in 2001.
Research and Development Expenses
The research and development expenses for the six months ended June 30, 2002,
were $7,366,000 less reimbursement of $304,000 by TEVA under the strategic
alliance agreement signed in June 2001, as compared to $5,010,000 for the same
period in 2001. The increase of approximately 47% over 2001 was primarily due to
higher personnel, material and biostudy costs.
Selling Expenses
The selling expenses for the six months ended June 30, 2002, were $1,304,000 as
compared to $1,123,000 for the same period in 2001. The increase in selling
expenses as compared to 2001, which included a $200,000 expense related to the
TEVA agreement in 2001, was primarily due to additional personnel, advertising,
and freight costs.
General and Administrative Expenses
The general and administrative expenses for the six months ended June 30, 2002,
were $4,109,000 as compared to $4,395,000 for the same period in 2001, including
goodwill amortization expense of approximately $1,752,000. The increase in 2002
general and administrative expenses as compared to 2001, excluding 2001 goodwill
amortization expense, was primarily due to higher personnel costs, professional
fees, insurance premiums, and software expenses.
Interest Income
Interest income for the six months ended June 30, 2002, was $402,000 as compared
to $423,000 for the same period in 2001, primarily due to lower interest rates.
Interest Expense
Interest expense for the six months ended June 30, 2002, was $733,000 as
compared to $87,000 for the same period in 2001, primarily due to the $876,000
of interest accrued on the refundable deposit from TEVA and the interest payable
on the two Cathay Bank loans. The 2002 interest expense excludes $394,000 in
capitalized interest related to the construction of the San Antonio Street -
Hayward, California building.
Net Loss
The net loss for the six months ended June 30, 2002, was $11,359,000 as compared
to $11,488,000 for the same period in 2001, including goodwill amortization
expense of approximately $1,752,000. The increase in net loss of $1,623,000,
excluding 2001 goodwill amortization expense, was primarily due to higher
research and development and infrastructure costs related to the new
manufacturing facility in Hayward, California, and expansion of our sales and
marketing capabilities, partially offset by higher revenues.
Liquidity and Capital Resources
As of June 30, 2002, we had $20,486,000 in cash and cash equivalents, and
$7,914,000 in short-term investments. The short-term investments mature within a
year and we believe that the market risk arising from holding these investments
is not material.
The net cash provided by financing activities for the six months ended June 30,
2002, was approximately $7,953,000 consisting of the $7,500,000 sale of common
stock to TEVA, and proceeds from issuance of common stock upon exercise of stock
options and warrants. During the six months ended June 30, 2002, the sale and
maturities of short-term investments of $12,508,000 funded the net capital
expenditures of approximately $6,768,000 and the net cash used in operating
activities of $8,251,000.
We have no interest rate or derivative hedging contracts and material foreign
exchange or commodity price risks. We are also not party to any
off-balance-sheet arrangements, other than operating leases.
We expect to incur significant operating expenses, particularly research and
development and sales and marketing expenses, for the foreseeable future in
order to execute our business plan. We, therefore, anticipate that such
operating expenses, as well as planned capital expenditures, will constitute a
material use of our cash resources.
We anticipate obtaining, during the third quarter of 2002, a $25 million
revolving line of credit to partially fund our working capital requirements.
However, we may be unable to obtain this revolving line of credit on terms
acceptable to us, or at all.
Although our existing cash, cash equivalents, and short-term investments are
expected to decline during 2002, we believe that our existing balances will be
sufficient to meet our operational plan for at least the next twelve months. We
may, however, seek additional financing in order to primarily fund our business
plan in the brand name pharmaceutical area.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's investment portfolio consists of cash and cash equivalents and
marketable securities stated at cost which approximates market value. The
primary objective of the Company's investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, the Company maintains its portfolio
in a variety of high credit quality securities, including U.S. Government
securities, treasury bills, short-term commercial paper, and highly rated money
market funds. One hundred percent of the Company's portfolio matures in less
than one year. The carrying value of the investment portfolio approximates the
market value at June 30, 2002. The Company's debt instruments at June 30, 2002,
are subject to fixed interest rates and principal payments. We believe that the
fair value of our fixed rate long-term debt and refundable deposit approximates
their carrying value of approximately $29 million at June 30, 2002. While
changes in market interest rates may affect the fair value of our fixed rate
long-term debt, we believe the effect, if any, of reasonably possible near-term
changes in the fair value of such debt on the Company's financial statements
will not be material.
We do not use derivative financial instruments and have no material foreign
exchange or commodity price risks.
PART II - OTHER INFORMATION
- ----------------------------
ITEM 1. LEGAL PROCEEDINGS
Patent Litigation
There has been substantial litigation in the pharmaceutical, biological, and
biotechnology industries with respect to the manufacture, use and sale of new
products that are the subject of conflicting patent rights. Most of the brand
name controlled-release products for which we are developing generic versions
are covered by one or more patents. Under the Hatch-Waxman Amendments, when a
drug developer files an ANDA for a generic drug, and the developer believes that
an unexpired patent which has been listed with the FDA as covering that brand
name product will not be infringed by the developer's product or is invalid or
unenforceable, the developer must so certify to the FDA. That certification must
also be provided to the patent holder, who may challenge the developer's
certification of non-infringement, invalidity or unenforceability by filing a
suit for patent infringement within 45 days of the patent holder's receipt of
such certification. If the patent holder files suit, the FDA can review and
approve the ANDA, but is prevented from granting final marketing approval of the
product until a final judgment in the action has been rendered or 30 months from
the date the certification was received, whichever is sooner. Should a patent
holder commence a lawsuit with respect to an alleged patent infringement by us,
the uncertainties inherent in patent litigation make the outcome of such
litigation difficult to predict. The delay in obtaining FDA approval to market
our product candidates as a result of litigation, as well as the expense of such
litigation, whether or not we are successful, could have a material adverse
effect on our results of operations and financial position. In addition, there
can be no assurance that any patent litigation will be resolved prior to the
30-month period. As a result, even if the FDA were to approve a product upon
expiration of the 30-month period, we may be prevented from marketing that
product if patent litigation is still pending.
Litigation has been filed against us in connection with nine of our Paragraph IV
filings. The outcome of such litigation is difficult to predict because of the
uncertainties inherent in patent litigation.
Prilosec (Omeprazole) Litigation
In May 2000, AstraZeneca AB and four of its related companies filed suit against
us in the United States District Court in Delaware, claiming our submission of
an ANDA for Omeprazole Delayed Release Capsules, 10mg and 20mg, constitutes
infringement of six U.S. patents relating to the AstraZeneca Prilosec product.
In February 2001, AstraZeneca filed a second action against us in the same court
making the same claim against our Omeprazole Delayed Release Capsules, 40mg.
These actions seek an order enjoining us from marketing Omeprazole Delayed
Release Capsules, 10mg, 20mg and 40mg, until February 4, 2014, and awarding
costs and attorney fees. There is no claim for damages. AstraZeneca has filed
essentially the same lawsuit against nine other generic pharmaceutical companies
(Andrx, Genpharm, Cheminor, Kremers, LEK, Eon, Mylan, Apotex and Zenith).
Due to the number of these cases, a multi-district litigation proceeding, In re
Omeprazole MDL-1291, has been established to coordinate pretrial proceedings. We
were added to the multi-district proceeding in September 2000. In the
multi-district litigation, the district court ruled that one of the six
patents-in-suit is not infringed by the sale of a generic Omeprazole product and
another patent-in-suit is invalid. These rulings effectively eliminate two of
the six patents from the litigation. In March, 2000, AstraZeneca advised all of
the defendants in the multidistrict litigation that AstraZeneca added four new
patents to the FDA's Orange Book as Omeprazole patents. We filed Paragraph IV
Certifications asserting that our Omeprazole Delayed Release Capsules will not
infringe valid claims of the four newly listed patents. The forty-five (45) day
period for AstraZeneca to file suit against Impax under the four newly listed
patents expired on August 6, 2001. AstraZeneca did not file suit on these
patents against us or any other generic pharmaceutical company that filed
Paragraph IV Certifications for these patents.
Presently, we and five of the other generic company defendants are awaiting the
outcome of the trial involving AstraZeneca and the first four generic company
defendants who were sued a year earlier than us and the other generic company
defendants. The trial began in December 2001, concluded in June 2002, and is
expected to lead to a decision by the court in the third quarter of this year.
Once this first trial is concluded, discovery and other pretrial matters will
proceed with respect to us and the other remaining defendants.
We believe we have defenses to the claims made by AstraZeneca in the lawsuit
based upon non-infringement and invalidity of the patents-in-suit.
Tricor (Fenofibrate) Litigation
In 2000, Abbott Laboratories, Fournier Industrie et Sante, and a related company
filed two actions against us in the United States District Court in Chicago,
Illinois, claiming that our submission of an ANDA for Fenofibrate (Micronized)
Capsules, 67mg and 134mg constitutes infringement of a U.S. patent owned by
Fournier and exclusively licensed to Abbott, relating to Abbott's Tricor
product. In December 2000, Abbott and Fournier filed a third action against us
in the same court making the same claims against our 200mg Fenofibrate
(Micronized) Capsules. These actions seek an injunction preventing us from
marketing our fenofibrate products until January 19, 2009, and an award of
damages for any commercial manufacture, use or sale of our fenofibrate products,
together with costs and attorney fees. Abbott and Fournier previously filed
essentially the same lawsuit against Novopharm/TEVA, also in the United States
District Court in Chicago.
We filed an answer to Abbott's complaint in April 2001. Our answer asserts that
Abbott's patent is invalid and not enforceable against us. The parties in this
matter have conducted discovery but the court has not set a trial date. We
believe we have defenses based upon non-infringement, invalidity and
unenforceability.
In a related litigation concerning the same patent, the U.S. District Court of
Illinois granted, in March 2001, summary judgment of non-infringement regarding
Novopharm/TEVA's ANDA for Fenofibrate (Micronized) Capsules.
In April 2002, we filed a Motion for Summary Judgment to finally resolve this
litigation without the need for a trial. The Motion is based in part on the
recent decision won by Novopharm/TEVA. Our motion was fully briefed as of July
12, 2002.
Wellbutrin SR and Zyban (Bupropion) Litigation
In October 2000, Glaxo Wellcome Inc. filed a lawsuit against us in the United
States District Court, Northern District of California, claiming that our
submission of two ANDAs for Bupropion Hydrochloride constitutes infringement of
several patents owned by Glaxo relating to Glaxo's Wellbutrin SR and Zyban
products. The action seeks to enjoin us from receiving approval of our
application prior to the expiration date of Glaxo's patent, award Glaxo
preliminary and final injunctions enjoining us from continued infringement of
its patent, and award further relief as the Court may deem proper. Glaxo has
filed suit against Andrx, Watson and EON (only with regard to Wellbutrin SR) for
similar ANDA filings. We filed our answer and counterclaim to Glaxo's complaint
in November 2000. We filed a motion for Summary Judgment, which the court heard
in November 2001. To date, the Court has not ruled on our motion for Summary
Judgment nor entered a final date for the end of discovery. We believe that we
have strong defenses to the claims made by Glaxo in the lawsuit based on
non-infringement and invalidity. At the request of the Court, in July 2002, both
sides submitted briefs on the impact of the recent United States Supreme Court
decision in Festo vs. Shoketsu Kinzoku Kogyo Kabushi Co., et al to the pending
motion for summary judgment. In related litigation concerning the same patents,
a federal judge in Florida has ruled that Andrx Pharmaceuticals does not
infringe the Glaxo patents covering Bupropion. Also, Glaxo had decided to settle
its Bupropion litigation with Watson Pharmaceuticals in July 2001 on terms that
are confidential.
Claritin (Loratadine) Litigation
In January 2001, Schering-Plough Corporation ("Schering") sued us in the United
States District Court for the District of New Jersey, alleging that our proposed
loratadine and pseudoephedrine sulfate 24-hour extended release tablets,
containing 10mgs of loratadine and 240mgs of pseudoephedrine sulfate, infringe
their U.S. Patent Nos. 4,659,716 and 5,314,697. Schering has sought to enjoin us
from obtaining FDA approval to market our loratadine 24-hour product until the
5,314,697 patent expires in 2012. Schering has also sought monetary damages
should we use, sell, or offer to sell our loratadine 24-hour product prior to
the expiration of this patent.
We filed our answer to the complaint denying that we infringe any valid and/or
enforceable claim of their patents. Based in part on statements made by Schering
during the prosecution of its application for the 5,314,697 patent, we assert
that Schering should not succeed on its claims that our loratadine 24-hour
product infringes this patent. Additionally, we do not believe that Schering's
claims related to its 4,659,716 patent, which relate to an active metabolite of
loratadine produced in the body upon ingestion of loratadine, cover the generic
loratadine products.
In January 2001, Schering sued us in the United States District Court for the
District of New Jersey, alleging that our proposed orally-disintegrating
loratadine ODT product infringes claims of the 4,659,716 patent. Schering has
sought to enjoin us from obtaining approval to market our loratadine ODT product
until this patent expires in 2004. Schering has also sought monetary damages
should we use, sell, or offer to sell our loratadine ODT product prior to the
expiration of their patent. We filed the answer to the complaint denying that we
infringe any valid and/or enforceable claim of their patent.
In February 2001, Schering sued us in the United States District Court for the
District of New Jersey, alleging that our proposed loratadine and
pseudoephedrine sulfate 12-hour extended release tablets, containing 5mgs of
loratadine and 120mgs of pseudoephedrine sulfate, infringes claims of the
4,659,716 patent. Schering has sought to enjoin us from obtaining approval to
market our loratadine 12-hour product until this patent expires in 2004.
Schering has also sought monetary damages should we use, sell, or offer to sell
our loratadine product prior to the expiration of their patent. We filed the
answer to the complaint denying that we infringe any valid and/or enforceable
claim of their 4,659,716 patent.
These three cases have been consolidated for the purposes of discovery with
seven other cases in the District of New Jersey, in which Schering sued other
companies who sought FDA approval to market generic loratadine products. The
parties have concluded discovery related to the 4,659,716 patent. The parties
(IMPAX and Andrx) continue discovery related to the 5,314,697 patent and the
court has not yet entered a schedule for completion of this discovery.
On March 8, 2002, Schering announced that it had filed with the FDA an
application to switch all of the Claritin formulations from prescription to OTC.
If Schering's application is approved by the FDA, we may not be able to market
our generic versions of the Claritin formulation as prescription drugs. Oral
argument on the dispositive motions related to the 4,659,716 patent was heard
before the judge on June 25, 2002 and a decision is expected before December
2002.
Allegra-D(R) (Fexofenadine) Litigation
In March 2002, Aventis Pharmaceuticals, Inc. ("Aventis") filed a lawsuit against
us in the United States District Court for the District of New Jersey and filed
a virtually identical complaint in the United States District Court for the
District of Delaware claiming our submission of an ANDA for a generic version of
Allegra-D(R) (Fexofenadine HCl/Pseudoephedrine HCl) Extended Release 60mg/120mg
Tablets constitutes infringement of six Allegra-D(R) patents. We have yet to
file an answer in the litigation and no discovery has been scheduled. We intend
to vigorously defend our product and believe that we have strong defenses to the
claims made by Aventis in the lawsuit.
Oxycontin(R) (Oxycodone HCl) Litigation
In April 2002, Purdue Pharma L.P. filed a lawsuit against us in the United
States Southern District Court of New York alleging patent infringement related
to our filing of an ANDA for a generic version of Oxycontin(R) (Oxycodone HCl)
Extended Release 80mg Tablets. We have yet to file an answer in the litigation
and no discovery has been scheduled. We intend to vigorously defend our product
and believe that we have strong defenses to the claims made by Purdue Pharma in
the lawsuit.
Rilutek(R) (Riluzole) 50mg Litigation
In May 2002, we filed an ANDA for a generic version of Rilutek(R) (Riluzole)
50mg tablets. In June 2002, we filed a lawsuit against Aventis Pharmaceuticals
Inc. ("Aventis") alleging that Aventis' patent no. 5,527,814 related to
Rilutek(R) is invalid and that IMPAX has not infringed on this patent by filing
its ANDA. Aventis is yet to respond to this lawsuit.
Other than the patent litigations described above, we are not aware of any other
material pending or threatened legal actions, private or governmental, against
us.
Insurance
As part of our patent litigation strategy, we have obtained up to $7 million of
patent infringement liability insurance from American International Specialty
Line Company (an affiliate of AIG International). This litigation insurance
covers us against the costs associated with patent infringement claims made
against us relating to seven of the ten ANDAs we filed under Paragraph IV of the
Hatch-Waxman Amendments. At present, we believe this insurance coverage is
sufficient for our legal defense costs related to these seven ANDAs. However, we
do not believe that this type of litigation insurance will be available to us on
acceptable terms for our other current or future ANDAs.
Product liability claims by customers constitute a risk to all pharmaceutical
manufacturers. We carry $10 million of product liability insurance for our own
manufactured products. This insurance may not be adequate to cover any product
liability claims to which we may become subject.
ITEM 2. CHANGES IN SECURITES AND USE OF PROCEEDS
On June 17, 2002, the Company sold, in a private placement, 463,135 shares of
Common Stock to a subsidiary of TEVA for an aggregate consideration of
$3,750,000. The Company relied on the exemption from registration under the
Securities Act of 1933 (the "Act") provided by Section 4(2) of the Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on May 6, 2002, the
following actions were approved, by the votes indicated:
a) Ten directors were elected:
Leslie Z. Benet, Ph.D. 43,096,064 For 99,161 Withhold authority
Robert L. Burr 42,969,997 For 225,228 Withhold authority
Barry R. Edwards 41,753,417 For 1,441,808 Withhold authority
David J. Edwards 42,967,033 For 228,192 Withhold authority
Nigel Fleming, Ph.D. 43,096,564 For 98,661 Withhold authority
Charles Hsiao, Ph.D. 41,755,228 For 1,439,997 Withhold authority
Larry Hsu, Ph.D. 41,388,379 For 1,806,846 Withhold authority
Michael Markbreiter 43,096,464 For 98,761 Withhold authority
Oh Kim Sun 43,096,264 For 98,961 Withhold authority
Michael G. Wokasch 43,096,264 For 98,961 Withhold authority
b) The 2002 Equity Incentive Plan was approved by the stockholders as follows:
28,878,594 For 1,615,108 Against 1,038,092 Abstaining
c) The appointment of PricewaterhouseCoopers LLP as the Company's independent
accountants for the fiscal year ending December 31, 2002 was ratified, as
follows:
42,899,377 For 274,930 Against 20,918 Abstaining
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.60 Development, License and Supply Agreement dated as of June 1, 2002
between Wyeth, acting through its Wyeth Consumer Healthcare
Division, and Impax Laboratories, Inc. for
loratadine/pseudoephedrine combination tablets.
10.61 Licensing, Contract Manufacturing & Supply Agreement between
Schering Corporation and Impax Laboratories, Inc. dated June 18,
2002.
(b) None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMPAX LABORATORIES, INC.
By: /s/ BARRY R. EDWARDS (Principal Executive Officer)
--------------------------------
Co-Chief Executive Officer
By: /s/ CORNEL C. SPIEGLER (Principal Financial and
-------------------------------- Accounting Officer)
Chief Financial Officer