U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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
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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
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(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
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The number of shares outstanding of the registrant's common stock as of
October 31, 2002 was approximately 47,870,717.
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IMPAX LABORATORIES, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
PART I. FINANCIAL INFORMATION
PAGE
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Item 1. Financial Statements:
Balance Sheets as of September 30, 2002, and December 31, 2001......................................... 3
Statements of Operations for the Three and Nine Months Ended September 30, 2002 and 2001............... 4
Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001......................... 5
Notes to Financial Statements.......................................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk................................................. 13
Item 4. Controls and Procedures................................................................................... 13
PART II. OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings......................................................................................... 13
Item 6. Exhibits and Reports on Form 8-K.......................................................................... 18
Signatures .................................................................................................... 18
Certifications .................................................................................................... 19
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)
September 30, December 31,
2002 2001
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ASSETS
Current assets:
Cash and cash equivalents $ 22,405 $ 15,044
Short-term investments -- 20,422
Accounts receivable, net 5,667 3,523
Inventory 5,069 3,488
Prepaid expenses and other assets 577 1,506
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Total current assets 33,718 43,983
Property, plant and equipment, net 35,502 24,334
Investments and other assets 522 574
Goodwill, net 27,574 27,574
Intangibles, net 859 1,147
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Total assets $ 98,175 $ 97,612
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 232 $ 232
Accounts payable 4,072 3,996
Accrued expenses 5,858 3,575
Deferred revenues - current 3,691 0
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Total current liabilities 13,853 7,803
Refundable deposit 24,190 22,876
Long-term debt 6,695 6,868
Deferred revenues 1,602 117
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46,340 37,664
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Mandatorily redeemable convertible Preferred Stock:
Series 2 mandatorily redeemable convertible Preferred Stock, $0.01 par
value 75,000 outstanding at September 30, 2002,
and December 31, 2001, redeemable at $100 per share 7,500 7,500
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7,500 7,500
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Stockholders' equity:
Redeemable convertible Preferred Stock -- --
Common stock, $0.01 par value, 75,000,000 shares authorized and
47,847, 355 and 46,680,047 shares issued and outstanding
at September 30, 2002, and December 31, 2001, respectively 478 466
Additional paid-in capital 131,050 122,957
Unearned compensation (322) (673)
Accumulated deficit (86,871) (70,302)
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Total stockholders' equity 44,335 52,448
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Total liabilities and stockholders' equity $ 98,175 $ 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 Nine Months Ended
September 30, September 30,
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2002 2001 2002 2001
------ ------ ------ ------
Net sales $ 7,283 $ 1,658 $ 15,860 $ 4,566
Other revenues 255 -- 255 --
----------- ----------- ----------- -----------
Total revenues 7,538 1,658 16,115 4,566
Cost of sales 5,153 2,247 12,274 6,515
----------- ----------- ----------- -----------
Gross profit (loss) 2,385 (589) 3,841 (1,949)
Research and development 4,533 3,673 11,899 8,983
Less: Teva reimbursements (182) (399) (486) (699)
----- ----- ----- -----
Research and development, net 4,351 3,274 11,413 8,284
Selling 697 592 2,001 1,715
General and administrative* 2,084 2,269 6,193 6,664
Other operating income (expense), net (30) -- (39) 64
----------- ----------- ----------- -----------
Net loss from operations (4,777) (6,724) (15,805) (18,548)
Interest income 138 412 540 835
Interest expense** (571) (457) (1,304) (544)
----------- ----------- ----------- -----------
Net loss $ (5,210) $ (6,769) $ (16,569) $ (18,257)
=========== =========== =========== ===========
Net loss per share (basic and diluted) $ (0.11) $ (0.15) $ (0.35) $ (0.46)
=========== =========== =========== ===========
Weighted average common shares outstanding 47,778,512 45,943,604 47,302,950 $39,932,294
=========== =========== =========== ===========
* Includes amortization of goodwill of $876,000 in the quarter ended September
30, 2001 and $2,628,000 in the nine months ended September 30, 2001. As of
January 1, 2002, the Company adopted SFAS 142. Accordingly, there was no
amortization of goodwill in 2002.
** Total interest expense of $571,000 for the quarter ended September 30, 2002
includes interest of $438,000 on the refundable deposit from Teva. Total
interest expense of $1,304,000 for the nine months ended September 30, 2002,
is comprised of the following:
Interest on Refundable Deposit $1,314,000
Other Interest 384,000
Less: Amounts Capitalized (394,000)
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$1,304,000
The accompanying notes are an integral part of these financial statements.
IMPAX LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Nine Months Ended
September 30,
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2002 2001
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Cash flows from operating activities:
Net loss $ (16,569) $ (18,257)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 1,773 4,601
Non-cash compensation charge (warrants and options) 351 260
Change in assets and liabilities:
Accounts receivable (2,144) (1,520)
Inventory (1,581) (607)
Prepaid expenses and other assets 981 (742)
Accounts payable and other liabilities 8,849 2,855
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Net cash used in operating activities (8,340) (13,410)
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Cash flows from investing activities:
Purchases of property and equipment (12,653) (7,672)
Sale and maturities of short-term investments 20,422 7,780
Purchases of short-term investments -- (32,232)
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Net cash provided by (used for) investing activities 7,769 (32,124)
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Cash flows from financing activities:
Notes payable repayments -- (2,425)
Additions to long-term debt borrowings -- 2,470
Repayment of long-term debt (173) (114)
Proceeds from sale of common stock 7,500 21,055
Refundable deposit -- 22,000
Proceeds from issuance of common stock (upon exercise of
stock options and warrants) 605 612
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Net cash provided by financing activities 7,932 43,598
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Net increase (decrease) in cash and cash equivalents 7,361 (1,936)
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Cash and cash equivalents, beginning of the period $ 15,044 $ 11,448
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Cash and cash equivalents, end of the period $ 22,405 $ 9,512
========= =========
Cash paid for interest $ 384 $ 159
========= =========
The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS
Nine Months Ended
September 30, 2002 and September 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 nine months ended September 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 drug
delivery technologies. The Company is currently marketing twenty-five products
and has nineteen Abbreviated New Drug Applications (ANDAs) under review with the
Food and Drug Administration (FDA), addressing more than $9.7 billion in U.S.
branded product sales in the twelve months ending June 30, 2002. Twelve of these
ANDAs were filed under Paragraph IV of the Hatch-Waxman Amendments, and four of
these nineteen ANDAs have received tentative approval from the FDA. The Company
has approximately seventeen 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 September 30, 2002, our accumulated deficit was $86,871,000 and
we had outstanding indebtedness in an aggregate amount of $31,117,000. 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 and cash equivalents are expected to decline during
the remainder of 2002 and during most of 2003, we believe that our existing cash
and cash equivalent balances, together with our new $25 million term loan and
revolving line of credit, will be sufficient to meet our operational plan for
the next twelve months. We may, however, seek additional financing through
strategic alliances and/or equity markets to fund, primarily, our research and
development plans. However, we may be unable to obtain such financing.
To date, the Company has funded its research and development and other operating
activities through equity and debt financings, and strategic alliances.
Note 2. The major operational highlights of the nine months ended September 30,
2002 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 resolution of 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 L.P. 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, according to IMS Health. 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 a New Drug
Application (NDA). Additionally, progress has been made in formulation
development for three other brand products with Investigational New Drug
(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 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. In August 2002, the
United States District Court of New Jersey granted our Motion for Summary
Judgment and declared portions of the Schering-Plough Corporation U.S.
Patent No 4,659,716 invalid as they relate to our generic
Claritin(R)ANDAs.
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.
o 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 suit against Aventis Pharmaceuticals, Inc. in the United
States District Court in Delaware, seeking a declaration that Aventis'
U.S. Patent No. 5,527,814 is invalid. Aventis filed an answer and
counterclaim, claiming that our submission of an ANDA for Riluzole
Tablets constituted infringement of U.S. Patent No. 5,527,814 and that
our intended marketing activities constituted inducement of infringement
of this patent. We filed an answer to the counterclaim in August 2002. A
scheduling conference was conducted by the court in early September 2002,
and trial was set for October 2003. The parties are presently engaged in
discovery. On October 15, 2002, Aventis filed a motion seeking a
preliminary injunction enjoining us from marketing Riluzole Tablets until
a final decision is reached by the court in this case.
o In August 2002, the FDA accepted our filing of an ANDA for a generic
version of OxyContin(R)(Oxycodone HCl) Extended Release 40mg Tablets
(IMPAX's tenth Paragraph IV filing). Purdue Pharma L.P. markets
OxyContin(R)for the management of moderate-to-severe pain. U.S. sales of
OxyContin(R)Extended Release 40mg Tablets were approximately $520 million
in the twelve months ended June 30, 2002, according to IMS data. In
September 2002, Purdue Pharma L.P. filed a lawsuit against us alleging
patent infringement. In addition, we amended our ANDA for the 40mg
Tablets to include 10mg and 20mg Extended Release Tablets.
According to IMS Health, total U.S. sales for all OxyContin(R) strengths
(10, 20, 40 and 80mg) in the twelve months ended June 30, 2002 were over
$1.5 billion.
o Also, in August 2002, the U.S. District Court for the Northern District
of California granted our Motion for Summary Judgment of Non-Infringement
regarding our ANDAs for Wellbutrin SR(R) and Zyban(R). GlaxoSmithKline
markets Wellbutrin SR(R) for the treatment of depression, and Zyban(R)
for the cessation of smoking. According to IMS Health, U.S. sales of
these two products in the twelve months ended June 30, 2002 were over
$1.4 billion.
o In September 2002, the FDA approved our ANDA for a generic version of
Flumadine(R) (Rimantadine Hydrochloride 100mg) Tablets. Forest
Laboratories, Inc. markets Flumadine(R) for the prevention and treatment
of illness caused by various strains of influenza-A virus in adults.
According to IMS Health, U.S. sales of Rimantadine products in the twelve
months ended June 30, 2002 were approximately $7.2 million.
Note 3. The construction of the new manufacturing facility in Hayward,
California was completed last quarter. The total construction cost was
approximately $12,339,900, including capitalized interest cost of approximately
$595,000.
Note 4. During the three months ended September 30, 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 50mg and 100mg, generic
versions of Minocin(R), marketed by Lederle Pharmaceutical Division of Wyeth
Corporation. These products are antibiotics and are prescribed for the treatment
of infectious diseases and as adjunctive therapy in severe acne.
Note 5. On October 23, 2002, we signed a three year, $25 million Loan and
Security Agreement with Congress Financial Corporation, comprised of a revolving
loan of up to $20,500,000, and a term loan of up to $4,500,000. The revolving
loan is collateralized by eligible accounts receivable and inventory, subject to
sublimits, financial covenants and other terms, and the term loan is
collateralized by machinery and equipment, with a 60 month amortization. The
interest rates for the revolving loans range from prime rate plus 1% to 1.75%,
or eurodollar rate plus 3% to 3.75%, at our option, based on excess
availability. The term loan has an interest rate of prime rate plus 1.5%, or
eurodollar rate plus 4%, at our option. As of October 25, 2002, we borrowed
$4,000,000 against the revolving credit line and $3,150,000 against the term
loan. The total cash and cash equivalents at October 25, 2002 were approximately
$28,000,000. Please see other terms and conditions in the Loan and Security
Agreement enclosed in the Exhibit 10.62 to this Form 10-Q.
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 in the fourth quarter. 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 for the three months ended September 30, 2001 and $2,628,000 for
the nine months ended September 30, 2001, or the equivalent of $(0.02) and
$(0.07) per (basic and diluted) share, respectively. The Company's net loss and
net loss per share, respectively, would have been $6,086,000 and $(0.13) per
(basic and diluted) share for the three months ended September 30, 2001 and
$19,197,000 and $(0.41) per (basic and diluted) share for the nine months ended
September 30, 2001, had the non-amortization 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 2,548,266 shares of common stock,
and stock options to purchase 4,474,058 shares of common stock were outstanding
at September 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:
September 30, December 31,
2002 2001
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(in thousands)
Raw materials......................................................... $ 3,277 $ 2,004
Finished goods........................................................ 1,942 1,634
5,219 3,638
Less: Reserve for obsolete inventory 150 150
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$ 5,069 $ 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 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 non-amortization provisions of SFAS 142 had been effective at the
beginning of fiscal 2001, the net loss for the three and nine months ended
September 30, 2001 would have decreased by $876,000 and $2,628,000 respectively,
representing the exclusion of goodwill amortization.
Effective January 1, 2002, we evaluated 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 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. We will perform our annual goodwill impairment test in the
fourth quarter of each fiscal year.
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-five generic
products and have nineteen ANDA filings pending at the FDA addressing more than
$9.7 billion in U.S. branded product sales in the twelve months ended June 30,
2002. Twelve of these filings were made under Paragraph IV of the Hatch-Waxman
Amendments and four of these nineteen ANDAs have received tentative approval
from the FDA. We have approximately seventeen additional products under
development.
Results of Operations
We have incurred net losses in each year since our inception. We had an
accumulated deficit of $86,871,000 at September 30, 2002.
THREE MONTHS ENDED SEPTEMBER 30, 2002, COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
Overview
The net loss for the three months ended September 30, 2002, was $5,210,000 as
compared to $6,769,000 for the three months ended September 30, 2001, including
goodwill amortization of approximately $876,000 The decrease in the net loss of
$683,000, excluding 2001 goodwill amortization, was primarily due to higher
revenues, which offset the increase in research and development, and operating
expenses.
Revenues
The total revenues for the three months ended September 30, 2002, were
$7,538,000 as compared to $1,658,000 for the same period in 2001. The higher
revenues 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), an increase in Lipram(TM) sales due to
increased utilization and the addition of new customers, the re-introduction of
Methitest Tablets (in August 2001) and Minocycline 50, 75 and 100mg Capsules
(third quarter of 2002), as well as lower product returns. The returns for the
three months ended September 30, 2002, were $442,000, including discontinued
products of $46,000, as compared to $1,337,000 for the same period of 2001,
including discontinued products of $406,000. Included in 2002 total revenues
were $225,000 in other revenues representing the revenue recognized for the
up-front fee payments on the over-the-counter (OTC) contracts. The up-front fee
payments are recorded as deferred revenue and are amortized over the term of the
respective contracts.
Cost of Sales
The cost of sales for the three months ended September 30, 2002, was $5,153,000
as compared to $2,247,000 for the same period in 2001. The overall increase in
cost of sales was primarily due to increased sales volume.
Gross Margin
Due primarily to higher total revenues, which offset the increase in the
infrastructure costs included in the cost of sales related to the new
manufacturing facility in Hayward, California, we realized a gross profit of
$2,385,000 for the three months ended September 30, 2002, as compared to a loss
of $589,000 for the same period in 2001.
Research and Development Expenses
The research and development expenses for the three months ended September 30,
2002, were $4,533,000, less reimbursement of $182,000 by TEVA under the
strategic alliance agreement signed in June 2001, as compared to $3,673,000,
less reimbursement of $399,000 by TEVA, for the same period in 2001. The
increase of approximately 23% over 2001 was primarily due to higher personnel,
material and patent-related legal costs.
Selling Expenses
The selling expenses for the three months ended September 30, 2002, were
$697,000 as compared to $592,000 for the same period in 2001. The increase in
selling expenses as compared to 2001 was primarily due to additional personnel,
advertising, and freight costs.
General and Administrative Expenses
The general and administrative expenses for the three months ended September 30,
2002, were $2,084,000 as compared to $2,269,000 for the same period in 2001,
including goodwill amortization of approximately $876,000. The increase in 2002
general and administrative expenses as compared to 2001, excluding 2001 goodwill
amortization, was primarily due to higher personnel costs, professional fees,
and insurance premiums.
Interest Income
Interest income for the three months ended September 30, 2002, was $138,000 as
compared to $412,000 for the same period in 2001, primarily due to lower cash
equivalents and short term investments, and lower interest rates.
Interest Expense
Interest expense for the three months ended September 30, 2002, was $571,000 as
compared to $457,000 for the same period in 2001, primarily due to additional
interest expense related to two Cathay Bank loans in 2002, as compared to one
loan for the same period in 2001.
Net Loss
The net loss for the three months ended September 30, 2002, was $5,210,000 as
compared to $6,769,000 for the same period in 2001, including goodwill
amortization of approximately $876,000. The decrease in net loss of $683,000,
excluding 2001 goodwill amortization, was primarily due to higher revenues,
which offset the higher research and development and operating expenses.
NINE MONTHS ENDED SEPTEMBER 30, 2002, COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2001
Overview
The net loss for the nine months ended September 20, 2002, was $16,569,000 as
compared to $18,257,000 for the nine months ended September 30, 2001, including
goodwill amortization of approximately $2,628,000. The increase in the net loss
of $940,000, excluding 2001 goodwill amortization, 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 total revenues for the nine months ended September 30, 2002, were
$16,115,000 as compared to $4,566,000 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), an increase in Lipram(TM) sales due to
increased utilization and the addition of new customers, the re-introduction of
Methitest Tablets (in August 2001) and Minocycline 50, 75 and 100mg Capsules
(third quarter of 2002); as well as lower product returns. The returns for the
first nine months of 2002 were $1,937,000, including discontinued products of
$229,000, as compared to $2,843,000, including discontinued products of
$1,017,000, for the same period in 2001.
Cost of Sales
The cost of sales for the nine months ended September 30, 2002, was $12,274,000
as compared to $6,515,000 for the same period in 2001. The overall increase in
cost of sales was primarily due to increased sales volume. Included in the cost
of sales are also 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 revenues, which offset the increase in the
infrastructure costs related to the new manufacturing facility in Hayward,
California, we realized a gross profit of $3,841,000 for the nine months ended
September 30, 2002, as compared to a loss of $1,949,000 for the same period in
2001.
Research and Development Expenses
The research and development expenses for the nine months ended September 30,
2002, were $11,899,000 less reimbursement of $486,000 by TEVA under the
strategic alliance agreement signed in June 2001, as compared to $8,983,000,
less reimbursement of $699,000, for the same period in 2001. The increase of
approximately 32% over 2001 was primarily due to higher personnel, material,
patent-related legal costs, as well as product introduction costs.
Selling Expenses
The selling expenses for the nine months ended September 30, 2002, were
$2,001,000 as compared to $1,715,000 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 nine months ended September 30,
2002, were $6,193,000 as compared to $6,664,000 for the same period in 2001,
including goodwill amortization of approximately $2,628,000. The increase in
2002 general and administrative expenses as compared to 2001, excluding 2001
goodwill amortization, was primarily due to higher personnel costs, professional
fees, and insurance premiums.
Interest Income
Interest income for the nine months ended September 30, 2002, was $540,000 as
compared to $835,000 for the same period in 2001, due to lower cash equivalents
and short term investments, and lower interest rates.
Interest Expense
Interest expense for the nine months ended September 30, 2002, was $1,304,000 as
compared to $544,000 for the same period in 2001, primarily due to the interest
accrued on the refundable deposit from TEVA and the additional interest expense
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 nine months ended September 30, 2002, was $16,569,000 as
compared to $18,257,000 for the same period in 2001, including goodwill
amortization of approximately $2,628,000. The increase in net loss of $940,000,
excluding 2001 goodwill amortization, 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 September 30, 2002, we had $22,405,000 in cash and cash equivalents.
The net cash provided by financing activities for the nine months ended
September 30, 2002, was approximately $7,932,000, consisting of proceeds of
$7,500,000 from the sale of common stock to TEVA, and proceeds from issuance of
common stock upon exercise of stock options and warrants. During the nine months
ended September 30, 2002, the sale and maturities of short-term investments of
$20,422,000 funded capital expenditures of approximately $12,653,000 and the net
cash used in operating activities of approximately $8,340,000.
On October 23, 2002, we signed a three year, $25 million Loan and Security
Agreement with Congress Financial Corporation, comprised of a revolving loan of
up to $20,500,000, and a term loan of up to $4,500,000. The revolving loan is
collateralized by eligible accounts receivable and inventory, subject to
sublimits and other terms, and the term loan is collateralized by machinery and
equipment, with a 60 month amortization. The interest rates for the revolving
loans range from prime rate plus 1% to 1.75%, or eurodollar rate plus 3% to
3.75%, at our option, based on excess availability. The term loan has an
interest rate of prime rate plus 1.5%, or eurodollar rate plus 4%, at our
option. As of October 25, 2002, we borrowed $4,000,000 against the revolving
credit line and $3,150,000 against the term loan. The total cash and cash
equivalents at October 25, 2002 were approximately $28,000,000. Please see other
terms and conditions in the Loan and Security Agreement enclosed in the Exhibit
10.62 to this Form 10-Q.
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.
Although our existing cash and cash equivalents are expected to decline during
the remainder of 2002 and during most of 2003, we believe that our existing cash
and cash equivalent balances, together with our new $25 million term loan and
revolving line of credit, will be sufficient to meet our operational plan for
the next twelve months. We may, however, seek additional financing through
strategic alliances and/or equity markets to primarily fund our research and
development plans. However, we may be unable to obtain such financing.
To date, the Company has funded its research and development and other operating
activities through equity and debt financings, and strategic alliances.
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 September 30, 2002. The Company's debt instruments at September
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 $28.7 million at September
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.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 day period prior to the filing of this quarterly report on Form
10-Q, an evaluation was carried out under the supervision and with the
participation of our management, including our principal executive officers and
our principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on this evaluation,
our principal executive officers and our principal financial officer concluded
that our disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized,
and reported within the time period specified in the Securities and Exchange
Commission's rules and forms. In addition, subsequent to the date of the
evaluation of our disclosure controls and procedures, there were no significant
changes in our internal controls, or in other factors that could significantly
affect these controls.
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 ten 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
IMPAX in the United States District Court in Wilmington, Delaware, claiming that
IMPAX's submission of an Abbreviated New Drug Application ("ANDA") for
Omeprazole Delayed Release Capsules, 10mg and 20mg, constitutes infringement of
six U.S. patents relating to AstraZeneca's Prilosec product. The action seeks an
order enjoining IMPAX from marketing Omeprazole Delayed Release Capsules, 10 and
20mg, until February 4, 2014, and awarding costs and attorney fees. There is no
claim for damages.
In February 2001, AstraZeneca and the same related companies filed the same suit
against IMPAX in the same federal court in Delaware for infringement, based upon
IMPAX's amendment to its ANDA, adding 40mg strength Omeprazole Delayed Release
Capsules.
AstraZeneca filed, essentially, the same lawsuits against nine other generic
pharmaceutical companies (Andrx, Genpharm, Cheminor, Kremers, LEK, Eon, Mylan,
Apotex and Zenith). Due to the number of these cases, a multidistrict litigation
proceeding, In re Omeprazole Patent Litigation, MDL-1291, has been established
to coordinate pre-trial proceedings. Both lawsuits filed by AstraZeneca et al.
against IMPAX have been transferred to the multidistrict litigation.
Either in pre-trial proceedings or after the trial described below, the trial
court ruled that the '794 patent (omeprazole in combination with clarithromycin
in the treatment of H.pylori); the '305 patent (combination therapy for H.pylori
related disease); and the '342 patent (H.pylori treatment) were invalid. The
trial court also ruled that the '499 (sulphenamide salt of omeprazole) was not
infringed in related summary proceedings. These rulings effectively eliminated
these four patents from the trial of these infringement cases, although
AstraZeneca may appeal these decisions as part of the overall appeal process in
the case.
On October 11, 2002, after a 52-day long trial involving Andrx, Genpharm,
Cheminor, and Kremers, the trial judge handling the multidistrict litigation
rendered a 277 page opinion that ruled on AstraZeneca's complaints that these
four defendants (the "First Wave Defendants") infringed the remaining
patents-in-suit. Most importantly, the trial judge ruled that three of the First
Wave defendants, Andrx, Genpharm and Cheminor, infringed the '505 and '230
patents asserted by AstraZeneca in its complaints, and that those patents are
valid until 2007. The court construed the specific language of those two related
patents and found that each of these three First Wave Defendants proposed to
manufacture their generic equivalents of omeprazole using a process that
employed an Alkaline Reacting Compound, which the trial court said was defined
in the patent to include disodium hydrogen phosphate (a substance also used in
IMPAX's formulation), to create a "stabilizing" alkaline protective
"microenvironment" around active omeprazole particles in the "core region." The
trial court also construed the language of these patents to require that an
inert "subcoating" be "disposed" on the "core." The court said that the language
of the patents should be construed to mean that such a "subcoating" might be
created "in situ" by some reaction between elements of the "core" and an enteric
coating. The court held that the formulations employed by Andrx, Genpharm, and
Cheminor met these patent requirements, as well, and that these three First Wave
Defendants thus infringed both the '505 and '230 patents.
In the same ruling, the trial court ruled that of the remaining First Wave
Defendant, Kremers, did not infringe either the '505 or the '230 patent. This
defendant's formulation differed from the formulation used by the other First
Wave Defendants in several respects. Among other things, the trial court's
opinion stated that Kremers does not use an Alkaline Reacting Compound in its
"core."
The formulation that IMPAX would employ in manufacturing its generic equivalent
of omeprazole has not been publicly announced. IMPAX's formulation has elements
which resemble those of other First Wave Defendants, but it also has elements
which differ. Although the ruling by the trial court in the multidistrict has
significant effect on the course of AstraZeneca's litigation against IMPAX,
application of the trial court's opinion is not certain. IMPAX believes that it
has defenses to AstraZeneca's claims of infringement, but the opinion rendered
by the trial court in the First Wave cases makes the outcome of AstraZeneca's
litigation against IMPAX less certain.
Now that a decision has been rendered in the trial, a new scheduling order may
be entered by the court for the remaining six defendants, including IMPAX. The
timing of further proceedings in this litigation may be adversely affected by
the appellate proceedings which may be commenced by AstraZeneca and the First
Wave Defendants. Although the timing of further proceedings remains undecided,
it is at least possible, if not likely, that the trial court may delay any
further proceedings in the litigation involving IMPAX until appellate
proceedings in the First Wave cases are completed.
Once a scheduling order is entered by the court in the multidistrict litigation,
discovery and pre-trial proceedings will commence. If those pre-trial
proceedings are not summarily resolved (as by summary judgment), the case
involving IMPAX will be returned to the U.S. District Court in Delaware for
trial. A possibility exists that the case will be transferred back to New York
for a consolidated trial, before the same judge who decided the First Wave
cases.
IMPAX is defending the action brought by AstraZeneca under an insurance policy
issued by AIG, which pays a portion of the costs of IMPAX's defense of
AstraZeneca's suit.
In March 2001, AstraZeneca advised all of the defendants in the multidistrict
litigation that four new patents had been added to the FDA's Orange Book as
Omeprazole patents. IMPAX filed Paragraph IV certifications asserting that its
Omeprazole Delayed Release Capsules will not infringe valid claims of the four
newly listed patents. The 45 day period for AstraZeneca to file suit against
IMPAX under the four patents expired on August 6, 2001. AstraZeneca did not file
suit on these patents against IMPAX or any other generic company that filed
Paragraph IV certifications for these patents.
Tricor (Fenofibrate) Litigation
In August 2000, Abbott Laboratories and Fournier Industrie et Sante and a
related company, filed suit against IMPAX in the United States District Court in
Chicago, Illinois, claiming that IMPAX's submission of an ANDA for Fenofibrate
(Micronized) Capsules, 67mg, constitutes infringement of a U.S. patent owned by
Fournier and exclusively licensed to Abbott, relating to Abbott's TRICOR(R)
product.
In December 2000, Abbott and Fournier filed a second action against IMPAX in the
same court making the same claims against IMPAX's 200mg Fenofibrate (Micronized)
capsules. A third action was filed for IMPAX's 134mg Fenofibrate (Micronized)
Capsules in March 2001. All three actions seek an injunction preventing IMPAX
from marketing its fenofibrate products until January 19, 2009, and an award of
damages for any commercial manufacture, use, or sale of IMPAX's fenofibrate
product, together with costs and attorney fees.
Abbott and Fournier have filed essentially the same lawsuits against Novopharm
and Teva, also in the U.S. District Court in Chicago. IMPAX responded to the
complaints by asserting that its proposed generic fenofibrate product does not
infringe the patent-in-suit, and by asserting that the patent-in-suit is invalid
and not enforceable against IMPAX.
In March 2002, Judge Darrah granted Novopharm's motion for summary judgment of
non-infringement. The grounds for finding non-infringement by Novopharm were
directly applicable to IMPAX. IMPAX filed its own motion for summary judgment of
non-infringement before Judge Gotschall, the judge who is presiding over the
IMPAX case. IMPAX's motion has been fully briefed since June 2002 and is
awaiting disposition by the district court.
In the interim, Abbott has appealed Judge Darrah's ruling to the United States
Court of Appeals for the Federal Circuit. IMPAX has filed a brief in that appeal
as a "friend of court," although IMPAX is not directly a party to the appeal.
The Federal Circuit will hear argument on the appeal in the Novopharm case
shortly, and will render a written opinion in the next several months. If the
Federal Circuit affirms Judge Darrah's opinion, IMPAX will again urge Judge
Gotschall to grant IMPAX's motion for summary judgment. If the Federal Circuit
overturns Judge Darrah's ruling, IMPAX will evaluate the basis for any such
ruling and determine an appropriate course for further litigation at that time.
IMPAX is defending the action brought by Abbott Labs under an insurance policy
issued by AIG which pays a portion of the costs of IMPAX's defense of Abbott's
suit.
Wellbutrin SR and Zyban (Bupropion) Litigation
Glaxo Wellcome, Inc ("Glaxo") filed a complaint against us in the U.S. District
Court for the Northern District of California on September 28, 2000 (No.
00-4403), alleging infringement of U.S. Patent No. 5,427,798, which covers
Wellbutrin SR and Zyban. Glaxo has filed similar complaints against Andrx, Eon,
Excel, and Watson, all of which allege infringement of the same patent.
In 2001, we moved for summary judgment of non-infringement by way of prosecution
history estoppel. Midway through 2002, the district court asked for supplemental
briefing in light of the Supreme Court's decision in Festo Corp. v. Shoketsu
Kinzoku Kogyo Kabushiki Co. (May 28, 2002). In response to the supplemental
briefing, the district court entered judgment in favor of IMPAX on August 22,
2002. In its opinion, the district court held as matter of law that prosecution
history estoppel bars Glaxo from resorting to the doctrine of equivalents to
prove infringement.
Glaxo recently appealed the judgment in favor of IMPAX. The appeal was docketed
in the Federal Circuit on October 11, 2002 (No. O3-1013). Assuming the appeal is
not delayed, Glaxo's initial brief will be due in the Federal Circuit no later
than December 10, 2002, and IMPAX's initial brief will be due no later than 40
days after receipt of Glaxo's brief. At this time, it is not known if and when
there will be oral arguments before the Federal Circuit.
In its litigation against Andrx, Glaxo lost on summary judgment in early 2002.
The district court held that Andrx does not infringe Glaxo's patent. Glaxo
appealed the judgment in favor of Andrx. That appeal is pending before the
Federal Circuit.
In its litigation against Eon, Glaxo recently defeated Eon's motion for summary
judgment of non-infringement by way of prosecution history estoppel. The
district court held that Eon's motion raised questions of fact which could only
be resolved at trial. Glaxo's case against Eon is nearly identical to the case
against IMPAX. Accordingly, Eon has asked the district court to reconsider its
decision in light of the judgment in favor of IMPAX.
In its litigation against Excel, Glaxo recently lost on summary judgment. The
district court held that prosecution history estoppel bars Glaxo from resorting
to the doctrine of equivalents to prove infringement. Glaxo's case against Excel
is very similar to the cases against Eon and IMPAX. Glaxo has appealed the
judgment in favor of Excel. Glaxo's initial brief will be due in the Federal
Circuit no later than December 3, 2002, and Excel's initial brief will be due no
later than 40 days after receipt of Glaxo's brief. At this time, it is not known
if and when there will be oral arguments before the Federal Circuit.
Glaxo settled its litigation against Watson in July 2001 on terms that are
confidential.
Claritin (Loratadine) Litigation
On January 2, 2001, Schering Corporation ("Schering") sued IMPAX in the United
States District Court for the District of New Jersey (Case No. 01-0009),
alleging that IMPAX's proposed loratadine and pseudoephedrine sulfate 24-hour
extended release tablets, containing 10mgs of loratadine and 240mgs of
pseudoephedrine sulfate, infringe U.S. Patent Nos. 4,659,716 (the "'716 patent")
and 5,314,697 (the "'697 patent"). Schering has sought to enjoin IMPAX from
obtaining FDA approval to market its 24-hour extended release tablets until the
`697 patent expires in 2012. Schering has also sought monetary damages should
IMPAX use, sell, or offer to sell its loratadine product prior to the expiration
of the `697 patent. IMPAX filed its Answer to the Complaint on February 1, 2001.
IMPAX has denied that it infringes any valid and/or enforceable claim of the
`716 or `697 patent.
On January 18, 2001, Schering sued IMPAX in the United States District Court for
the District of New Jersey (Case No. 01-0279), alleging that IMPAX's proposed
orally-disintegrating loratadine tablets ("Reditabs") infringe claims of the
'716 patent. Schering has sought to enjoin IMPAX from obtaining approval to
market its Reditab products until the `716 patent expires in 2004. Schering has
also sought monetary damages should IMPAX use, sell, or offer to sell its
loratadine product prior to the expiration of the `716 patent. IMPAX filed its
Answer to the Complaint on February 27, 2001, and has denied that it infringes
any valid or enforceable claim of the `716 patent.
On February 1, 2001, Schering sued IMPAX in the United States District Court for
the District of New Jersey (Case No. 01-0520), alleging that IMPAX's proposed
loratadine and pseudoephedrine sulfate 12-hour extended release tablets,
containing 5mgs of loratadine and 120mgs of pseudoephedrine sulfate, infringe
claims of the '716 patent. Schering has sought to enjoin IMPAX from obtaining
approval to market its 12-hour extended release tablets until the `716 patent
expires in 2004. Schering has also sought monetary damages should IMPAX use,
sell, or offer to sell its loratadine product prior to the expiration of the
`716 patent. Schering served its Complaint upon IMPAX on February 7, 2001. IMPAX
filed its Answer to the Complaint on February 27, 2001, and has denied that it
infringes any valid or enforceable claim of the `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
corporations who have sought FDA approval to market generic loratadine products.
The United States District Court for the District of New Jersey granted summary
judgment in IMPAX's favor in Case Nos. 01-009, 01-0279, and 01-0520, holding
that the asserted claims of the `716 patent are invalid. This decision applied
in all of the consolidated loratadine actions. Schering has appealed this
decision to the United States Court of Appeals for the Federal Circuit.
At this time, fact discovery on the `697 patent has been completed in Case No.
01-0009. Pursuant to the Court's Scheduling Order, expert discovery regarding
the `697 patent is to be completed by December 20, 2002.
Allegra-D(R) (Fexofenadine) Litigation
On March 25, 2002, Aventis Pharmaceuticals Inc., Merrell Pharmaceuticals Inc.,
and Carderm Capital L.P. (collectively "Aventis") sued IMPAX in the United
States District Court for the District of New Jersey (Civil Action No.
02-CV-1322), alleging that IMPAX's proposed fexofenadine hydrochloride and
pseudoephedrine hydrochloride tablets, containing 60mg of fexofenadine
hydrochloride and 120mg of pseudoephedrine hydrochloride, infringe United States
Patent Nos. 6,039,974; 6,037,353; 5,738,872; 6,187,791; 5,855,912; and
6,113,942. In addition, on March 26, 2002, Aventis filed a virtually identical
complaint against IMPAX in the United States District Court for the District of
Delaware (Civil Action No. 02-226). Aventis seeks an injunction preventing IMPAX
from marketing its fexofenadine/pseudoephedrine product until the
patents-in-suit have expired, and an award of damages for any commercial
manufacture, use, or sale of IMPAX's fexofenadine/pseudoephedrine product,
together with costs and attorneys' fees. Aventis has also filed suit against
Barr Laboratories, Inc. in New Jersey for a similar proposed
fexofenadine/pseudoephedrine product.
On May 8, 2002, IMPAX moved to dismiss the New Jersey action for lack of
personal jurisdiction, which motion Aventis has opposed. Briefing is complete on
the motion, but no date is scheduled for oral argument.
On July 22, 2002, Aventis served IMPAX with the Delaware complaint, but
simultaneously moved to stay the action pending the New Jersey court's decision
on IMPAX's motion to dismiss. On August 8, 2002, IMPAX answered the Delaware
complaint by asserting that the patents-in-suit are invalid and not infringed,
and filed an opposition to the motion to stay. The Delaware court has not
indicated whether it will hear oral argument on the motion to stay, nor when it
will rule on the motion. In the meantime, IMPAX has asked the Delaware court to
schedule a Rule 16 Scheduling Conference so that the parties can begin to
conduct discovery. To date, Aventis has not filed any objection to IMPAX's
request.
Because of the pending procedural motions, discovery on the merits has not yet
begun. IMPAX believes, however, that it has strong defenses to the claims made
by Aventis based on non-infringement and invalidity.
OxyContin(R) (Oxycodone HCl) Litigation
On April 11, 2002, Purdue Pharma and related companies filed a complaint in the
Federal District Court for the Southern District of New York alleging that
IMPAX's submission of ANDA No. 76-318, for a generic version of 80mg OxyContin
Tablets, infringes three patents owned by Purdue. The Purdue patents are U.S.
4,861,598, U.S. 4,970,075 and U.S. 5,266,331, all directed to controlled release
opiod formulations. On September 19, 2002, Purdue filed a second infringement
complaint regarding IMPAX's 40mg generic product. Purdue is seeking, among other
things, a court order preventing IMPAX from manufacturing, using, or selling any
drug product which infringes the subject Purdue patents. IMPAX is currently
disputing the jurisdiction of the New York court in which Purdue has brought
this matter by pursuing a motion to dismiss Purdue's New York action. As of
October 24, 2002, the court has not ruled on IMPAX's pending motion. Discovery
will begin once this jurisdictional question has been resolved.
Purdue previously has sued Boehringer-Ingellheim/Roxanne, Endo, and Teva on the
same patents. It is possible that one or more of these other defendants will
resolve the invalidity issues surrounding the Purdue patents prior to IMPAX
going to trial.
Rilutek(R) (Riluzole) 50mg Litigation
In June 2002, IMPAX filed a suit against Aventis Pharmaceuticals, Inc. in the
United States District Court in Delaware, seeking a declaration that Aventis'
U.S. Patent No. 5,527,814 is invalid. In July 2002, Aventis filed an answer and
counterclaim, claiming that IMPAX's submission of an ANDA for Riluzole Tablets
constituted infringement of U.S. Patent No. 5,527,814 and that our intended
marketing activities constituted inducement of infringement of this patent.
IMPAX filed an answer to the counterclaim in August 2002. A scheduling
conference was conducted by the court in early September 2002, and trial was set
for October 2003. The parties are presently engaged in discovery. On October 15,
2002, Aventis filed a motion seeking a preliminary injunction enjoining us from
marketing Riluzole Tablets until a final decision is reached by the court in
this case.
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 twelve 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.62 Loan and Security Agreement by and between Congress Financial
Corporation as Lender, and IMPAX Laboratories, Inc. as Borrower,
dated October 23, 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
CERTIFICATIONS
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
I, Charles Hsiao, Ph.D., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Impax Laboratories,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact, or omit to state a material fact, necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present, in all
material respects, the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize, and report financial data, and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls, or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ CHARLES HSIAO, PH.D.
-----------------------------------------
Chairman and Co-Chief Executive Officer
October 30, 2002
-----------------------------------------
Date
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
I, Barry R. Edwards, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Impax Laboratories,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact, or omit to state a material fact, necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present, in all
material respects, the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize, and report financial data, and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls, or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ BARRY R. EDWARDS
-----------------------------------------
Co-Chief Executive Officer
October 31, 2002
-----------------------------------------
Date
CERTIFICATION OF
CHIEF FINANCIAL OFFICER
I, Cornel C. Spiegler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Impax Laboratories,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact, or omit to state a material fact, necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present, in all
material respects, the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize, and report financial data, and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls, or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ CORNEL C. SPIEGLER
-----------------------------------------
Chief Financial Officer
October 31, 2002
-----------------------------------------
Date