August 26, 2005
Analyst: Raymond Kwan
Research Digest
Ian Madsen, MBA, CFA, Editor
1-800-767-3771, x417; imadsen@zacks.com
155 North Wacker Drive  Chicago, IL 60606
www.zackspro.com
Impax Laboratories, Inc.
(IPXL- PINK SHEETS)
$11.64
Note: This report contains substantially new material. Subsequent editions will have new or revised
material highlighted
Overview
Impax Laboratories, Inc. engages in the development, manufacture, and marketing of specialty
prescription pharmaceutical products utilizing its own formulation expertise and drug delivery
technologies. As of March 5, 2004, the company had approximately 60 generic products approved or
pending approval, or under development, which consisted of 17 abbreviated new drug applications
(ANDAs) approved by the FDA, which include generic versions of brand name pharmaceuticals, such
as Brethine, Florinef, Minocin, Claritin-D 12-hour, Claritin-D 24-hour, Wellbutrin SR, and Prilosec; 19
applications pending at the FDA, including generic versions of OxyContin, Allegra D, and Tricor; and 24
other products in various stages of development, which are for generic versions of brand name
pharmaceuticals. The Company sells its products to large pharmaceutical wholesalers, warehousing
chain drug stores, mass merchandisers, and mail-order pharmacies through strategic alliances and the
company’s global pharmaceuticals division. Impax Laboratories, Inc. was formed through a business
combination between Impax Pharmaceuticals, Inc., and Global Pharmaceutical Corporation in 1999.
Impax is headquartered in Hayward, California with employees totaling 453. Additional information
about the Company can be found at www.impaxlabs.com.
On August 8th, 2005, Impax Laboratories’ stock was delisted from NASDAQ due to the Company’s
inability to file its 10-K and 10-Q since 3Q’04. The Company’s stock now trades on The Pink Sheets.
Analysts have identified the following factors for evaluating investment merits of IPXL.
Key Positive Arguments
Unique Patent Challenge Strategy: Impax’s unique
competitive advantage stems from the Company’s
patent challenge strategy, which focuses on difficult-toformulate products that can aid in stretching revenues
and earnings as compared to the first-to-file strategy.
Key Negative Arguments
NASDAQ Delisting: On August 8th, 2005, Impax
Laboratories’ stock was delisted from NASDAQ due to
the Company inability to file its 10-K and 10Q since
3Q’05. This delisting may result in a potential loss of
liquidity.
Patent Challenge Risk: Impax has filed for thirteen
drug applications to the FDA. Of these, ten are patent
challenges, making the Company’s revenues and
earning highly dependent on the outcome of this
strategy.
Analysts are generally impartial on Impax Laboratories’ outlook. With little indication of an agreement
between Impax and its independent auditors on revenue recognition related to its strategic alliance with
Teva Pharmaceuticals, analysts feel the Company offers limited visibility over the near and long-term.
Until uncertainty over the SEC filings or relisting of the shares on the NASDAQ market become more
lucid, most analysts have rated the Company with a “neutral” stance. On a positive note, some
analysts believe Impax’s shares appear attractively valued from an absolute and relative standpoint.
© Copyright 2005, Zacks Investment Research. All Rights Reserved.
Note: The Company’s fiscal year ends December 31st; all fiscal references coincide with the calendar
year.
Revenues
Under the Company’s existing revenue-recognition policy, Impax Laboratories reported preliminary
2Q’05 revenues of $38.5MM and full-year 2004 revenues of $124.7MM. Under the new revenue
recognition policy proposed by the Office of the Chief Accountant of the Securities and Exchange
Commission (OCA), the Company expects revenues to come in at $35.6M in 2Q’05 and $138.6MM for
FY2004. Overall, the results were significantly below analysts’ expectations. In fact, sales for generic
Wellbutrin SR 200mg severely underperformed in 1H’05 due to lower than expected pricing, while the
generic OxyContin 80mg launch failed to meet analysts expected market share gains. According to
(SG Cowen), Impax only managed to capture less than 3% of the total prescription share of the generic
OxyContin 80mg market as of the week ending July 22, 2005. Looking ahead, analysts have lowered
their revenue expectation for FY2005 and FY2006, as many anticipate slower generic Wellbutrin and
OxyContin sales. One analyst (Lehman) dropped their previously aggressive 2H’05 Wellbutrin SR100
& 150mg, and generic OxyContin sales estimates from $57M and $23M to $32M and $4M,
respectively.
Generic Revenue Sales
Fiscal Year Ends: December
$ in millions
Digest High
Digest Low
Digest Average
Digest Average YoY Growth
Digest Average QoQ Growth
FY2004E
124.7
124.7
124.7
112.1%
1Q05E
39.6
39.6
39.6
14.8%
37.0%
2Q05E
38.5
38.5
38.5
26.0%
-2.8%
3Q05E
46.2
37.4
41.8
36.2%
8.6%
4Q05E
55.8
37.4
46.6
61.2%
11.5%
FY2005E
180.0
153.0
166.9
33.8%
FY2006E
293.7
186.0
241.6
44.7%
For future pipeline drugs, Impax Laboratories sees opportunities in several key generic products,
including generic Allegra-D, generic Adderall XR, generic Concerta, and generic Distropan XL. With
respect to generic Concerta, analysts estimate sales for this drug, if launched in 2006, could boost
sales by $35MM (Lehman) to $50MM (Merrill) in 2006. It should be noted that Impax/Teva appears to
have secured 180-day market exclusivity for the sale of generic Concerta over its competitor Andrx.
Impax has previously filed an ANDA to the FDA related to this drug, but the approval is currently being
delayed by a Citizen Petition filed by J&J in March 2004. J&J also recently issued a patent covering
Concerta asking generic companies to amend their drug application. No indication has been
announced on when the FDA will approve/reject Impax’s drug application.
Major Patents/Paragraph III Pipeline
Brand Name
Generic Name
Allegra –D
Fexofenadine
(Teva Distributed)
Adderall XR
Dextro Extended
(Direct Sales)
Release
Concerta
Methylphenidate
(Teva Distributed) ER
Distropan XL
(Teva Distributed)
Oxybutynin XL
Company
Sanofi-AVentis
2004E U.S. Sales
$460MM
Shire
$550MM
Johnson &
Johnson
$600MM
Johnson &
Johnson
$415MM
Litigation Status
Trial should begin
in October 2005
Trail should begin
in January 2006
J&J filed for
Citizen’s Petition
March 2004
2nd ANDA filed
behind Mylan.
Trial should begin
in November 2005
Please refer to Zacks Research Digest spreadsheet for specific revenue estimates.
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Margins
Analysts expect gross margins to remain relatively flat with slight incremental margin gains over the
2005-2006 timeframe. With respect to operating margins, analysts anticipate depressed margins for
2005 due to markedly higher R&D and SG&A costs in 2H’05 versus 1H’05. For 2006, operating
margins are forecasted to at least 10 percent points higher than FY2005 due to the elimination of costs
related to the SEC filings and the revenue recognition policy.
FY'03A
FY'04E
FY'05E
FY'06E
Gross Margin
25.56%
40.35%
52.64%
54.75%
Operating Margin
-23.13%
1.39%
12.39%
25.92%
Please refer to Zacks Research Digest spreadsheet for more extensive margin figures.
Earnings Per Share
Fiscal Year Ends: December
FY2004E
1Q05E
2Q05E
3Q05E
4Q05E
FY2005E
FY2006E
Digest High EPS
Digest Low EPS
Digest Average
Digest Average YoY Growth
Digest Average QoQ Growth
($0.28)
($0.28)
($0.28)
-33.33%
0.10
0.10
0.10
25.13%
-211.98%
0.12
0.06
0.07
628.55%
-27.22%
0.10
0.01
0.05
399.65%
-31.42%
0.38
0.01
0.14
-258.82%
184.15%
0.64
0.18
0.36
4592.40%
0.97
0.34
0.73
99.67%
Under the proposed revenue recognition policy, IPXL reported preliminary 2Q’05 EPS of $0.06 per
diluted share. The results, although higher on a year-over-year comparison, were below most analysts’
estimates. Accordingly, most analysts have lowered their FY2005 and FY2006 EPS estimates.
For FY2005, (First Albany) currently holds the street high EPS estimate at $0.64. The lowest estimate
comes from (Merrill) at $0.18. The average EPS estimate for FY’05 is $0.36. For FY2006, the highest
estimate is $0.97 from (Smith Barney) while the lowest estimate is from (Merrill) at $0.34. The average
EPS estimate for FY’06 stands at $0.73.
Please refer to Zacks Research Digest spreadsheet for more extensive EPS figures.
Target Price/Valuation
The average target price for IPXL is $15.00. The most common valuation technique is a multiple
applied to 2005 or 2006 EPS estimates. Of the 7 firms covering the stock, 1 has a positive rating, 4
have a neutral rating, and 2 discontinued coverage.
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Rating Distribution
Positive
20.00%
Neutral
80.00%
Negative
0.00%
Avg. Target Price
$15.00
Low TP
$15.00
High TP
$15.00
Please refer to Zacks Research Digest Spreadsheet for further details on valuation.
Other Discussion/Capital Structure/Cash Flow/Solvency/Governance
As mentioned previously, Impax Laboratories’ stock was de-listed from NASDAQ on August 8, 2005
and now trades on The Pink Sheets. The de-listing stems from the Company’s inability to file its 10-K
and 10-Q since 3Q’04 due to disagreement between Impax and its independent auditor, Deloitte &
Touche, on revenue recognition policies related with Teva Pharmaceuticals. One analyst (Lehman)
notes that the Company’s auditors have now extended its review up to when the Impax-Teva
relationship first began in June 2001 and thus sees the restatement process to be rather lengthy going
forward. It should be noted that a quick relisting on NASDAQ requires Impax to submit documents to
the SEC within the next 90 days.
Long-Term Growth
Long-term growth rates for IPXL ranges from 44% to 50% with an average growth rate of 47%.
Analysts believe these growth rates will be mainly achieved through the ramp up in drug sales for
generic Wellbutrin SR, generic Concerta and generic OxyContin over the next 1-2 years. Looking
ahead, most analysts believe earnings/revenue growth will continue to be in double-digit area due to
Company’s unique patent challenge strategy. Specifically, (Smith Barney) indicates that Impax
Laboratories focuses on difficult-to-formulate products that provide the Company with prolonged
revenue streams beyond that of a “first-to-file” strategy. The Company’s generic revenue streams are
often protected from other competitors due to its own intellectual property (e.g. controlled-release
technologies) that successfully circumvents patent infringement. In contrast, the typically generic
player would rely on claims of invalidity, which often leads to the entry of other competitors. This
strategy has so far been successfully with the recent launch of generic Wellbutrin SR and generic
OxyContin 80mg.
Individual Analyst Opinions
POSITIVE
Smith Barney – BUY (1) ($15.00 price target): 08/05/2005 – The analyst sees not fundamental
change in the underlying value of Impax given its recent delisting from NASDAQ. In fact, the analyst
sees Impax Laboratories being a potential takeover candidate due its “high barrier to entry” products.
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NEUTRAL
First Albany – NEUTRAL (no price target): 08/03/2005 – The analyst notes that fair value for Impax
Laboratories should be somewhere in the low-teens.
Lehman – 2-EQUALWEIGHT ($15.00 price target): 08/08/2005 – The analyst notes that the stock is
currently attractive at ~12 times its 2006 EPS estimate. Given the uncertainty regarding the timing of
the SEC filing and NASDAQ relisting, however, the analyst is reiterating their “2-Equal weight” rating.
Merrill – NEUTRAL (no price target): 08/19/2005 – Firm remains neutral on the Company’s shares
due to limited visibility over when the Company will file its 2004 10-K and 1Q’05/2Q’05 10-Q’s. Notably,
the analyst sees upside of $0.60-$0.65 per share to their 2006 EPS estimates if the Company is
successfully able to launch generic Concerta by January 1, 2006.
SG Cowen – NEUTRAL (no price target): 08/19/2005 – Although Impax/Teva have apparently
secured 180 day generic market exclusivity for Concerta, the analyst see a potential risk of generic
Concerta going to Andrx, if Impax/Teva fails to finalize their own approval given J&J Citizen Petition.
NOT RATED
B. of America – Coverage Discontinued: 08/05/2005 – Coverage discounted due to NASDAQ
delisting.
Wachovia – Coverage Discontinued: 08/05/2005 – Coverage discontinued due to NASDAQ delisting.
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