Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
AMRI > SEC Filings for AMRI > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for ALBANY MOLECULAR RESEARCH INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for ALBANY MOLECULAR RESEARCH INC


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The following discussion of our results of operations and financial condition should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and the Notes thereto included within this report. This quarterly report on Form 10-Q 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. These statements may be identified by forward-looking words such as "may," "could," "should," "would," "will," "intend," "expect," "anticipate," "believe," and "continue" or similar words and include, but are not limited to, statements concerning pension and postretirement benefit costs, the Company's relationship with its largest customers, the Company's collaboration with Bristol-Myers Squibb ("BMS"), future acquisitions, earnings, contract revenues, costs and margins, royalty revenues, patent protection and the ongoing AllegraŽ patent infringement litigation, AllegraŽ royalty revenue, government regulation, retention and recruitment of employees, customer spending and business trends, foreign operations, including increasing options and solutions for customers, business growth and the expansion of the Company's global market, clinical supply manufacturing, management's strategic plans, drug discovery, product commercialization, license arrangements, research and development projects and expenses, revenue and expense expectations for future periods, long-lived asset impairment, competition and tax rates. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that could cause such differences include, but are not limited to, those discussed in Part I, Item 1A, "Risk Factors", of the Company's Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission on March 15, 2012, as updated by Part II Item 1A, "Risk Factors," in subsequent Forms 10-Q. All forward-looking statements are made as of the date of this report, and we do not undertake to update any such forward-looking statements in the future, except as required by law. References to "AMRI", the "Company," "we," "us," and "our," refer to Albany Molecular Research, Inc. and its subsidiaries, taken as a whole.

Strategy and Overview

We are a global contract research and manufacturing organization that provides customers fully integrated drug discovery, development, and manufacturing services. We supply a broad range of services and technologies that support the discovery and development of pharmaceutical products and the manufacturing of active pharmaceutical ingredients ("API") and drug product for existing and experimental new drugs. With locations in the United States, Europe, and Asia, we maintain geographic proximity and flexible cost models. We have also historically leveraged our drug-discovery expertise to execute on several internal drug discovery programs, which have progressed to the development candidate stage and in some cases into Phase I clinical development. We have successfully partnered certain programs and are actively seeking to out-license our remaining programs to strategic partners for further development.

We continue to integrate our research and manufacturing facilities worldwide, increasing our access to key global markets and enabling us to provide our customers with a flexible combination of high quality services and competitive cost structures to meet their individual outsourcing needs. Our service offerings range from early stage discovery through manufacturing and formulation across U.S., Europe and Asia. We believe that the ability to partner with a single provider is of significant benefit to our customers as we are able to provide them with a more efficient transition of experimental compounds through the research and development process, ultimately reducing the time and cost involved in bringing these compounds from concept to market. Compounds discovered and/or developed in our contract research facilities can then be more easily transitioned to production at our large-scale manufacturing facilities for use in clinical trials and, ultimately, commercial sales if the product meets regulatory approval.

Additionally, we offer our customers a fully integrated manufacturing process for sterile injectable drugs. This includes the development and manufacture of the API, the design of the criteria to formulate the API into an injectable drug product, and the manufacture of the final drug product. We continue to make investments to build and recover our formulation business, as we believe this type of business has significant potential in the drug product world driven by the growth in biologically based compounds which are formulated/manufactured on an aseptic basis.

In addition to providing our customers our hybrid services model for outsourcing, we now offer the option of insourcing. With our world class expertise in managing high performing groups of scientists, this option allows us to embed our scientists into the customer's facility allowing the customer to cost effectively leverage their unused laboratory space.

As our customers continue to seek innovative new strategies for R&D efficiency and productivity, we are aggressively realigning our business and resources to address their needs. To that end, we have launched AMRI SMARTSOURCING™, a cross functional approach that maximizes the strengths of both insourcing and outsourcing, by leveraging AMRI's people, know-how, facilities, expertise and global project management to provide exactly what is needed across the discovery or development process. We have also streamlined our sales and marketing organization to optimize cross-selling opportunities and enhanced our commitment to quality with the appointment of key personnel at our Burlington aseptic services facility, both underscoring our dedication to client service. Our improved organizational structure, combined with more focused marketing efforts, should enable us to continue to drive long term growth and profitability.

In 2011, we made a decision to cease activities related to our internal proprietary compound discovery R&D programs. Although we halted our proprietary R&D activities, we continue to believe there are additional opportunities to partner our proprietary compounds or programs to create value, as we have seen a renewed commitment by pharmaceutical companies for innovation both internally and through licensing. Our goal is to partner these compounds or programs in return for a combination of up-front license fees, milestone payments and recurring royalty payments if any compound based on our intellectual property is successfully developed into new drugs and reach the market.

In March 2012, we approved a restructuring plan that ceased all operations at our Budapest, Hungary facility effective March 30, 2012. The goal of the restructuring plan is to advance our continued strategy of increasing global competitiveness and remaining diligent in managing costs by improving efficiency and customer service and by realigning resources to meet shifting customer demand and market preferences.

Our total revenue for the quarter ended September 30, 2012 was $55.8 million, as compared to $50.2 million for the quarter ended September 30, 2011.

Contract services revenue for the third quarter of 2012 was $45.6 million, compared to $43.8 million for the same quarter in 2011. Recurring royalty revenues increased in the third quarter of 2012 as compared to the same quarter in 2011 due to the receipt of a new recurring royalty stream beginning in the quarter, offset in part by a decrease in Allegra royalties.

Consolidated gross margin was 4.3% for the quarter ended September 30, 2012 as compared to (3.7%) for the quarter ended September 30, 2011.

During the nine months ended September 30, 2012, cash provided by operations was $4.4 million compared to cash used in operations of $9.1 million for the same period of 2011. This change from the nine months ended September 30, 2011 resulted primarily from the receipt of an income tax refund in the third quarter of 2012 as well as a payment of $4.8 million in the first quarter of 2011 associated with the Company's arbitration settlement with a supplier. During the nine months ended September 30, 2012, we spent $7.1 million in capital expenditures, primarily related to domestic modernization of our lab and production equipment. As of September 30, 2012, we had $15.7 million in unrestricted cash and cash equivalents and $8.0 million in bank and other related debt.

Results of Operations - Three and Nine Months ended September 30, 2012 Compared to Three and Nine Months Ended September 30, 2011

Revenues

Total contract revenue

Contract revenue consists primarily of fees earned under contracts with our third party customers. Our contract revenues for each of our Discovery/Development/Small Scale Manufacturing ("DDS") and Large-Scale Manufacturing ("LSM") segments were as follows:

                   Three Months Ended           Nine Months Ended
                      September 30,                September 30,
(in thousands)      2012           2011         2012          2011

DDS              $    16,293     $ 18,049     $  52,410     $  57,193
LSM                   29,334       25,722        78,317        73,006
Total            $    45,627     $ 43,771     $ 130,727     $ 130,199

The decrease in DDS contract revenue for the three and nine months ended September 30, 2012 from the same periods in 2011 is primarily due to lower contract revenue for our development and small-scale manufacturing services of $1.7 million and $3.4 million, respectively, as a result of lower demand for our U.S. chemistry development services. Additionally, contract revenue for our discovery services in the nine months ended September 30, 2012 decreased $1.3 million from the same period in 2011 resulting from lower demand for our U.S. biology services, along with decreased revenues due to the closure of our Hungarian operations. These decreases were offset in part by higher demand for our U.S. chemistry discovery services.

We currently expect DDS contract revenue for full year 2012 to decrease slightly from amounts recognized in 2011 driven by the decrease in revenue resulting from the closure of our Hungarian operations along with lower demand for our U.S. development services partially offset by increased revenue from our U.S. chemistry discovery services.

LSM contract revenue increased for the three and nine months ended September 30, 2012 from the same periods in 2011. These increases were primarily due to an increase in commercial manufacturing services at our Rensselaer, NY facility, as well as continued improvement in clinical manufacturing services revenue at our Burlington, MA facility.

We currently expect LSM contract revenue for full year 2012 to significantly increase from amounts recognized in 2011 driven by robust U.S. commercial API demand, an increase in our Phase III portfolio, and improved revenues from our Burlington, MA and UK facilities.

Recurring royalty revenue

Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 2012 2011

(in thousands)

$ 9,393 $ 6,458 $ 27,907 $ 27,854

A portion of our recurring royalties are based on the worldwide sales of AllegraŽ/Telfast, as well as on sales of Sanofi over-the-counter ("OTC") product and authorized generics. Additionally, beginning in the third quarter of 2012 we earned recurring royalty revenue in conjunction with a development and supply agreement at the Company's Rensselaer, NY manufacturing facility.

Recurring royalties increased during the quarter ended September 30, 2012 from the same period in 2011 due to the receipt of a new recurring royalty stream from one of our Rensselaer facility's long-standing customer's product launch of $3.3 million, offset in part by a decrease in Allegra royalties of $0.4 million.

Recurring royalties remained flat for the nine months ended September 30, 2012 from the same period in 2011. Increases in recurring royalties due to the above mentioned new royalty stream were offset primarily by a decrease in royalties recognized from the sales of prescription AllegraŽ in Japan in the first quarter of 2012 as a result of a less severe allergy season.

We currently expect full year 2012 recurring royalties to approximate amounts recognized in 2011 reflecting the reduced revenues from Allegra, offset by the new royalty stream described above.

The recurring royalties we receive on the sales of AllegraŽ/Telfast have historically provided a material portion of our revenues, earnings and operating cash flows. We continue to develop our business in an effort to supplement the revenues, earnings and operating cash flows that have historically been provided by AllegraŽ/Telfast royalties.

Milestone revenue

Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 2012 2011

(in thousands)

$ 750 $ - $ 840 $ 3,000

Milestone revenue for the three months ended September 30, 2012 was recognized in conjunction with the Company's license and research agreement with BMS for advancing a fourth compound into preclinical development. Additionally, milestone revenue for the nine months ended September 30, 2012 includes $0.1 million recognized in the first half of 2012 in conjunction with a development and supply agreement at the Company's Rensselaer, NY manufacturing facility.

Milestone revenue of $3.0 million received during the nine months ended September 30, 2011 was recognized in conjunction with the Company's license and research agreement with BMS for initiating a Phase II clinical trial of an AMRI compound licensed exclusively to BMS.

Costs and Expenses

Cost of contract revenue

Cost of contract revenue consists primarily of compensation and associated fringe benefits for employees, as well as chemicals, depreciation and other indirect project related costs. Cost of contract revenue for our DDS and LSM segments were as follows:

                       Three Months Ended             Nine Months Ended
Segment                   September 30,                  September 30,
(in thousands)          2012           2011           2012          2011

       DDS           $    16,090     $ 18,427       $  51,238     $  56,089
       LSM                27,570       26,961          68,343        72,027
      Total          $    43,660     $ 45,388       $ 119,581     $ 128,116

 DDS Gross Margin            1.3 %       (2.1 )%          2.2 %         1.9 %
 LSM Gross Margin            6.0 %       (4.8 ))%        12.7 %         1.3 %
Total Gross Margin           4.3 %       (3.7 )%          8.5 %         1.6 %

DDS contract revenue gross margin percentage increased for the three and nine months ended September 30, 2012 compared to the same period in 2011. These increases are primarily due to cost savings initiatives taken in our U.S chemistry operations in 2011, as well as the impact of the closure of our Hungarian operations in 2012, offset in part by lower demand for our U.S. biology and development services in relation to our fixed costs.

As a result of the continued impact of the current trends in demand and the closure of our Hungarian operations, we currently expect DDS contract margins for the full year of 2012 to improve over amounts recognized in 2011.

LSM's contract revenue gross margin percentages improved for the three and nine months ended September 30, 2012 compared to the same period in 2011 primarily due to an increase in sales of higher margin products for our U.S. manufacturing services, as well as an increase in capacity utilization at our large-scale manufacturing facilities worldwide.

We currently expect LSM contract margins for 2012 to significantly improve from amounts recognized in 2011 driven by improved capacity utilization, along with shift in revenues to higher margin commercial products.

Technology incentive award

We maintain a Technology Development Incentive Plan, the purpose of which is to stimulate and encourage novel innovative technology developments by our employees. This plan allows eligible participants to share in a percentage of the net revenue earned by us relating to patented technology with respect to which the eligible participant is named as an inventor or made a significant intellectual contribution. To date, the royalties from AllegraŽ are the main driver of the awards. Accordingly, as the creator of the technology, the award is currently payable primarily to Dr. Thomas D'Ambra, the Chief Executive Officer and President of the Company. The incentive awards were as follows:

Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 2012 2011

(in thousands)

$ 621 $ 646 $ 2,473 $ 2,839

Technology incentive award expense for the three and nine months ended September 30, 2012 decreased from expense recognized for the same period in 2011 due to the decrease in Allegra recurring royalty revenue as discussed above.

We expect technology incentive award expense to generally fluctuate directionally and proportionately with fluctuations in Allegra royalties in future periods.

Research and development

Research and development ("R&D") expense consists of compensation and benefits for scientific personnel for work performed on proprietary technology R&D projects, costs of chemicals, materials, outsourced activities and other out of pocket costs and overhead costs.

During the fourth quarter of 2011, the Company's Board of Directors made a decision to cease activities related to its internal discovery research and development programs, excluding its generic program. Although we ceased our proprietary R&D activities, we continue to believe there are additional opportunities to partner our proprietary compounds in return for a combination of up-front license fees, milestone payments and recurring royalty payments if these compounds are successfully developed into new drugs and reach the market. In addition, R&D activities continue at our large-scale manufacturing facility related to the potential manufacture of new products, the development of processes for the manufacture of generic products with commercial potential, and the development of alternative manufacturing processes.

Research and development expenses were as follows:

Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 2012 2011

(in thousands)

$ 196 $ 1,608 $ 800 $ 6,122

R&D expense for the three and nine months ended September 30, 2012 decreased from the same periods in 2011 as a result of our strategic decision during the fourth quarter of 2011 to cease R&D operations related to our internal discovery research and development programs, excluding our generics program. R&D expenditures incurred in the first nine months of 2012 related primarily to developing new niche generic products and improving process efficiencies in our manufacturing plants.

We currently expect full year 2012 R&D expense to reduce to approximately $1.0 million, with costs primarily related to developing new niche generic products and improving process efficiencies in our manufacturing plants.

Selling, general and administrative

Selling, general and administrative ("SG&A") expenses consist of compensation and related fringe benefits for selling, marketing, operational and administrative employees, professional service fees, marketing costs and costs related to facilities and information services.

SG&A expenses were as follows:

Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 2012 2011

(in thousands)

$ 10,774 $ 10,504 $ 30,461 $ 31,702

SG&A expenses increased for the three months ended September 30, 2012 when compared to the same period in 2011 due to $1.0 million of executive transition costs, offset in part by cost savings actions implemented in the U.S. along with the closure of our Hungarian operations.

The decrease in SG&A expenses for the nine months ended September 30, 2012 from the comparable prior year period is primarily attributable to the cost savings actions and closure of our Hungarian operations discussed above, offset in part by the executive transition costs. Additionally, in the first half of 2011 we incurred charges attributable to AMRI Burlington's efforts to remediate certain issues identified during an inspection by the FDA in 2010.

We currently expect SG&A expenses for 2012 to be relatively consistent with 2011 due to the closure of our Hungarian operations, as well as other cost saving actions implemented in the U.S. in 2011, offset in part by executive transition costs.

Restructuring

Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 2012 2011

(in thousands)

$ 1,616 $ - $ 3,743 $ 951

In March 2012, we approved a restructuring plan that ceased all operations at our Budapest, Hungary facility effective March 30, 2012. The goal of the restructuring plan is to advance our continued strategy of increasing global competitiveness and remaining diligent in managing costs by improving efficiency and customer service and by realigning resources to meet shifting customer demand and market preferences. In connection with this closure, we recorded a restructuring charge of $3.3 million in our DDS operating segment in the first nine months of 2012. This amount included $1.3 million for termination benefits and $2.1 million for preparing the facility for closure, estimated costs associated with terminating the Budapest facility lease and other administrative costs. We exited the facility in the third quarter of 2012 and are in the process of resolving the termination of the lease.

In December 2011, we initiated a restructuring plan at one of our U.S. locations which included actions to further reduce our workforce, right size capacity, and reduce operating costs. These actions were implemented to better align the business to current and expected market conditions and are expected to improve our overall cost competitiveness and increase cash flow generation. The workforce reduction primarily affected certain positions associated with our elimination of internal R&D activities. As a result of the workforce reduction, we will be terminating the lease of one of our U.S. facilities which will result in a reduction in annual operating expenses related to this facility. As a result of this restructuring, we recorded a restructuring charge in the DDS operating segment of $0.3 million in the fourth quarter of 2011 and $0.4 million in the first nine months of 2012.

Anticipated cash outflow related to the restructurings for the remainder of 2012 is approximately $0.4 million.

Property and Equipment Impairment

Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 2012 2011

(in thousands)

$ - $ - $ 3,967 $ -

In the first quarter of 2012, we recorded property and equipment impairment charges of $4.0 million in our DDS segment associated with the Company's decision to cease operations at our Budapest, Hungary facility, as discussed above.

Interest expense, net

                          Three Months Ended           Nine Months Ended
                             September 30,               September 30,
(in thousands)             2012           2011         2012           2011

Interest expense        $     (111 )     $  (205 )   $    (373 )     $ (470 )
Interest income                  2             -             9          143
Interest expense, net   $     (109 )     $  (205 )   $    (364 )     $ (327 )

Net interest expense decreased for the three months ended September 30, 2012 from the same period in 2011 due to decreased rates on lower balances of our interest bearing liabilities.

Net interest expense increased for the nine months ended September 30, 2012 from the same period in 2011 due to decreased balances of interest bearing assets, offset in part by decreased rates on lower balances of our interest bearing liabilities.

Other income (expense), net

Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 2012 2011

(in thousands)

$ (445 ) $ 547 $ (1,101 ) $ 133

Other expense for the three months ended September 30, 2012 was primarily due to changes in rates associated with foreign currency transactions.

Other expense for the nine months ended September 30, 2012 was primarily related to deferred financing amortization expense related to our prior credit agreement that was amended in June 2011 with a one year term, as well as changes in rates associated with foreign currency transactions.

Other income for the three months ended September 30, 2011 was primarily related to changes in rates associated with foreign currency transactions. Other income for the nine months ended September 30, 2011 includes income from purchase accounting adjustments in the first quarter of $0.3 million related to the 2010 AMRI UK and AMRI Burlington acquisitions.

Income tax expense (benefit)

Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 2012 2011

(in thousands)

$ 492 $ (1,723 ) $ 2,677 $ (1,111 )

Income tax expense increased for the three and nine months ended September 30, 2012 due primarily to the composition of pre-tax income or losses in relation to the applicable tax rates at our various locations worldwide.

Liquidity and Capital Resources

We have historically funded our business through operating cash flows and proceeds from borrowings. During the first nine months of 2012, we generated cash of $4.4 million in operating activities primarily related to the receipt of a $4.7 million income tax refund.

During the first nine months of 2012, cash used in investing activities was $6.9 million, resulting primarily from the acquisition of property and equipment. During the first nine months of 2012, we used $2.3 million in financing activities, relating primarily to pledging $5.0 million of cash to collateralize our revolving line of credit issued in conjunction with our credit facility executed in April 2012 along with principal payments of long-term debt, partially offset by net proceeds from the term loan issued under this agreement.

Working capital was $69.2 million at September 30, 2012 as compared to $62.6 million as of December 31, 2011.

In April 2012, we entered into a $20.0 million credit facility consisting of a 4-year, $5.0 million term loan and a $15.0 million revolving line of credit. As . . .

  Add AMRI to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for AMRI - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.