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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2007
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission file number: 000-51445
 ADAMS RESPIRATORY THERAPEUTICS, INC.
 (Exact Name of Registrant as Specified in Charter)
 Delaware
(State or Other Jurisdiction of 
Incorporation or Organization)
    
    75-2725552
(I.R.S. Employer Identification No.)
 4 Mill Ridge Lane
Chester, New Jersey 07930
(Address of principal executive offices including zip code)
 (908) 879-1400
(Registrants telephone number, including area code)
 þ o
  þ o o
 o þ




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##### 



ADAMS RESPIRATORY THERAPEUTICS, INC.
 INDEX
 PageSpecial Note Regarding Forward-looking Statements
    
    
    3Part I. Financial Information
    
    
    3Item 1.
    
    Financial Statements (Unaudited)
    
    
    5Consolidated Balance Sheets  September 30, 2007 and June 30, 2007
    
    
    5Consolidated Statements of Income  Three months ended September 30, 2007 and 2006
    
    
    6Consolidated Statement of Stockholders Equity  Three months ended September 30, 2007
    
    
    7Consolidated Statements of Cash Flows  Three months ended September 30, 2007 and 2006
    
    
    8Notes to Consolidated Financial Statements
    
    
    9Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosure of Market Risk
    
    
    21Item 4.
    
    Controls and Procedures
    
    
    22Part II. Other Information
    
    
    23Item 1.
    
    Legal Proceedings
    
    
    23Item 1A.
    
    Risk Factors
    
    
    23Item 6.
    
    Exhibits
    
    
    28Signatures
    
    
    29EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO




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PART I  FINANCIAL INFORMATION
 
 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
  
    
    our course of action related to, and the FDAs response to, an abbreviated new drug
application filing by Perrigo R&D Co.;
    
    FTC and DOJ approval of our settlement agreement with Mutual Pharmaceutical Company;
    
    our involvement in litigation having an adverse impact on our business, financial
condition, results of operations or cash flows;
    
    our ability to obtain sufficient quantities of raw materials, including guaifenesin,
dextromethorphan and codeine;
    
    our expectations of the seasonality of our product sales and related revenue
fluctuations;
    
    our intentions to market additional products, grow our business and expand our product
portfolio;
    
    the need to conduct clinical trials to develop product candidates;
    
    the FDAs approval of Mucinex with Codeine;
    
    the conversion of prescriptions for long-acting guaifenesin products into sales of our
Mucinex brand products;
    
    our expectations regarding changes in our unrecognized tax benefit;
    
    our operating capital requirements and our ability to meet our anticipated operating
needs with revenues, existing cash and our credit facility;
    
    the timing of the USPTOs reexamination of the patentability of our delivery system for
guaifenesin and our ability to prevail in the reexamination process;
    
    our reliance on and continued consolidation of our top customers;
    
    our expectations of increased pricing pressures;
    
    our intentions with respect to our consumer and professional marketing efforts;
    
    our ability to effectively compete in the respiratory therapeutics market; and
    
    our exposure to credit rate and interest rate risk.
  3




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ITEM 1. FINANCIAL STATEMENTS.
 Adams Respiratory Therapeutics, Inc.
 
 Consolidated Balance Sheets
 (Amounts in thousands, except per share amounts)
 September 30,
    
    
    June 30,2007
    
    
    2007(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    32,780
    
    
    $
    46,809Short-term investments
    
    
    33,698
    
    
    
    32,972Accounts receivable, net
    
    
    67,428
    
    
    
    15,936Inventories, net
    
    
    55,901
    
    
    
    52,875Prepaid expenses and other assets
    
    
    7,883
    
    
    
    3,335Income taxes receivable
    
    
    
    
    
    
    3,749Deferred tax assets
    
    
    8,081
    
    
    
    8,178Total current assets
    
    
    205,771
    
    
    
    163,854Property, plant and equipment, net of accumulated depreciation
    
    
    20,400
    
    
    
    19,763Deferred tax assets
    
    
    5,651
    
    
    
    5,041Intangible assets, net of accumulated amortization
    
    
    125,384
    
    
    
    126,635Other assets
    
    
    4,027
    
    
    
    3,458Total assets
    
    $
    361,233
    
    
    $
    318,751LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    19,143
    
    
    $
    24,010Income taxes payable
    
    
    11,955
    
    
    
    Accrued compensation and related items
    
    
    3,790
    
    
    
    6,670Accrued returns, chargebacks, rebates and other sales allowances
    
    
    7,842
    
    
    
    7,934Other current liabilities
    
    
    5,572
    
    
    
    2,249Total current liabilities
    
    
    48,302
    
    
    
    40,863Long-term liabilities:Deferred compensation liability
    
    
    2,188
    
    
    
    1,548Income tax liability
    
    
    2,876
    
    
    
    286Accrued royalties
    
    
    725
    
    
    
    706Total liabilities
    
    
    54,091
    
    
    
    43,403Commitments and contingencies (Note 7)Stockholders equity:Preferred stock $0.01 par value:Authorized shares  50,000, Issued and outstanding  none
    
    
    
    
    
    
    Common stock, Class A, $0.01 par value:Authorized shares  100,000Issued and outstanding shares  35,866 at September 30, 2007 and
35,695 at June 30, 2007, respectively
    
    
    359
    
    
    
    357Additional paid-in capital
    
    
    492,202
    
    
    
    487,322Accumulated deficit
    
    
    (185,418
    )
    
    
    (212,313
    )Accumulated other comprehensive loss
    
    
    (1
    )
    
    
    (18
    )Total stockholders equity
    
    
    307,142
    
    
    
    275,348Total liabilities and stockholders equity
    
    $
    361,233
    
    
    $
    318,751
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Adams Respiratory Therapeutics, Inc.
 
 Consolidated Statements of Income
 (Amounts in thousands, except per share amounts)
 Three Months endedSeptember 30,2007
    
    
    2006(unaudited)Net sales
    
    $
    109,976
    
    
    $
    90,142Cost of goods sold
    
    
    28,494
    
    
    
    29,358Gross margin
    
    
    81,482
    
    
    
    60,784Selling, marketing & administrative
    
    
    29,881
    
    
    
    29,983Product development
    
    
    6,264
    
    
    
    6,287Other, net
    
    
    (831
    )
    
    
    (879
    )35,314
    
    
    
    35,391Income before income taxes
    
    
    46,168
    
    
    
    25,393Provision for income taxes
    
    
    16,929
    
    
    
    9,215Net income
    
    $
    29,239
    
    
    $
    16,178Income per common shareBasic
    
    $
    0.82
    
    
    $
    0.46Diluted
    
    $
    0.79
    
    
    $
    0.44Weighted-average of common shares used in income per share calculationBasic
    
    
    35,826
    
    
    
    35,014Diluted
    
    
    37,184
    
    
    
    36,965
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Adams Respiratory Therapeutics, Inc.
 
 Consolidated Statement of Stockholders Equity
 (Amounts in thousands)
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TotalCommon Stock
    
    
    Paid-In
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Loss
    
    
    EquityBalance as of June 30, 2007
    
    
    35,695
    
    
    $
    357
    
    
    $
    487,322
    
    
    $
    (212,313
    )
    
    $
    (18
    )
    
    $
    275,348Comprehensive income:Net income (unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,239
    
    
    
    
    
    
    
    29,239Unrealized gain on
marketable securities,
net of tax of $6
(unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    17Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,256Stock compensation expense
(unaudited)
    
    
    
    
    
    
    
    
    
    
    1,733
    
    
    
    
    
    
    
    
    
    
    
    1,733Cumulative effect
adjustment from adoption
of FIN 48 (Note 1)
(unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,344
    )
    
    
    
    
    
    
    (2,344
    )Exercise of stock options
and warrants (unaudited)
    
    
    171
    
    
    
    2
    
    
    
    1,319
    
    
    
    
    
    
    
    
    
    
    
    1,321Tax benefit of stock
options (unaudited)
    
    
    
    
    
    
    
    
    
    
    1,828
    
    
    
    
    
    
    
    
    
    
    
    1,828Balance as of September
30, 2007 (unaudited)
    
    
    35,866
    
    
    $
    359
    
    
    $
    492,202
    
    
    $
    (185,418
    )
    
    $
    (1
    )
    
    $
    307,142
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Adams Respiratory Therapeutics, Inc.
 
 Consolidated Statements of Cash Flows
 (Amounts in thousands)
 Three months Ended September 30,2007
    
    
    2006(unaudited)Operating ActivitiesNet income
    
    $
    29,239
    
    
    $
    16,178Adjustments to reconcile net income to net cash used in operating
activities:Depreciation and amortization
    
    
    2,173
    
    
    
    684Stock compensation expense
    
    
    1,733
    
    
    
    1,983Deferred taxes
    
    
    (513
    )
    
    
    (576
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (51,492
    )
    
    
    (39,226
    )Inventories
    
    
    (3,026
    )
    
    
    (16,000
    )Prepaid expenses and other current assets
    
    
    (4,548
    )
    
    
    (3,635
    )Other assets
    
    
    (552
    )
    
    
    (1,420
    )Accounts payable
    
    
    (4,867
    )
    
    
    11,700Income taxes
    
    
    15,950
    
    
    
    7,880Accrued expenses and other liabilities
    
    
    1,010
    
    
    
    205Net cash used in operating activities
    
    
    (14,893
    )
    
    
    (22,227
    )Investing ActivitiesPurchases of property, plant and equipment
    
    
    (1,559
    )
    
    
    (8,151
    )Increase in investments
    
    
    (5,700
    )
    
    
    (2,087
    )Maturities of investments
    
    
    4,974
    
    
    
    2,607Net cash used in investing activities
    
    
    (2,285
    )
    
    
    (7,631
    )Financing ActivitiesBorrowings from line of credit
    
    
    
    
    
    
    20,000Repayments of line of credit
    
    
    
    
    
    
    (9,750
    )Debt issuance costs
    
    
    
    
    
    
    (367
    )Proceeds from exercise of stock options and warrants
    
    
    1,321
    
    
    
    1,801Excess tax benefit from exercise of stock options
    
    
    1,828
    
    
    
    2,011Net cash provided by financing activities
    
    
    3,149
    
    
    
    13,695Net decrease in cash and cash equivalents
    
    
    (14,029
    )
    
    
    (16,163
    )Cash and cash equivalents at beginning of period
    
    
    46,809
    
    
    
    34,815Cash and cash equivalents at end of period
    
    $
    32,780
    
    
    $
    18,652
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Adams Respiratory Therapeutics, Inc.
 
 Notes to Consolidated Financial Statements (unaudited)
 ($ in thousands, except per share amounts)
 1. Summary of Significant Accounting Policies
 Basis of Presentation
   Principles of Consolidation
  Use of Estimates
  Income Taxes
  Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
  9




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Adams Respiratory Therapeutics, Inc.
Notes to Consolidated Financial Statements (unaudited)
($ in thousands, except per share amounts)
   2. Manufacturing Assets Repurchase
  3. Supplementary Financial Information
 Allowances for Accounts Receivable
  Inventories
  September 30,
    
    
    June 30,2007
    
    
    2007Raw materials
    
    $
    8,933
    
    
    $
    8,033Work in progress
    
    
    14,144
    
    
    
    12,443Finished goods
    
    
    35,780
    
    
    
    36,25358,857
    
    
    
    56,729Less: reserve for obsolescence
    
    
    (2,956
    )
    
    
    (3,854
    )Inventories, net
    
    $
    55,901
    
    
    $
    52,875
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Adams Respiratory Therapeutics, Inc.
Notes to Consolidated Financial Statements (unaudited)
($ in thousands, except per share amounts)
 Property, Plant and Equipment
  September 30,
    
    
    June 30,2007
    
    
    2007Machinery and equipment
    
    $
    11,340
    
    
    $
    10,764Software
    
    
    3,008
    
    
    
    2,991Leasehold improvements
    
    
    4,279
    
    
    
    4,210Furniture and fixtures
    
    
    3,970
    
    
    
    3,719Construction in progress
    
    
    2,000
    
    
    
    1,35424,597
    
    
    
    23,038Less: accumulated depreciation and amortization
    
    
    (4,197
    )
    
    
    (3,275
    )Property, plant and equipment, net
    
    $
    20,400
    
    
    $
    19,763
  Intangible Assets
  September 30,
    
    
    June 30,2007
    
    
    2007Intangible Asset with Indefinite Life:Delsym trademark
    
    $
    122,000
    
    
    $
    122,000Amortizable Intangible Assets:
    
    
    6,454
    
    
    
    6,454Accumulated amortization
    
    
    (3,070
    )
    
    
    (1,819
    )Net balance
    
    $
    3,384
    
    
    $
    4,635
 TM Accounting for the Impairment or Disposal of Long Lived Assets TM TM
  Other Assets
  Sales Returns and Allowances
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Adams Respiratory Therapeutics, Inc.
Notes to Consolidated Financial Statements (unaudited)
($ in thousands, except per share amounts)
  Other, net
 TM
 4. Benefit Plan
  5. Stockholders Equity
  6 . Income per Common Share
  12




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Adams Respiratory Therapeutics, Inc.
Notes to Consolidated Financial Statements (unaudited)
($ in thousands, except per share amounts)
 September 30,2007
    
    
    2006(Shares in thousands)Net income
    
    $
    29,239
    
    
    $
    16,178Average shares outstanding  basic
    
    
    35,826
    
    
    
    35,014Weighted average dilutive stock options
    
    
    1,295
    
    
    
    1,933Weighted average dilutive warrants, restricted stock units and
performance shares
    
    
    63
    
    
    
    18Average shares outstanding  diluted
    
    
    37,184
    
    
    
    36,965Income per common share:Basic
    
    $
    0.82
    
    
    $
    0.46Diluted
    
    $
    0.79
    
    
    $
    0.44
  7. Senior Revolving Credit Facility
     8. Commitments and Contingencies
  13




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Adams Respiratory Therapeutics, Inc.
Notes to Consolidated Financial Statements (unaudited)
($ in thousands, except per share amounts)
     9. Net Sales Information
 Net Sales by Product
  Three Months EndedSeptember 30,Product
    

2007
    
    

2006Mucinex SE (1)
    
    $
    45,455
    
    
    $
    40,772Mucinex DM (1)
    
    
    33,872
    
    
    
    24,259Mucinex D (1)
    
    
    10,102
    
    
    
    6,948Total
oral-solid adult Mucinex products
    
    
    89,429
    
    
    
    71,979Mucinex nasal sprays
    
    
    3,307
    
    
    
    Mucinex products for children
    
    
    7,344
    
    
    
    9,950Humibid SE
    
    
    
    
    
    
    53Delsym
    
    
    9,896
    
    
    
    8,160Net sales
    
    $
    109,976
    
    
    $
    90,142
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Adams Respiratory Therapeutics, Inc.
Notes to Consolidated Financial Statements (unaudited)
($ in thousands, except per share amounts)
 
 (1)
    
    Net sales for the three months ended September 30, 2007 include sales of maximum
strength versions of these products, which were launched in July 2007. Concentration of Credit Risk
  Three months endedSeptember 30,2007
    

2006Wal-Mart Stores, Inc./Sams Club
    
    
    25
    %
    
    
    32
    %CVS Caremark Corporation
    
    
    15
    %
    
    
    20
    %Walgreen Co.
    
    
    13
    %
    
    
    7
    %
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with the MD&A, financial statements and related notes included in our
Annual Report on Form 10-K for the year ended June 30, 2007, together with our financial statements
and related notes appearing elsewhere in this Quarterly Report on Form 10-Q . Some of the
information contained in this discussion and analysis or set forth elsewhere in this document,
including information with respect to our plans and strategy for our business and related capital
requirements, includes forward-looking statements that involve risks and uncertainties. You should
review Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q and Part I, Item 1A.
Risk Factors in our Annual Report on Form 10-K for the fiscal year ended June 30, 2007, for a
discussion of important factors that could cause our actual results to differ materially from the
results described in or implied by the forward-looking statements contained in the following
discussion and analysis.
 Overview
  Mucinex SE.
 Mucinex DM.
 Mucinex D.
 Maximum Strength Mucinex.
 Delsym.
 Mucinex Products for Children.
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Mucinex Nasal Sprays.
 Other Products.
 Future Products.
 Seasonality
  Results of Operations
 Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006
 Net Sales.
  Three Months EndedSeptember 30,
    
    
    Increase/Product
    

2007
    
    

2006
    
    

(Decrease)(In thousands)Mucinex SE (1)
    
    $
    45,455
    
    
    $
    40,772
    
    
    $
    4,683Mucinex DM (1)
    
    
    33,872
    
    
    
    24,259
    
    
    
    9,613Mucinex D (1)
    
    
    10,102
    
    
    
    6,948
    
    
    
    3,154Total
oral-solid adult Mucinex products
    
    
    89,429
    
    
    
    71,979
    
    
    
    17,450Mucinex products for children
    
    
    7,344
    
    
    
    9,950
    
    
    
    (2,606
    )Mucinex nasal sprays
    
    
    3,307
    
    
    
    
    
    
    
    3,307Delsym
    
    
    9,896
    
    
    
    8,160
    
    
    
    1,736Humibid SE
    
    
    
    
    
    
    53
    
    
    
    (53
    )Net sales
    
    $
    109,976
    
    
    $
    90,142
    
    
    $
    19,834
 17




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(1)
    
    Net sales for the three months ended September 30, 2007 include sales of maximum
strength versions of these products, which we launched in July 2007. Cost of Goods Sold.
 Selling, Marketing and Administrative. TM
 Product Development.
 Other, net. TM
 Income Taxes.
 Accounting for Uncertainty in Income Taxes
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Cash Flows
    Liquidity and Capital Resources
   19




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Commitments and Contractual Obligations
     Off-Balance Sheet Arrangements
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Control Over Financial Reporting.
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PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
      
 ITEM 1A. RISK FACTORS.
 Mutual and Perrigo have filed ANDAs for single-ingredient, extended-release formulations of
guaifenesin with the FDA. If the FDA approves either of these ANDAs or another ANDA filed by a
third party for generic versions of our products, we may face more direct competition, which could
negatively impact our sales.
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We depend heavily on the success of two of our existing products, Mucinex SE and Mucinex DM, and
the strength of the Mucinex brand. If we are unable to continue to successfully commercialize
Mucinex SE and Mucinex DM and their maximum strength versions and build the Mucinex and Delsym brands with the introduction of new
products, our results of operations and future prospects will suffer.
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We rely on two suppliers for guaifenesin, the active ingredient we require to manufacture Mucinex
SE, Mucinex DM, Mucinex D, and the maximum strength versions of these products, and we have
historically had difficulty obtaining the amount of guaifenesin we have required. We also rely on
two suppliers for dextromethorphan, the additional active ingredient in Mucinex DM.
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We depend on a limited number of customers for a large portion of our sales, and demands made by,
or the loss of, one or more of these customers could significantly reduce our margins or sales and
adversely affect our business and financial results.
  Regulatory Risks
 We may not be able to obtain marketing approval for any of the products resulting from our
development efforts and failure to obtain these approvals could materially harm our business.
     A
joint FDA advisory committee has recommended that the FDA prohibit the use of cough and cold
medicines in children younger than six years old. If the FDA requires modifications to the
labeling of cough and cold medicines to prohibit the use by children under six, our sales will be
negatively impacted.
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Risks Related to Intellectual Property
 Our U.S. patent no. 6,372,252 is the subject of a request for reexamination, which the United
States Patent and Trade Mark Office, or USPTO, granted upon petition to the USPTO Director. If the
USPTO cancels our patent or substantially narrows the claims of our patent such that it no longer
protects our products from competition, our business will be materially harmed.
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ITEM 6. EXHIBITS.
 ExhibitNumber
    
    
    
    Description31.1*
    
    
    
    Certification of the Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
    
    
    
    Certification of the Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*
    
    
    
    Certification of the Chief Executive Officer pursuant to Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2*
    
    
    
    Certification of the Chief Financial Officer pursuant to Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed with this Quarterly Report. 28




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##### Table of Contents



SIGNATURES
  ADAMS RESPIRATORY THERAPEUTICS, INC.Date      November 9, 2007
    /s/   RITA M. OCONNORBy: Rita M. OConnorChief Financial Officer 29