Form 8-K IMPAX LABORATORIES INC For: Nov 04

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November 4, 2014 8:14 AM EST

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

�

FORM 8-K

�

CURRENT REPORT

�

Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

�

Date of Report (Date of earliest event reported): November 4, 2014

�

Impax Laboratories, Inc.

(Exact name of registrant as specified in its charter)

�

Delaware

�

001-34263

�

65-0403311

(State or other jurisdiction

of incorporation)

�

(Commission

File Number)

�

(IRS Employer

Identification No.)

�

30831 Huntwood Avenue, Hayward, CA	�	94544
(Address of principal executive offices)	�	(Zip Code)

�

Registrants telephone number, including area code:

(510) 240-6000

�

Not Applicable

(Former name or former address, if changed since last report)

�

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

�

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

�

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

�

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

�

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

��

�

Item 2.02

Results of Operations and Financial Condition.

�

On November 4, 2014, Impax Laboratories, Inc. issued a press release announcing its results for the third quarter ended September 30, 2014. A copy of the press release is attached hereto as Exhibit 99.1 and incorporated by reference herein.

�

The information in this report furnished pursuant to Item 2.02, including Exhibit 99.1 attached hereto, shall not be deemed filed for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), or otherwise subject to the liabilities of that section. It may only be incorporated by reference in another filing under the Exchange Act or the Securities Act of 1933, as amended, if such subsequent filing specifically references the information furnished pursuant to Item 2.02 of this report.

�

Item 9.01��Financial Statements and Exhibits.

�

�	(d)	Exhibits.
�	�	�
�	�	The following exhibit is furnished herewith.

�

Exhibit No.	�	Description
99.1	�	Press release issued�November 4, 2014.

�

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 hereunto duly authorized.

�

Dated: November 4, 2014�	IMPAX LABORATORIES, INC.�
�	�	�	�
�	�	�	�
�	By:�	/s/ Bryan M. Reasons�
�	�	Name:�	Bryan M. Reasons�
�	�	Title:�	Senior VP, Chief Financial Officer�

�

EXHIBIT INDEX

�

Exhibit No.	�	Description
99.1	�	Press release issued�November 4, 2014.

�

Exhibit 99.1

�

��

Impaxs Third Quarter 2014 Revenues Increased 19% to $158 Million

Third Quarter 2014 Adjusted Diluted EPS Increased to $0.33; GAAP Diluted EPS Increased to $0.22

Nine Month 2014 Revenues Increased 13% to $465 Million

Company Updates 2014 Financial Guidance

�

HAYWARD, Calif., Nov. 4, 2014 Impax Laboratories, Inc. (NASDAQ: IPXL) today reported total revenues increased 19.1% to $158.0 million for the third quarter ended September 30, 2014, compared to $132.6 million in the prior year period. Adjusted diluted earnings per share increased to $0.33 for the third quarter 2014, compared to $0.25 per diluted share in the prior year period. On a GAAP basis, diluted earnings per share increased to $0.22 for the third quarter 2014, compared to break-even results in the prior year period.

�

Third quarter 2014 adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) increased $14.0 million to $48.2 million, compared to $34.2 million in the prior year period. Cash, cash equivalents and short-term investments increased $29.4 million to $442.5 million as of September 30, 2014, compared to December 31, 2013.

�

The strong third quarter results were driven by higher sales from our key products in the generics business as well as continued growth of Zomig^�nasal sprayin our brand division, said Fred Wilkinson, president and chief executive officer of Impax Laboratories. The increased revenues are the direct result of our increased focus on commercialization strategies for our current line of assets.

�

Since the close of the quarter, we announced the proposed acquisition of Tower Holdings, Inc. and Lineage Therapeutics Inc. Once successfully completed, this transaction is expected to be immediately accretive and to create both near and long-term brand and generic growth opportunities. The resulting combination will have the effect of creating a more efficient capital structure and will preserve our ability to pursue additional growth opportunities that expand and diversify our business.

�

We also recently announced that we have aligned our research and development organizations to enhance efficiencies and maximize our investment in product development, and we continue to commit substantial resources to advance our quality improvement initiatives.

�

Business Segment Information

�

The Company has two reportable segments, the Global Pharmaceuticals Division (generic products and services) and the Impax Pharmaceuticals Division (brand products and services) and does not allocate general corporate services to either segment. All information presented is on a GAAP basis unless otherwise noted on an adjusted basis.

�

Global Pharmaceuticals Division Information

(unaudited, amounts in thousands)

�

Three Months Ended

�

Nine Months Ended

�

September 30,

�

September 30,

�

2014

�

2013

�

2014

�

2013

�

Revenues:

�

Global Product sales, net

�

143,575

�

111,686

�

413,653

�

299,231

�

Rx Partner

�

1,447

�

3,016

�

13,086

�

9,797

�

Other revenues

�

611

�

1,046

�

4,428

�

2,323

�

Total revenues

�

145,633

�

115,748

�

431,167

�

311,351

�

Cost of revenues

�

68,488

�

77,082

�

195,382

�

193,251

�

Gross profit

�

77,145

�

38,666

�

235,785

�

118,100

�

Operating expenses:

�

Research and development

�

10,213

�

10,970

�

32,175

�

31,972

�

Patent litigation expense

�

1,066

�

4,497

�

5,006

�

13,079

�

Selling, general and administrative

�

4,867

�

3,671

�

11,822

�

12,597

�

Total operating expenses

�

16,146

�

19,138

�

49,003

�

57,648

�

Income from operations

�

60,999

�

19,528

�

186,782

�

60,452

�

Gross margin

�

53.0

�

33.4

�

54.7

�

37.9

Adjusted gross profit ⁽¹⁾

�

82,383

�

62,867

�

265,491

�

165,105

�

Adjusted gross margin ⁽¹⁾

�

56.6

�

54.3

�

61.6

�

53.0

^�

⁽¹⁾Adjusted gross profit is calculated as total revenues less adjusted cost of revenues. Adjusted gross margin is calculated as adjusted gross profit divided by total revenues. Refer to the "Non-GAAP Financial Measures" for a reconciliation of GAAP to non-GAAP items.

�

Global Product sales, net increased 28.6% to $143.6 million in the third quarter 2014, compared to $111.7 million in the prior year period. The increase was driven by higher sales of several key generic products, including the mid-April launch of the Companys allotment of a specified number of bottles of authorized generic RENVELA^�.

�

Gross margin in the third quarter 2014 increased to 53.0%, compared to gross margin of 33.4% in the prior year period. Adjusted gross margin in the third quarter 2014 increased to 56.6%, compared to adjusted gross margin of 54.3% in the prior year period. The increase in gross margin and adjusted gross margin was due to the favorable contribution from several key generic products, including authorized generic RENVELA.

�

Total Global Pharmaceuticals operating expenses in the third quarter 2014 decreased to $16.1 million, compared to $19.1 million in the prior year period, primarily due to reduced patent litigation expenses.

��

�

��

Impax Pharmaceuticals Division Information

(unaudited, amounts in thousands)

�

Three Months Ended

�

Nine Months Ended

�

September 30,

�

September 30,

�

2014

�

2013

�

2014

�

2013

�

Revenues:

�

Impax Product sales, net

�

12,100

�

16,562

�

32,869

�

98,416

�

Other revenues

�

266

�

331

�

802

�

994

�

Total revenues

�

12,366

�

16,893

�

33,671

�

99,410

�

Cost of revenues

�

5,073

�

7,217

�

17,624

�

52,407

�

Gross profit

�

7,293

�

9,676

�

16,047

�

47,003

�

Operating expenses:

�

Research and development

�

8,770

�

5,101

�

29,801

�

19,244

�

Selling, general and administrative

�

10,794

�

10,078

�

31,749

�

34,677

�

Total operating expenses

�

19,564

�

15,179

�

61,550

�

53,921

�

Loss from operations

�

(12,271

)

�

(5,503

)

�

(45,503

)

�

(6,918

)

�

Gross margin

�

59.0

�

57.3

�

47.7

�

47.3

Adjusted gross profit ⁽¹⁾

�

8,023

�

10,406

�

18,237

�

65,258

�

Adjusted gross margin ⁽¹⁾

�

64.9

�

61.6

�

54.2

�

65.6

�

Impax Product sales, net decreased 26.9% to $12.1 million in the third quarter 2014, compared to $16.6 million in the prior year period, due to lower sales of Zomig tablet and orally disintegrating tablet products from the loss of exclusivity in May 2013, partially offset by a 54% increase in sales of Zomig nasal spray which has patents expiring as late as May 2021.

�

Gross margin in the third quarter 2014 increased to 59.0%, compared to 57.3% in the prior year period. Adjusted gross margin in the third quarter 2014 increased to 64.9%, compared to adjusted gross margin of 61.6% in the prior year period. The increase in gross margin and adjusted gross margin was due to favorable product contribution from higher sales of Zomig nasal spray.

�

Total Impax Pharmaceuticals operating expenses in the third quarter 2014 increased to $19.6 million, compared to $15.2 million in the prior year period, primarily due to an increase in research and development activity.

��

�

Corporate and Other

(unaudited, amounts in thousands)

�

Three Months Ended

�

Nine Months Ended

�

September 30,

�

September 30,

�

2014

�

2013

�

2014

�

2013

�

General and administrative expenses

�

23,227

�

14,219

�

53,611

�

43,687

�

Loss from operations

�

(23,227

)

�

(14,219

)

�

(53,611

)

�

(43,687

)

�

General and administrative expenses in the third quarter 2014 increased to $23.2 million, compared to $14.2 million in the prior year period, primarily due to higher professional fees of $5.2 million related to business development activities, as well as the inclusion of executive transition charges and higher litigation expenses.

�

2014 Financial Guidance

�

Impax Laboratories full year 2014 estimates are based on managements current belief about prescription trends, pricing levels, inventory levels, and the anticipated timing of future product launches and events. The Company updated its estimated adjusted 2014 financial guidance as noted below.

�

�	Adjusted gross margins as a percent of total revenue are expected to be in the upper 50% range.

�

UPDATED - Total research and development (R&D) expenses across the generic and brand divisions of approximately $76.0 - $78.0 million (previously $82.0 - $88.0 million). The reduction is primarily due to the reallocation of resources for facility remediation and quality improvement initiatives, as well as the recently announced reorganization of the R&D department.

�

Generic R&D expenses of approximately $40.0 - $41.0 million (previously $46.0 - $49.0 million), and

�

Brand R&D expenses of approximately $36.0 - $37.0 million (previously $36.0 - $39.0 million).

�	UPDATED - Patent litigation expenses of approximately $7.0 - $8.0 million (previously $11.0 - $13.0 million) due to reduced litigation activity.

�	UPDATED - Selling, general and administrative expenses of approximately $127.0 - $129.0 million (previously $115.0 - $120.0 million) due to executive and other compensation costs, higher corporate legal expenses and increased information technology activity.

�	UPDATED - Capital expenditures of approximately $35.0 million (previously $40.0 - $45.0 million) due to changes in the timing and reprioritization of projects.

�	UPDATED - Hayward facility remediation costs of approximately $25.0 - $28.0 million (previously $25.0 - $30.0 million).

�

UPDATED - Effective tax rate of approximately 34% (previously 32% to 34%) on a GAAP basis due to product sales mix based on jurisdiction. The 34% tax rate assumes that the U.S. R&D tax credit is renewed for 2014 and is enacted before December 31, 2014. The R&D tax credit expired on December 31, 2013. The Company anticipates that its non-GAAP effective tax rate may experience volatility as the Companys tax benefits may be high compared to the Companys operating income or loss.

�

Conference Call Information

�

The Company will host a conference call on November 4, 2014 at 8:30 a.m. ET to discuss its results. The call can also be accessed via a live Webcast through the Investor Relations section of the Companys Web site, www.impaxlabs.com. The number to call from within the United States is (877) 356-3814 and (706) 758-0033 internationally. The conference ID is 15780142. A replay of the conference call will be available shortly after the call for a period of seven days. To access the replay, dial (855) 859-2056 (in the U.S.) and (404) 537-3406 (international callers).

��

�

About Impax Laboratories, Inc.

�

Impax Laboratories, Inc. (Impax) is a technology based specialty pharmaceutical company applying its formulation expertise and drug delivery technology to the development of controlled-release and specialty generics in addition to the development of central nervous system disorder branded products. Impax markets its generic products through its Global Pharmaceuticals division and markets its branded products through the Impax Pharmaceuticals division. Additionally, where strategically appropriate, Impax develops marketing partnerships to fully leverage its technology platform and pursues partnership opportunities that offer alternative dosage form technologies, such as injectables, nasal sprays, inhalers, patches, creams, and ointments. For more information, please visit the Company's Web site at: www.impaxlabs.com.

�

"Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995:

�

To the extent any statements made in this news release contain information that is not historical; these statements are forward-looking in nature and express the beliefs and expectations of management. Such statements are based on current expectations and involve a number of known and unknown risks and uncertainties that could cause the Companys future results, performance, or achievements to differ significantly from the results, performance, or achievements expressed or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to: fluctuations in revenues and operating income; the Companys ability to promptly correct the issues raised in the warning letter and Form 483 observations received from the FDA; the Companys ability to successfully develop and commercialize pharmaceutical products in a timely manner; reductions or loss of business with any significant customer; the impact of consolidation of the Companys customer base; the impact of competition; the substantial portion of our total revenues derived from sales of a limited number of products; the Companys ability to sustain profitability and positive cash flows; any delays or unanticipated expenses in connection with the operation of the Companys manufacturing facilities; the effect of foreign economic, political, legal, and other risks on the Companys operations abroad; the uncertainty of patent litigation and other legal proceedings; the increased government scrutiny on the Companys agreements with brand pharmaceutical companies; product development risks and the difficulty of predicting FDA filings and approvals; consumer acceptance and demand for new pharmaceutical products; the impact of market perceptions of the Company and the safety and quality of the Companys products; the Companys determinations to discontinue the manufacture and distribution of certain products; the Companys ability to achieve returns on its investments in research and development activities; the Companys inexperience in conducting clinical trials and submitting new drug applications; the Companys ability to successfully conduct clinical trials; the Companys reliance on third parties to conduct clinical trials and testing; the Companys lack of a license partner for commercialization of IPX066 outside of the United States; impact of illegal distribution and sale by third parties of counterfeits or stolen products; the availability of raw materials and impact of interruptions in the Companys supply chain; the Companys policies regarding returns, allowances and chargebacks; the use of controlled substances in the Companys products; the effect of current economic conditions on our industry, business, results of operations and financial condition; disruptions or failures in the Companys information technology systems and network infrastructure; the Companys reliance on alliance and collaboration agreements; the Companys reliance on licenses to proprietary technologies; the Companys dependence on certain employees; the Companys ability to comply with legal and regulatory requirements governing the healthcare industry; the regulatory environment; the Companys ability to protect its intellectual property; exposure to product liability claims; risks relating to goodwill and intangibles; changes in tax regulations; the Companys ability to manage growth, including through potential acquisitions; the Companys ability to meet expectations regarding the timing and completion of the proposed transaction with Tower Holdings, Inc. and Lineage Therapeutics Inc.; the Companys ability to consummate such proposed transaction; the conditions to the completion of such proposed transaction (including the receipt of the regulatory approvals required for the transaction not being obtained on the terms expected or on the anticipated schedule), the integration of the acquired business by the Company being more difficult, time-consuming or costly than expected, operating costs, customer loss and business disruption (including, without limitation, difficulties in maintaining relationships with employees, customers, clients or suppliers) being greater than expected following the proposed transaction, the retention of certain key employees of the acquired business being difficult, the Companys and the acquired businesss expected or targeted future financial and operating performance and results, the combined companys capacity to bring new products to market, and the possibility that the Company may be unable to achieve expected synergies and operating efficiencies in connection with such proposed transaction within the expected time-frames or at all and to successfully integrate the acquired business, the restrictions imposed by the Companys credit facility; uncertainties involved in the preparation of the Companys financial statements; the Companys ability to maintain an effective system of internal control over financial reporting; the effect of terrorist attacks on the Companys business; the location of the Companys manufacturing and research and development facilities near earthquake fault lines; expansion of social media platforms and�other risks described in the Companys periodic reports filed with the Securities and Exchange Commission.�Forward-looking statements speak only as to the date on which they are made, and the Company undertakes no obligation to update publicly or revise any forward-looking statement, regardless of whether new information becomes available, future developments occur or otherwise.

��

Company Contact:

Mark Donohue

Investor Relations and Corporate Communications

(215) 558-4526��

www.impaxlabs.com�

�

Impax Laboratories, Inc.

Consolidated Statements of Operations

(unaudited, amounts in thousands, except share and per share data)

�

Three Months Ended

�

Nine Months Ended

�

September 30,

�

September 30,

�

2014

�

2013

�

2014

�

2013

�

Revenues:

�

Global Pharmaceuticals Division, net

�

145,633

�

115,748

�

431,167

�

311,351

�

Impax Pharmaceuticals Division, net

�

12,366

�

16,893

�

33,671

�

99,410

�

Total revenues

�

157,999

�

132,641

�

464,838

�

410,761

�

Cost of revenues

�

73,561

�

84,299

�

213,006

�

245,658

�

Gross profit

�

84,438

�

48,342

�

251,832

�

165,103

�

Operating expenses:

�

Research and development

�

18,983

�

16,071

�

61,976

�

51,216

�

Patent litigation expense

�

1,066

�

4,497

�

5,006

�

13,079

�

Selling, general and administrative

�

38,888

�

27,968

�

97,182

�

90,961

�

Total operating expenses

�

58,937

�

48,536

�

164,164

�

155,256

�

Income (loss) from operations

�

25,501

�

(194

)

�

87,668

�

9,847

�

Other income (loss), net

�

(85

)

�

115

�

152,366

�

Interest income

�

370

�

349

�

1,123

�

940

�

Interest expense

�

(25

)

�

(50

)

�

(378

)

Income before income taxes

�

25,854

�

88,909

�

162,775

�

Provision for income taxes

�

10,117

�

200

�

31,676

�

51,894

�

Net income (loss)

�

15,737

�

(180

)

�

57,233

�

110,881

�

Net income (loss) per share:

�

Basic

�

0.23

�

(0.00

)

�

0.84

�

1.66

�

Diluted

�

0.22

�

(0.00

)

�

0.81

�

1.62

�

Weighted average common shares outstanding:

�

Basic

�

68,254,327

�

67,051,121

�

68,019,336

�

66,764,550

�

Diluted

�

70,715,226

�

67,051,121

�

70,304,933

�

68,354,439

�

Impax Laboratories, Inc.

Condensed Consolidated Balance Sheets

(unaudited, amounts in thousands)

�

�	�	September 30,		�	�	December 31,		�
�	�	2014		�	�	2013		�
Assets	�	�	�	�	�	�	�	�
Current assets:	�	�	�	�	�	�	�	�
Cash and cash equivalents	�	$	200,470	�	�	$	184,612	�
Short-term investments	�	�	242,045	�	�	�	228,521	�
Accounts receivable, net	�	�	152,287	�	�	�	112,993	�
Inventory, net	�	�	86,146	�	�	�	70,107	�
Deferred income taxes	�	�	51,842	�	�	�	50,788	�
Prepaid expenses and other assets	�	�	18,219	�	�	�	12,721	�
Total current assets	�	�	751,009	�	�	�	659,742	�
Property, plant and equipment, net	�	�	191,272	�	�	�	188,191	�
Other assets	�	�	94,008	�	�	�	91,746	�
Intangible assets, net	�	�	28,307	�	�	�	29,670	�
Goodwill	�	�	27,574	�	�	�	27,574	�
Total assets	�	$	1,092,170	�	�	$	996,923	�
�	�	�	�	�	�	�	�	�
Liabilities and Stockholders' Equity	�	�	�	�	�	�	�	�
Current liabilities:	�	�	�	�	�	�	�	�
Accounts payable and accrued expenses	�	$	154,904	�	�	$	138,347	�
Accrued profit sharing and royalty expenses	�	�	13,611	�	�	�	11,560	�
Deferred revenue	�	�	1,633	�	�	�	3,983	�
Total current liabilities	�	�	170,148	�	�	�	153,890	�
Deferred revenue	�	�	3,466	�	�	�	4,267	�
Other liabilities	�	�	30,055	�	�	�	28,563	�
Total liabilities	�	�	203,669	�	�	�	186,720	�
Total stockholders' equity	�	�	888,501	�	�	�	810,203	�
Total liabilities and stockholders' equity	�	$	1,092,170	�	�	$	996,923	�

�

Impax Laboratories, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited, amounts in thousands)

�	�	Nine Months Ended						�
�	�	September 30,						�
�	�	2014		�	�	2013		�
Cash flows from operating activities:	�	�	�	�	�	�	�	�
Net income	�	$	57,233	�	�	$	110,881	�
�	�	�	�	�	�	�	�	�
Adjustments to reconcile net income to net cash provided by operating activities:	�	�	�	�	�	�	�	�
Depreciation and amortization	�	�	24,551	�	�	�	30,482	�
Provision for inventory reserves	�	�	5,833	�	�	�	21,073	�
Intangible asset impairment charges	�	�	2,876	�	�	�	13,906	�
Charge for licensing agreement	�	�	2,000	�	�	�	-	�
Accretion of interest income on short-term investments	�	�	(603	)	�	�	(518	)
Deferred income tax benefit	�	�	(8,741	)	�	�	(13,996	)
Tax impact related to the exercise of employee stock options and restricted stock	�	�	(1,736	)	�	�	(742	)
Recognition of deferred revenue	�	�	(3,150	)	�	�	(3,339	)
Accrued profit sharing and royalty expense	�	�	37,065	�	�	�	49,768	�
Payments of profit sharing and royalty expense	�	�	(35,014	)	�	�	(42,797	)
Share-based compensation expense	�	�	15,309	�	�	�	14,066	�
Changes in assets and liabilities which used cash	�	�	(41,684	)	�	�	(23,518	)
Net cash provided by operating activities	�	�	53,939	�	�	�	155,266	�
Cash flows from investing activities:	�	�	�	�	�	�	�	�
Purchase of short-term investments	�	�	(314,306	)	�	�	(266,291	)
Maturities of short-term investments	�	�	301,385	�	�	�	220,048	�
Purchases of property, plant and equipment	�	�	(23,968	)	�	�	(24,222	)
Payments for licensing agreements and acquisitions	�	�	(11,000	)	�	�	-	�
Net cash used in investing activities	�	�	(47,889	)	�	�	(70,465	)
Cash flows from financing activities:	�	�	�	�	�	�	�	�
Proceeds from exercise of stock options and ESPP	�	�	8,961	�	�	�	5,882	�
Tax impact related to the exercise of employee stock options and restricted stock	�	�	1,736	�	�	�	742	�
Net cash provided by financing activities	�	�	10,697	�	�	�	6,624	�
Effect of exchange rate changes on cash and cash equivalents	�	�	(889	)	�	�	(458	)
Net increase in cash and cash equivalents	�	�	15,858	�	�	�	90,967	�
Cash and cash equivalents, beginning of period	�	�	184,612	�	�	�	142,162	�
Cash and cash equivalents, end of period	�	$	200,470	�	�	$	233,129	�

�

Impax Laboratories, Inc.

Non-GAAP Financial Measures

�

Adjusted net income, adjusted net income per diluted share, EBITDA, adjusted EBITDA, adjusted cost of revenues, adjusted research and development expenses and adjusted selling, general and administrative expenses are not measures of financial performance under generally accepted accounting principles (GAAP) and should not be construed as substitutes for, or superior to, GAAP net income, GAAP net income per diluted share, GAAP cost of revenues, GAAP research and development expenses and GAAP selling, general and administrative expenses as a measure of financial performance. However, management uses both GAAP financial measures and the disclosed non-GAAP financial measures internally to evaluate and manage the Companys operations and to better understand its business. Further, management believes the inclusion of non-GAAP financial measures provides meaningful supplementary information to, and facilitates analysis by, investors in evaluating the Companys financial performance, results of operations and trends. The Companys calculations of adjusted net income, adjusted net income per diluted share, EBITDA, adjusted EBITDA, adjusted cost of revenues, adjusted research and development expenses and adjusted selling, general and administrative expenses, may not be comparable to similarly designated measures reported by other companies, since companies and investors may differ as to what type of events warrant adjustment.

�

The following table reconciles reported net income to adjusted net income.

(Unaudited, amounts in thousands, except per share data)

�

Three months ended

�

Nine months ended

�

September 30,

�

September 30,

�

2014

�

2013

�

2014

�

2013

�

Net income (loss)

�

15,737

�

(180

)

�

57,233

�

110,881

�

Adjusted to add (deduct):

�

Amortization ^(a)

�

2,463

�

1,032

�

7,487

�

14,399

�

Business development expenses ^(b)

�

5,187

�

5,187

�

Hayward facility remediation costs ⁽^c⁾

�

3,505

�

10,743

�

20,673

�

17,241

�

Employee severance ^(d)

�

860

�

7,988

�

Payments received from litigation settlement ^(e)

�

(153,049

)

Intangible asset impairment charges ^(f)

�

13,906

�

2,876

�

13,906

�

Provision for inventory reserve ^(g)

�

18,053

�

R&D partner milestone payment ^(h)

�

2,000

�

Loss on asset disposal ⁽ⁱ⁾

�

881

�

Payment for licensing agreement ^(j)

�

2,000

�

Income tax effect

�

(3,496

)

�

(8,951

)

�

(14,144

)

�

25,450

�

Adjusted net income

�

23,396

�

16,550

�

82,172

�

57,750

�

Adjusted net income per diluted share

�

0.33

�

0.25

�

1.17

�

0.84

�

Net income per diluted share

�

0.22

�

(0.00

)

�

0.81

�

1.62

�

(a)	Primarily resulting from the June 2012 agreement with TOLMAR, Inc. (Tolmar) and the January 2012 agreement with AstraZeneca UK Limited. Included in Cost of revenues on the Consolidated Statements of Operations.

(b)	Professional fees related to business development activities. Included in Selling, general and administrative expenses on the Consolidated Statements of Operations.

�

(c)	Remediation costs relating to the Hayward, CA manufacturing facility. Included in Cost of revenues on the Consolidated Statements of Operations.

(d)	The nine months ended September 30, 2014 expenses are included in Cost of revenues on the Consolidated Statements of Operations. Refer to the Non-GAAP Financial Measures tables for the allocation of the prior year amounts on the Consolidated Statement of Operations.

(e)

Reflects the receipt of a pre-tax payment of $102.0 million from Endo Health Solutions Inc. in connection with a settlement and license agreement and $48.0 million from Shire LLC in connection with the settlement of litigation relating to supply of authorized generic Adderall XR^� products to the Company. Included in Other income, net on the Consolidated Statements of Operations.

(f)

During the first quarter 2014, as a result of a decline in pricing on a currently approved Tolmar product, the Company revised the projections for the product and performed an intangible asset impairment analysis. Based on the results of this analysis, the Company recorded a $2.9 million charge to cost of revenues. During the third quarter 2013, as a result of a decline in the market share data and the Companys revised five year projections for the Tolmar product lines, the Company performed an intangible asset impairment analysis. Based on the results of this analysis, the Company recorded a $13.2 million charge to cost of revenues, which brought the intangible asset down from its carrying value to its revised fair value. Other product rights consist of Abbreviated New Drug Applications (ANDAs) which have been filed with the FDA. During the third quarter 2013, as a result of a decision by management to withdraw one of these ANDAs and no longer seek FDA approval, the Company recorded an intangible asset impairment charge of $0.8 million to research and development expenses, representing the full carrying value of the asset.

(g)	An inventory reserve charge relating to discontinued products, a reserve of pre-launch inventory for RYTARY^TM and other generic products as a result of the delay in the anticipated regulatory approvals. Included in Cost of revenues on the Consolidated Statements of Operations.

(h)	The Company recorded a $2.0 million milestone payment in the first quarter of 2013 under the terms of a research and development partnership agreement. Included in Research and development expense on the Consolidated Statements of Operations.

(i)	Included in Other income, net on the Consolidated Statements of Operations.

(j)	In January 2014, the Company entered into an agreement with DURECT Corporation and paid an upfront fee of $2.0 million. Included in Research and development expense on the Consolidated Statements of Operations.

�

Impax Laboratories, Inc.

Non-GAAP Financial Measures

�

The following table reconciles reported net income to adjusted EBITDA.

(Unaudited, amounts in thousands)

�

Three months ended

�

Nine months ended

�

September 30,

�

September 30,

�

2014

�

2013

�

2014

�

2013

�

Net income (loss)

�

15,737

�

(180

)

�

57,233

�

110,881

�

Adjusted to add (deduct):

�

Interest income

�

(370

)

�

(349

)

�

(1,123

)

�

(940

)

Interest expense

�

)

�

378

�

Depreciation and other

�

5,785

�

5,272

�

17,064

�

16,084

�

Income taxes

�

10,117

�

200

�

31,676

�

51,894

�

EBITDA

�

31,294

�

4,993

�

104,847

�

178,297

�

Adjusted to add (deduct):

�

Amortization

�

2,463

�

1,032

�

7,487

�

14,399

�

Business development expenses

�

5,187

�

5,187

�

Hayward facility remediation costs

�

3,505

�

10,743

�

20,673

�

17,241

�

Employee severance

�

860

�

7,988

�

Payments received from litigation settlement

�

(153,049

)

Intangible asset impairment charges

�

13,906

�

2,876

�

13,906

�

Provision for inventory reserve

�

18,053

�

R&D partner milestone payment

�

2,000

�

Loss on asset disposal

�

881

�

Payment for licensing agreement

�

2,000

�

Share-based compensation

�

5,789

�

3,563

�

15,309

�

14,066

�

Adjusted EBITDA

�

48,238

�

34,237

�

159,239

�

113,782

�

Impax Laboratories, Inc.

Non-GAAP Financial Measures

�

The following table reconciles total Company reported cost of revenues, research and development expenses, and selling, general and administrative expenses to adjusted cost of revenues, adjusted gross profit, adjusted gross margin, adjusted research and development expenses, and adjusted selling, general and administrative expenses.

�

(Unaudited, amounts in thousands)

�

Three months ended

�

Nine months ended

�

September 30,

�

September 30,

�

2014

�

2013

�

2014

�

2013

�

Cost of revenues

�

73,561

�

84,299

�

213,006

�

245,658

�

Adjusted to deduct:

�

Amortization

�

2,463

�

1,032

�

7,487

�

14,399

�

Hayward facility remediation costs

�

3,505

�

10,743

�

20,673

�

17,241

�

Employee severance

�

860

�

2,411

�

Intangible asset impairment charge

�

13,156

�

2,876

�

13,156

�

Provision for inventory reserve

�

18,053

�

Adjusted cost of revenues

�

67,593

�

59,368

�

181,110

�

180,398

�

Adjusted gross profit ⁽¹⁾

�

90,406

�

73,273

�

283,728

�

230,363

�

Adjusted gross margin ⁽¹⁾

�

57.2

�

55.2

�

61.0

�

56.1

�

Research and development expenses

�

18,983

�

16,071

�

61,976

�

51,216

�

Adjusted to deduct:

�

Payment for licensing agreement ⁽²⁾

�

2,000

�

Employee severance ⁽³⁾

�

Intangible asset impairment charge ⁽³⁾

�

750

�

750

�

R&D partner milestone payment ⁽³⁾

�

2,000

�

Adjusted research and development expenses

�

18,983

�

15,321

�

59,976

�

48,375

�

Selling, general and administrative expenses

�

38,888

�

27,968

�

97,182

�

90,961

�

Adjusted to deduct:

�

Employee severance ⁽⁴⁾

�

5,486

�

Business development expenses ⁽⁴⁾

�

5,187

�

5,187

�

Adjusted selling, general and administrative expenses

�

33,701

�

27,968

�

91,995

�

85,475

�

(1)	Adjusted gross profit is calculated as total revenues less adjusted cost of revenues. Adjusted gross margin is calculated as adjusted gross profit divided by total revenues.

(2)	Included within the Impax Pharmaceuticals Division reported results.

(3)	Included within the Global Pharmaceuticals Division reported results.

(4)	Included within the Corporate and Other section of this press release.

�

Impax Laboratories, Inc.

Non-GAAP Financial Measures

�

The following tables reconcile the Global Pharmaceuticals Division and the Impax Pharmaceuticals Division reported cost of revenues to adjusted cost of revenues, adjusted gross profit and adjusted gross margin.

�

Global Pharmaceuticals Division Information

(unaudited, amounts in thousands)

�

Three months ended

�

Nine months ended

�

September 30,

�

September 30,

�

2014

�

2013

�

2014

�

2013

�

Cost of revenues

�

68,488

�

77,082

�

195,382

�

193,251

�

Adjusted to deduct:

�

Amortization

�

1,733

�

302

�

5,297

�

1,161

�

Hayward facility remediation costs

�

3,505

�

10,743

�

20,673

�

17,241

�

Employee severance

�

860

�

2,411

�

Provision for inventory reserve

�

13,036

�

Intangible asset impairment charge

�

13,156

�

2,876

�

13,156

�

Adjusted cost of revenues

�

63,250

�

52,881

�

165,676

�

146,246

�

Adjusted gross profit ⁽¹⁾

�

82,383

�

62,867

�

265,491

�

165,105

�

Adjusted gross margin ⁽¹⁾

�

56.6

�

54.3

�

61.6

�

53.0

�

Impax Pharmaceuticals Division Information

(unaudited, amounts in thousands)

�

Three months ended

�

Nine Months Ended

�

September 30,

�

September 30,

�

2014

�

2013

�

2014

�

2013

�

Cost of revenues

�

5,073

�

7,217

�

17,624

�

52,407

�

Adjusted to deduct:

�

Amortization

�

730

�

730

�

2,190

�

13,238

�

Provision for inventory reserve

�

5,017

�

Adjusted cost of revenues

�

4,343

�

6,487

�

15,434

�

34,152

�

Adjusted gross profit ⁽¹⁾

�

8,023

�

10,406

�

18,237

�

65,258

�

Adjusted gross margin ⁽¹⁾

�

64.9

�

61.6

�

54.2

�

65.6

�

(1)	Adjusted gross profit is calculated as total revenues less adjusted cost of revenues. Adjusted gross margin is calculated as adjusted gross profit divided by total revenues.

�

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