UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q




x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934





For
the Quarterly Period Ended September 30, 2010





 ̈
            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:  0-25323




ALBANY
MOLECULAR RESEARCH, INC.


(Exact
name of registrant as specified in its charter)




DELAWARE
            
            14-1742717(State
      or other jurisdiction of
            
            (I.R.S.
      Employerincorporation
      or organization)
            
            Identification
      No.)




21
Corporate Circle


PO
Box 15098


Albany,
New York  12212-5098


(Address
of principal executive offices)




(518)
512-2000


(Registrant’s
telephone number, including area code)




N/A


(Former
name, former address and former fiscal year, if changed since last
report)




Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.




Yes   x
              
              No   o




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).




Yes    ̈
              
              No    ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.




Large
      accelerated filer o
                
                Accelerated
      filer xNon-accelerated
      filer o
                
                Smaller
      reporting company o




Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).




Yes   o
              
              No   x




Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.




Class
                
                Outstanding at October
      31, 2010Common
      Stock, $.01 par value
                
                30,256,171,
      excluding treasury shares of
5,411,372





ALBANY
MOLECULAR RESEARCH, INC.


INDEX




Part I.
                
                Financial
      Information
                
                3Item
      1.
                
                Condensed
      Consolidated Financial Statements (Unaudited)
                
                3Condensed
      Consolidated Statements of Operations
                
                3Condensed
      Consolidated Balance Sheets
                
                4Condensed
      Consolidated Statements of Cash Flows
                
                5Notes
      to Condensed Consolidated Financial Statements
                
                6Item
      2.
                
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                
                20Item
      3.
                
                Quantitative
      and Qualitative Disclosures About Market Risk
                
                29Item
      4.
                
                Controls
      and Procedures
                
                29Part II.
                
                Other
      Information
                
                30Item
      1.
                
                Legal
      Proceedings
                
                30Item
      1A.
                
                Risk
      Factors
                
                30Item
      2.
                
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                
                31Item
      6.
                
                Exhibits
                
                32Signatures
                
                
                
                33Exhibit Index







PART I
— FINANCIAL INFORMATION




Item
1.   Condensed Consolidated Financial Statements
(Unaudited)




Albany
Molecular Research, Inc.


Condensed
Consolidated Statements of Operations


(unaudited)




Three Months Ended
                  
                  
                  Nine Months EndedSeptember 30,
                  
                  
                  September 30,
                  
                  
                  September 30,
                  
                  
                  September 30,(Dollars in thousands, except for per share data)
                  
                  2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Contract
      revenue
                  
                  $
                  42,873
                  
                  
                  $
                  39,737
                  
                  
                  $
                  122,497
                  
                  
                  $
                  121,763Recurring
      royalties
                  
                  
                  7,744
                  
                  
                  
                  7,929
                  
                  
                  
                  26,926
                  
                  
                  
                  27,239Milestone
      revenue
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  4,000Total
      revenue
                  
                  
                  50,617
                  
                  
                  
                  47,666
                  
                  
                  
                  149,423
                  
                  
                  
                  153,002Cost
      of contract revenue
                  
                  
                  42,083
                  
                  
                  
                  33,885
                  
                  
                  
                  111,360
                  
                  
                  
                  107,224Technology
      incentive award
                  
                  
                  775
                  
                  
                  
                  790
                  
                  
                  
                  2,693
                  
                  
                  
                  2,815Research
      and development
                  
                  
                  2,873
                  
                  
                  
                  4,075
                  
                  
                  
                  8,449
                  
                  
                  
                  12,061Selling,
      general and administrative
                  
                  
                  10,517
                  
                  
                  
                  9,042
                  
                  
                  
                  30,399
                  
                  
                  
                  28,063Restructuring
      and impairment charges
                  
                  
                  9
                  
                  
                  
                  (20
                  )
                  
                  
                  8,002
                  
                  
                  
                  (35
                  )Arbitration
      reserve
                  
                  
                  9,626
                  
                  
                  
                  —
                  
                  
                  
                  9,626
                  
                  
                  
                  —Total
      operating expenses
                  
                  
                  65,883
                  
                  
                  
                  47,772
                  
                  
                  
                  170,529
                  
                  
                  
                  150,128(Loss)
      income from operations
                  
                  
                  (15,266
                  )
                  
                  
                  (106
                  )
                  
                  
                  (21,106
                  )
                  
                  
                  2,874Interest
      income, net
                  
                  
                  53
                  
                  
                  
                  93
                  
                  
                  
                  162
                  
                  
                  
                  304Other
      (expense) income, net
                  
                  
                  (650
                  )
                  
                  
                  98
                  
                  
                  
                  (612
                  )
                  
                  
                  (91
                  )(Loss)
      income before income taxes
                  
                  
                  (15,863
                  )
                  
                  
                  85
                  
                  
                  
                  (21,556
                  )
                  
                  
                  3,087Income
      tax (benefit) expense
                  
                  
                  (5,972
                  )
                  
                  
                  (280
                  )
                  
                  
                  (7,805
                  )
                  
                  
                  601Net
      (loss) income
                  
                  $
                  (9,891
                  )
                  
                  $
                  365
                  
                  
                  $
                  (13,751
                  )
                  
                  
                  2,486Basic
      (loss) earnings per share
                  
                  $
                  (0.33
                  )
                  
                  $
                  0.01
                  
                  
                  $
                  (0.44
                  )
                  
                  $
                  0.08Diluted
      (loss) earnings per share
                  
                  $
                  (0.33
                  )
                  
                  $
                  0.01
                  
                  
                  $
                  (0.44
                  )
                  
                  $
                  0.08




See
notes to unaudited condensed consolidated financial statements.




3


Albany
Molecular Research, Inc.


Condensed
Consolidated Balance Sheets


(unaudited)


(Dollars and shares in thousands, except for per share data)
                
                September 30,
                  2010
                
                
                December 31,
                  2009AssetsCurrent
      assets:Cash
      and cash equivalents
                
                $
                22,735
                
                
                $
                80,953Investment
      securities
                
                
                19,420
                
                
                
                30,105Accounts
      receivable, net
                
                
                34,132
                
                
                
                23,616Royalty
      income receivable
                
                
                7,380
                
                
                
                7,101Income
      taxes receivable
                
                
                7,285
                
                
                
                —Inventory
                
                
                28,369
                
                
                
                25,143Unbilled
      services
                
                
                103
                
                
                
                58Prepaid
      expenses and other current assets
                
                
                9,896
                
                
                
                8,780Deferred
      income taxes
                
                
                3,683
                
                
                
                4,708Total
      current assets
                
                
                133,003
                
                
                
                180,464Property
      and equipment, net
                
                
                177,072
                
                
                
                166,746Goodwill
                
                
                47,077
                
                
                
                17,551Intangible
      assets and patents, net
                
                
                2,907
                
                
                
                2,461Equity
      investment in unconsolidated affiliates
                
                
                956
                
                
                
                956Deferred
      income taxes
                
                
                2,243
                
                
                
                1,166Other
      assets
                
                
                5,852
                
                
                
                4,348Total
      assets
                
                $
                369,110
                
                
                $
                373,692Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Accounts
      payable and accrued expenses
                
                $
                25,195
                
                
                $
                18,368Arbitration
      reserve
                
                
                9,626
                
                
                
                —Deferred
      revenue and licensing fees
                
                
                12,130
                
                
                
                10,777Accrued
      pension benefits
                
                
                218
                
                
                
                218Income
      taxes payable
                
                
                —
                
                
                
                1,101Current
      installments of long-term debt
                
                
                275
                
                
                
                270Total
      current liabilities
                
                
                47,444
                
                
                
                30,734Long-term
      liabilities:Long-term
      debt, excluding current installments
                
                
                12,937
                
                
                
                13,212Deferred
      licensing fees
                
                
                6,071
                
                
                
                7,143Deferred
      rent
                
                
                1,302
                
                
                
                1,354Pension
      and postretirement benefits
                
                
                6,090
                
                
                
                6,445Accrued
      long-term restructuring
                
                
                1,534
                
                
                
                —Environmental
      liabilities
                
                
                191
                
                
                
                191Total
      liabilities
                
                
                75,569
                
                
                
                59,079Commitments
      and contingenciesStockholders’
      equity:Common
      stock, $0.01 par value, 100,000 shares authorized, 35,692 shares
      issued as of September 30, 2010, and 35,467 shares issued as of December
      31, 2009
                
                
                357
                
                
                
                355Additional
      paid-in capital
                
                
                203,496
                
                
                
                201,667Retained
      earnings
                
                
                160,370
                
                
                
                174,121Accumulated
      other comprehensive loss, net
                
                
                (3,794
                )
                
                
                (4,642
                )360,429
                
                
                
                371,501Less,
      treasury shares at cost, 5,411 shares as of September 30, 2010 and 3,825
      shares at December 31, 2009
                
                
                (66,888
                )
                
                
                (56,888
                )Total
      stockholders’ equity
                
                
                293,541
                
                
                
                314,613Total
      liabilities and stockholders’ equity
                
                $
                369,110
                
                
                $
                373,692




See
notes to unaudited condensed consolidated financial statements.




4




Albany
Molecular Research, Inc.




Condensed
Consolidated Statements of Cash Flows


(unaudited)




Nine Months Ended(Dollars in thousands)
                  
                  September 30, 2010
                  
                  
                  September 30, 2009Operating
      activitiesNet
      (loss) income
                  
                  $
                  (13,751
                  )
                  
                  $
                  2,486Adjustments
      to reconcile net (loss) income to net cash (used in) provided by operating
      activities:Depreciation
      and amortization
                  
                  
                  12,958
                  
                  
                  
                  12,670Deferred
      income tax benefit
                  
                  
                  1,479
                  
                  
                  
                  (4,523
                  )Impairment
      and loss on disposal of property, plant and equipment
                  
                  
                  5,199
                  
                  
                  
                  279Stock-based
      compensation expense
                  
                  
                  1,253
                  
                  
                  
                  1,559Recovery
      of bad debt
                  
                  
                  (65
                  )
                  
                  
                  (243
                  )Write
      down for obsolete inventories
                  
                  
                  631
                  
                  
                  
                  4,278Change
      in assets and liabilities, net of effect of acquisitions:Accounts
      receivable
                  
                  
                  (8,715
                  )
                  
                  
                  3,060Royalty
      income receivable
                  
                  
                  (279
                  )
                  
                  
                  (579
                  )Inventory,
      prepaid expenses and other assets
                  
                  
                  (3,557
                  )
                  
                  
                  2,910Accounts
      payable and accrued expenses
                  
                  
                  2,718
                  
                  
                  
                  (2,744
                  )Arbitration
      reserve
                  
                  
                  9,626
                  
                  
                  
                  —Income
      tax payable/receivable
                  
                  
                  (9,967
                  )
                  
                  
                  (1,298
                  )Deferred
      revenue and licensing fees
                  
                  
                  (2,505
                  )
                  
                  
                  10,928Pension
      and postretirement benefits
                  
                  
                  (175
                  )
                  
                  
                  21Other
      long-term liabilities
                  
                  
                  (118
                  )
                  
                  
                  396Net
      cash (used in) provided by operating activities
                  
                  
                  (5,268
                  )
                  
                  
                  29,200Investing
      activitiesPurchases
      of investment securities
                  
                  
                  (7,003
                  )
                  
                  
                  (7,782
                  )Proceeds
      from sales and maturities of investment securities
                  
                  
                  17,356
                  
                  
                  
                  9,273Purchase
      of businesses, net of cash acquired
                  
                  
                  (45,406
                  )
                  
                  
                  (12
                  )Purchase
      of property, plant and equipment
                  
                  
                  (8,265
                  )
                  
                  
                  (13,573
                  )Proceeds
      from disposal of property, plant and equipment
                  
                  
                  —
                  
                  
                  
                  143Payments
      for patent applications and other costs
                  
                  
                  (626
                  )
                  
                  
                  (442
                  )Net
      cash used in investing activities
                  
                  
                  (43,944
                  )
                  
                  
                  (12,393
                  )Financing
      activitiesPrincipal
      payments on long-term debt
                  
                  
                  (270
                  )
                  
                  
                  (260
                  )Purchase
      of treasury stock
                  
                  
                  (10,000
                  )
                  
                  
                  —Proceeds
      from sale of common stock
                  
                  
                  576
                  
                  
                  
                  509Tax
      benefit of stock option exercises
                  
                  
                  —
                  
                  
                  
                  5Net
      cash (used in) provided by financing activities
                  
                  
                  (9,694
                  )
                  
                  
                  254Effect
      of exchange rate changes on cash flows
                  
                  
                  688
                  
                  
                  
                  304(Decrease)
      increase in cash and cash equivalents
                  
                  
                  (58,218
                  )
                  
                  
                  17,365Cash
      and cash equivalents at beginning of period
                  
                  
                  80,953
                  
                  
                  
                  60,400Cash
      and cash equivalents at end of period
                  
                  $
                  22,735
                  
                  
                  $
                  77,765




See
notes to unaudited condensed consolidated financial statements.




5


(All
amounts in thousands, except per share amounts, unless otherwise
noted)




Note
1 — Summary of Operations and Significant Accounting Policies




Nature
of Business and Operations




Albany
Molecular Research, Inc. (the “Company”) provides scientific services,
technologies and products focused on improving the quality of life. The
Company’s core business consists of a fee-for-service contract services platform
encompassing drug discovery, development and manufacturing and a separate
stand-alone research and development division consisting of proprietary
technology investments, internal drug discovery and niche generic active
pharmaceutical ingredient product development.  With locations in the
U.S., Europe, and Asia, the Company provides customers with a range of services
and cost models.




Basis
of Presentation




The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. In accordance with Rule 10-01, the unaudited condensed
consolidated financial statements do not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete
consolidated financial statements. The year-end condensed consolidated balance
sheet data was derived from audited financial statements but does not include
all disclosures required by U.S. generally accepted accounting principles. In
the opinion of management, all adjustments (consisting of normal recurring
accruals and adjustments) considered necessary for a fair statement of the
results for the interim period have been included. Operating results for the
three and nine months ended September 30, 2010 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2010. The
accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and notes
thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2009.




The
accompanying unaudited condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All intercompany
balances and transactions have been eliminated during consolidation. Assets and
liabilities of non-U.S. operations are translated at period-end rates of
exchange, and the statements of operations are translated at the average rates
of exchange for the period. Unrealized gains or losses resulting from
translating non-U.S. currency financial statements are recorded in accumulated
other comprehensive (loss) income in the accompanying unaudited condensed
consolidated balance sheets.




Use
of Management Estimates




The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosures of
contingent assets and liabilities, at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting
period.  The most significant estimates included in the accompanying
consolidated financial statements include assumptions regarding the anticipated
collection of receivables, the valuation of inventory, restructuring and
impairment charges and the fair value of goodwill, intangible assets, and
long-lived assets. Other significant estimates include assumptions utilized in
determining the amount and expected realization of deferred tax assets and
assumptions utilized in determining actuarial obligations in conjunction with
the Company’s pension and postretirement health plans.  Actual results
can vary from these estimates.




Contract
Revenue Recognition




The
Company’s contract revenue consists primarily of fees earned under contracts
with third-party customers and reimbursed expenses under such contracts. The
Company also seeks to include provisions in certain contracts that contain a
combination of up-front licensing fees, milestone and royalty payments should
the Company’s proprietary technology and expertise lead to the discovery of new
products that become commercial. Reimbursed expenses consist of chemicals and
other project specific costs. Generally, the Company’s contracts may be
terminated by the customer upon 30 days’ to one year’s prior notice,
depending on the terms and/or size of the contract. The Company analyzes its
agreements to determine whether the elements can be separated and accounted for
individually or as a single unit of accounting in accordance with FASB’s
Accounting Standards Codification (“ASC”) 605-25, “Revenue Arrangements with
Multiple Deliverables,” and ASC Topic 13 (formerly Staff Accounting Bulletin
(“SAB”) 104), “Revenue Recognition”. Allocation of revenue to individual
elements that qualify for separate accounting is based on the fair value of the
respective elements.




The
Company generates contract revenue on the following basis:




6




Full-time
Equivalent (“FTE”). An FTE
agreement establishes the number of Company employees contracted for a project
or a series of projects, the duration of the contract period, the price per FTE,
plus an allowance for chemicals and other project specific costs, which may or
may not be incorporated in the FTE rate. FTE contracts can run in one month
increments, but typically have terms of six months or longer. FTE contracts
typically provide for annual adjustments in billing rates for the scientists
assigned to the contract.




These
contracts involve the Company’s scientists providing services on a “best
efforts” basis on a project that may involve a research component with a
timeframe or outcome that has some level of unpredictability. There are no fixed
deliverables that must be met for payment as part of these services. As such,
the Company recognizes revenue under FTE contracts on a monthly basis as
services are performed according to the terms of the contract.




Time and
Materials. Under
a time and materials contract the Company charges customers an hourly rate plus
reimbursement for chemicals and other project specific costs. The Company
recognizes revenue for time and material contracts based on the number of hours
devoted to the project multiplied by the customer’s billing rate plus other
project specific costs incurred.




Fixed-Fee. Under a fixed-fee contract
the Company charges a fixed agreed upon amount for a deliverable. Fixed-fee
contracts have fixed deliverables upon completion of the project. Typically, the
Company recognizes revenue for fixed-fee contracts after projects are completed,
delivery is made and title transfers to the customer, and collection is
reasonably assured. In certain instances, the Company’s customers request that
the Company retain materials produced upon completion of the project due to the
fact that the customer does not have a qualified facility to store those
materials or for other reasons.  In these instances, the revenue
recognition process is considered complete when project documents (batch
records, Certificates of Analysis, etc.) have been delivered to the customer and
payment has been collected.




Up-Front License
Fees, Milestone, and Royalty Revenue.The Company recognizes
revenue from up-front non-refundable licensing fees on a straight-line basis
over the period of the underlying project. The Company will recognize revenue
arising from a substantive milestone payment upon the successful achievement of
the event, and the resolution of any uncertainties or contingencies regarding
potential collection of the related payment, or if appropriate over the
remaining term of the agreement.




Recurring
Royalties Revenue Recognition.  Recurring
royalties consist of royalties under a license agreement with sanofi-aventis
based on the worldwide sales of fexofenadine HCl, marketed as Allegra in the
Americas and Telfast elsewhere, as well as on sales of sanofi-aventis’
authorized generics. The Company records royalty revenue in the period in which
the sales of Allegra/Telfast occur, because we can reasonably estimate such
royalties. Royalty payments from sanofi-aventis are due within 45 days
after each calendar quarter and are determined based on sales of Allegra/Telfast
in that quarter, with the exception of Allegra D-12 which had a fixed royalty
amount through July 2010.  Thereafter, the royalty rate has reverted
to the rate in effect prior to the signing of the sub-license amendment and the
Company will also receive a royalty on Teva’s sales of the generic
D-12.




Long-Lived
Assets:




The
Company assesses the impairment of long-lived assets whenever events or changes
in circumstances indicate that their carrying value may not be recoverable.
Factors the Company considers important that could trigger an impairment review
include, among others, the following:




·
            a
      significant change in the extent or manner in which a long-lived asset is
      being used;




·
            a
      significant change in the business climate that could affect the value of
      a long-lived asset; and




·
            a
      significant decrease in the market value of
  assets.




If the
Company determines that the carrying value of long-lived assets may not be
recoverable, based upon the existence of one or more of the above indicators of
impairment, the Company compares the carrying value of the asset group to the
undiscounted cash flows expected to be generated by the asset group. If the
carrying value exceeds the undiscounted cash flows an impairment charge is
recorded. An impairment charge is recognized to the extent that the carrying
amount of the asset group exceeds their fair value and will reduce only the
carrying amounts of the long-lived assets. The Company utilizes the assistance
of an independent valuation firm in determining the fair values.




7




Goodwill:




The
Company performs an annualassessment of the
carrying value of goodwill for potential impairment (or on an interim basis if
certain triggering events occur). A determination of impairment is made based
upon the comparison of the book value to the fair value of the related reporting
unit.  If goodwill is determined to be impaired, the Company would be
required to record a charge to its results of operations. Factors the Company
considers important which could result in an impairment include the
following:




·
            significant
      underperformance relative to historical or projected future operating
      results;




·
            significant
      negative industry or economic trends;
and




·
            market
      capitalization relative to net book
value




See Note
6 for further information on the Company’s goodwill balances.




Note
2 — Business Combinations




Acquisition
of Hyaluron Inc.




On June
14, 2010 the Company completed the purchase of all of the outstanding shares of
Hyaluron, Inc. (“AMRI Burlington”), a formulation facility located in
Burlington, Massachusetts.   The aggregate purchase price was
$27,876.




AMRI
Burlington provides high value-added contract manufacturing services in sterile
syringe and vial filling using specialized technologies including lyophilization
and BUBBLE-FREE FILLINGTM, a
unique patented technology acquired with AMRI Burlington.  AMRI
Burlington provides these services for both small molecule drug products and
biologicals, from clinical phase to commercial scale.





A final
valuation will be completed to determine the fair value of the acquired property
and equipment and any potential identifiable intangibles, which may result in
changes to their estimated fair values, as well as changes to the allocated
goodwill fair value.  The following table summarizes the preliminary
allocation of the purchase price to the estimated fair value of the net assets
acquired:




June 14, 2010Assets
      AcquiredCash
                            
                            $
                            740Accounts
      receivable
                            
                            
                            752Inventory
                            
                            
                            1,013Prepaid
      expenses and other current assets
                            
                            
                            187Deposits
                            
                            
                            63Property
      and equipment
                            
                            
                            4,807Intangibles
                            
                            
                            40Goodwill
                            
                            
                            24,413Total
      assets acquired
                            
                            $
                            32,015Liabilities
      AssumedAccounts
      payable and accrued expenses
                            
                            $
                            1,291Deferred
      revenue
                            
                            
                            2,786Other
      liabilities
                            
                            
                            62Total
      liabilities assumed
                            
                            $
                            4,139Net
      assets acquired
                            
                            $
                            27,876




8


The
following table shows the unaudited condensed pro forma statements of income for
the nine month period ended September 30, 2010 and the year ended December 31,
2009 as if the AMRI Burlington acquisition had occurred on January 1,
2009:




Nine months ended
                  
                  
                  Year ended(Dollars in thousands, except for per share data)
                  
                  September 30, 2010
                  
                  
                  December 31, 2009Total
      revenue
                  
                  $
                  154,484
                  
                  
                  $
                  209,255Total
      operating expenses
                  
                  
                  177,880
                  
                  
                  
                  231,648Loss
      from operations
                  
                  
                  (23,396
                  )
                  
                  
                  (22,393
                  )Other
      income (expense), net
                  
                  
                  (434
                  )
                  
                  
                  (115
                  )Loss
      before income taxes
                  
                  
                  (23,830
                  )
                  
                  
                  (22,508
                  )Income
      tax benefit
                  
                  
                  (8,601
                  )
                  
                  
                  (5,517
                  )Net
      loss
                  
                  $
                  (15,229
                  )
                  
                  $
                  (16,991
                  )Basic
      loss per share
                  
                  $
                  (0.49
                  )
                  
                  $
                  (0.55
                  )Diluted
      loss per share
                  
                  $
                  (0.49
                  )
                  
                  $
                  (0.55
                  )




On August
18, 2010, the Company received a warning letter, dated August 17, 2010, from the
U.S. Food and Drug Administration (“FDA”) in conjunction with the agency’s
inspection of the Company’s AMRI Burlington manufacturing facility in March
2010.  The warning letter does not restrict production or shipment of
products from the facility.  The Company is working with the FDA to
resolve the issues identified in the warning letter.




Acquisition
of Excelsyn Ltd.




On
February 17, 2010, the Company completed the purchase of all of the outstanding
shares of Excelsyn Ltd. (“AMRI UK”), a chemical development and manufacturing
facility located in Holywell, United Kingdom.  The aggregate purchase
price was $18,250.




AMRI UK
provides development and large scale manufacturing services to large
pharmaceutical, specialty pharmaceutical and biotechnology customers throughout
Europe, Asia and North America. Manufacturing services include pre-clinical and
Phase I – III product development as well as commercial manufacturing services
for approved products.  The acquisition of AMRI UK expands AMRI’s
portfolio of development and large scale manufacturing facilities as well as its
customer portfolio, with little overlap of customers between the two
companies.




A final
valuation will be completed to determine the fair value of the acquired property
and equipment and any potential identifiable intangibles, which may result in
changes to their estimated fair values, as well as changes to the allocated
goodwill fair value.  The following table summarizes the preliminary
allocation of the purchase price to the estimated fair value of the net assets
acquired:




February 17,
                          2010Assets
      AcquiredAccounts
      receivable
                        
                        $
                        984Inventory
                        
                        
                        1,005Prepaid
      expenses and other current assets
                        
                        
                        751Property
      and equipment
                        
                        
                        14,130Goodwill
                        
                        
                        5,771Total
      assets acquired
                        
                        $
                        22,641Liabilities
      AssumedAccounts
      payable and accrued expenses
                        
                        $
                        4,391Total
      liabilities assumed
                        
                        $
                        4,391Net
      assets acquired
                        
                        $
                        18,250




9




Pro forma
financial information for the three and nine months ended September 30, 2010, as
if the AMRI UK acquisition had been completed as of January 1, 2009, has been
excluded due to the immateriality of the operating results of AMRI UK in
relation to the Company’s consolidated operating results as a
whole.




Note
3 — Earnings Per Share




The
shares used in the computation of the Company’s basic and diluted earnings per
share are as follows:




Three Months Ended
                    September 30,
                  
                  
                  Nine Months Ended
                    September 30,(in thousands)
                  
                  2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Weighted
      average shares outstanding - basic
                  
                  
                  30,432
                  
                  
                  
                  31,007
                  
                  
                  
                  30,960
                  
                  
                  
                  30,981Dilutive
      effect of stock options
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Dilutive
      effect of restricted stock
                  
                  
                  —
                  
                  
                  
                  182
                  
                  
                  
                  —
                  
                  
                  
                  152Weighted
      average shares outstanding - diluted
                  
                  
                  30,432
                  
                  
                  
                  31,189
                  
                  
                  
                  30,960
                  
                  
                  
                  31,133




The
Company has excluded certain outstanding stock options and non-vested restricted
shares from the calculation of diluted earnings per share for the three and nine
months ended September 30, 2010 because the Company was in a net loss
position.  The Company has excluded certain outstanding stock options
and non-vested restricted shares from the calculation of diluted earnings per
share for the three and nine months ended September 30, 2009 because the
exercise price was greater than the average market price of the Company’s common
shares during that period, and as such, these options and shares would be
anti-dilutive. The weighted average number of anti-dilutive options and
restricted shares outstanding (before the effects of the treasury stock method)
was 1,786 and 1,949 for the three months ended September 30, 2010 and 2009,
respectively and 1,958 and 1,951 for the nine months ended September 30, 2010
and 2009, respectively.  These amounts are not included in the
calculation of weighted average common shares outstanding.




Note
4 — Inventory




Inventory
consisted of the following at September 30, 2010 and December 31,
2009:




September 30,
                    2010
                  
                  
                  December 31,
                    2009Raw
      materials
                  
                  $
                  6,746
                  
                  
                  $
                  7,415Work
      in process
                  
                  
                  5,741
                  
                  
                  
                  2,213Finished
      goods
                  
                  
                  15,882
                  
                  
                  
                  15,515Total
                  
                  $
                  28,369
                  
                  
                  $
                  25,143




Note
5 — Restructuring and Impairment




AMRI
U.S.





In May
2010, the Company initiated a restructuring of its AMRI U.S.
locations.  As part of its strategy to increase global competitiveness
and continue to be diligent in managing costs, the Company implemented
significant cost reduction activities at its operations in the
U.S.  These cost reduction activities included a reduction in the U.S.
workforce, as well as the suspension of operations at one of its research
laboratory facilities in Rensselaer, New York.  Employees and
equipment from this facility will be consolidated into other nearby Company
operations.





The
Company recorded a restructuring charge, including associated asset impairment
charges caused as a consequence of restructuring, of $5,820 in the second
quarter of 2010.  This charge includes lease termination charges of
$2,182, (net of estimated sublease income), termination benefits and personnel
realignment costs of $846 and facility and other costs of $250.  Asset
impairment charges as a consequence of restructuring of $2,542 were also
recorded in the second quarter of 2010.  Additionally, in the third
quarter of 2010, the Company recorded an additional $9 of termination benefits
and personnel realignment costs.





In
conjunction with the AMRI U.S. restructuring, the Company realigned the nature
of its operating activities in a nearby research laboratory
facility.  As a result, the Company evaluated the future economic
benefit expected to be generated from the revised operating activities in this
facility against the carrying value of the facility’s property and equipment and
determined that these assets were impaired.  The Company recorded a
property and equipment impairment charge of $2,306 in the second quarter of 2010
to reduce the carrying value of the assets to their estimated fair
value.


10




The
restructuring costs are included under the caption “Restructuring and impairment
charges” in the consolidated statement of operations for the three and nine
months ended September 30, 2010 and the restructuring liabilities are included
in “Accounts payable and accrued expenses” and “Accrued long-term restructuring”
on the consolidated balance sheet at September 30, 2010.




The
following table displays AMRI U.S.’ restructuring activity and liability
balances within our Discovery/Development/ Small Scale Manufacturing (“DDS”)
operating segment:




Balance at
                        January 1,
                        2010
                      
                      
                      Charges
                      
                      
                      Paid Amounts
                      
                      
                      Balance at
                        September 30,
                        2010Termination
      benefits and personnel realignment
                      
                      $
                      —
                      
                      
                      $
                      855
                      
                      
                      $
                      (749
                      )
                      
                      $
                      106Lease
      termination charges
                      
                      
                      —
                      
                      
                      
                      2,182
                      
                      
                      
                      (163
                      )
                      
                      
                      2,019Facility
      and other costs
                      
                      
                      —
                      
                      
                      
                      250
                      
                      
                      
                      (166
                      )
                      
                      
                      84Total
                      
                      $
                      —
                      
                      
                      $
                      3,287
                      
                      
                      $
                      (1,078
                      )
                      
                      $
                      2,209





Termination
benefits and personnel realignment costs relate to severance packages,
outplacement services, and career counseling for employees affected by this
restructuring.   Lease termination charges relate to costs
associated with exiting the current facility, net of estimated sublease
income.  Facility and other costs are charges associated with
consolidating into other nearby Company locations.





Anticipated
cash outflows related to the AMRI U.S. restructuring for the remainder of 2010
is approximately $303, which primarily consists of lease termination charges and
termination benefits.





AMRI
India




In
December 2009, the Company initiated a restructuring of its AMRI India locations
which consisted of closing and consolidating its Mumbai administrative office
into its Hyderabad location as part of the Company’s goal to streamline
operations and eliminate duplicate administrative functions.  The
Company recorded a restructuring charge of approximately $364 in the fourth
quarter of 2009, including lease termination charges of $215, leasehold
improvement abandonment charges of $107 and administrative costs of
$42.




The
restructuring liabilities are included in “Accounts payable and accrued
expenses” on the consolidated balance sheet at September 30, 2010 and December
31, 2009.




The AMRI
India restructuring activity was recorded in the Company’s Large Scale
Manufacturing (“LSM”) operating segment.  The following table displays
AMRI India’s restructuring activity and liability balances within our LSM
operating segment:





Balance at
                        January 1,
                        2010
                      
                      
                      Paid
                        Amounts
                      
                      
                      Foreign
                        Currency
                        Translation
                        Adjustments
                      
                      
                      Balance at
                        September 30,
                        2010Lease
      termination charges
                      
                      $
                      215
                      
                      
                      $
                      (165
                      )
                      
                      
                      4
                      
                      
                      $
                      54Administrative
      costs associated with restructuring
                      
                      
                      11
                      
                      
                      
                      (7
                      )
                      
                      
                      —
                      
                      
                      
                      4Total
                      
                      $
                      226
                      
                      
                      $
                      (172
                      )
                      
                      $
                      4
                      
                      
                      $
                      58





Lease
termination charges and leasehold improvement abandonment charges relate to
costs associated with exiting the current facility.





Anticipated
cash outflows related to the AMRI India restructuring for the remainder of 2010
is approximately $58, which primarily consists of lease termination
charges.





AMRI
Hungary





In May
2008, the Company initiated a restructuring of its Hungary
location.  The goal of the restructuring was to realign the business
model for these operations to better support the Company’s long-term strategy
for providing discovery services in the European marketplace.  The
Company recorded a restructuring charge of approximately $1,833 in the second
quarter of 2008, including termination benefits and personnel realignment costs
of approximately $901, losses on grant contracts of approximately $389, lease
termination charges of approximately $463 and administrative costs associated
with the restructuring plan of $80.


11




During
August 2009, the Company closed and consolidated its Balaton, Hungary facility
into the new facility in Budapest, Hungary as part of the Company’s goal to
streamline operations and to consolidate locations, equipment and operating
costs.  As a result, the Company recorded a restructuring charge of
approximately $327 in the second quarter of 2009, including termination benefits
and personnel realignment costs of approximately $134, lease termination charges
of $182 and administrative costs associated with the restructuring plan of
$11.




The
restructuring costs are included under the caption “Restructuring and impairment
charges” in the consolidated statement of operations for the nine month period
ended September 30, 2010 and the restructuring liabilities are included in
“Accounts payable and accrued expenses” on the consolidated balance sheet at
September 30, 2010 and December 31, 2009.




The
following table displays AMRI Hungary’s restructuring activity and liability
balances within our DDS operating segment:





Balance at
                      January 1,
                      2010
                    
                    
                    Charges/
                      (reversals)
                    
                    
                    Paid
                      Amounts
                    
                    
                    Foreign
                      Currency
                      Translation
                      Adjustments
                    
                    
                    Balance at
                      September 30,
                      2010Termination
      benefits and personnel realignment
                    
                    $
                    55
                    
                    
                    
                    112
                    
                    
                    $
                    (24
                    )
                    
                    $
                    (7
                    )
                    
                    $
                    136Losses
      on grant contracts
                    
                    
                    246
                    
                    
                    
                    —
                    
                    
                    
                    (135
                    )
                    
                    
                    (17
                    )
                    
                    
                    94Lease
      termination charges
                    
                    
                    275
                    
                    
                    
                    (262
                    )
                    
                    
                    —
                    
                    
                    
                    (13
                    )
                    
                    
                    —Administrative
      costs associated with restructuring
                    
                    
                    12
                    
                    
                    
                    17
                    
                    
                    
                    (1
                    )
                    
                    
                    —
                    
                    
                    
                    28Total
                    
                    $
                    588
                    
                    
                    $
                    (133
                    )
                    
                    $
                    (160
                    )
                    
                    $
                    (37
                    )
                    
                    $
                    258





Termination
benefits and personnel realignment costs relate to severance packages,
outplacement services, and career counseling for employees affected by this
restructuring.  Losses on grant contracts represent estimated
contractual losses that will be incurred in performing grant-based work under
Hungary’s legacy business model.  Lease termination charges relate to
costs associated with exiting the current facility.





Anticipated
cash outflows related to the Hungary restructuring for the remainder of 2010 is
approximately $122, which primarily consists of termination benefits and losses
on grant contracts.





Note
6 — Goodwill and Intangible Assets




The
carrying amounts of goodwill, by the Company’s DDS and LSM operating segments,
as of September 30, 2010 and December 31, 2009 are as follows:




DDS
                  
                  
                  LSM
                  
                  
                  TotalSeptember
      30, 2010
                  
                  $
                  14,161
                  
                  
                  $
                  32,916
                  
                  
                  $
                  47,077December 31,
      2009
                  
                  $
                  13,199
                  
                  
                  $
                  4,352
                  
                  
                  $
                  17,551




The
increase in goodwill within the DDS segment from December 31, 2009 to September
30, 2010 is primarily due to the goodwill recorded in association with the
acquisition of AMRI UK in February 2010, offset in part by the impact of foreign
currency translation.  The increase in goodwill within the LSM segment
from December 31, 2009 is primarily due to the goodwill recorded in association
with the acquisition of AMRI UK in February 2010 and the acquisition of AMRI
Burlington in June 2010, along with an increase due to the impact of foreign
currency translation.




The
components of intangible assets are as follows:




Cost
                        
                        
                        Accumulated
                          Amortization
                        
                        
                        Net
                        
                        Amortization
                          PeriodSeptember 30, 2010Patents
      and Licensing Rights
                        
                        $
                        4,145
                        
                        
                        $
                        (1,238
                        )
                        
                        $
                        2,907
                        
                        2-16
      yearsDecember 31, 2009Patents
      and Licensing Rights
                        
                        $
                        3,897
                        
                        
                        $
                        (1,436
                        )
                        
                        $
                        2,461
                        
                        2-16
      years




12




Amortization
expense related to intangible assets was $73 and $70 for the three months ended
September 30, 2010 and 2009, respectively, and $220 and $187 for the nine months
ended September 30, 2010 and 2009, respectively.




The
following chart represents estimated future annual amortization expense related
to intangible assets:




Year
      ending December 31,2010
      (remaining)
                      
                      $
                      782011
                      
                      
                      2612012
                      
                      
                      2572013
                      
                      
                      2452014
                      
                      
                      240Thereafter
                      
                      
                      1,826Total
                      
                      $
                      2,907




Note
7 — Share-Based Compensation




During
the three and nine months ended September 30, 2010, the Company recognized total
share based compensation cost of $473 and $1,253, respectively as compared to
total share based compensation cost for the three and nine months ended
September 30, 2009, of $534 and $1,559, respectively.




The
Company grants share-based payments, including restricted shares, under its 2008
Stock Option and Incentive Plan, as well as its 1998 Employee Stock Purchase
Plan.




Restricted
Stock




A summary
of unvested restricted stock activity as of September 30, 2010 and changes
during the nine months then ended is presented below:




Number of
                    Shares
                  
                  
                  Weighted
                    Average Grant Date
                    Fair Value Per
                    ShareOutstanding,
      December 31, 2009
                  
                  
                  516
                  
                  
                  $
                  10.08Granted
                  
                  
                  174
                  
                  
                  $
                  8.27Vested
                  
                  
                  (119
                  )
                  
                  $
                  9.71Forfeited
                  
                  
                  (51
                  )
                  
                  $
                  10.65Outstanding,
      September 30, 2010
                  
                  
                  520
                  
                  
                  $
                  9.50




The
weighted average fair value of restricted shares per share granted during the
nine months ended September 30, 2010 and 2009 was $8.27 and $8.42,
respectively.  As of September 30, 2010, there was $3,371 of total
unrecognized compensation cost related to non-vested restricted shares. That
cost is expected to be recognized over a weighted-average period of 2.6
years.




Stock
Options




The fair
value of each stock option award is estimated at the date of grant using the
Black-Scholes valuation model based on the following assumptions:




For the Nine Months EndedSeptember 30, 2010
                  
                  
                  September 30, 2009Expected
      life in years
                  
                  
                  5
                  
                  
                  
                  5Risk
      free interest rate
                  
                  
                  2.32
                  %
                  
                  
                  1.98
                  %Volatility
                  
                  
                  46
                  %
                  
                  
                  48
                  %Dividend
      yield
                  
                  
                  —
                  
                  
                  
                  —




A summary
of stock option activity under the Company’s Stock Option and Incentive Plans as
of September 30, 2010 and changes during the nine month period then ended is
presented below:




Number of
                  Shares
                
                
                Weighted
                  Exercise
                  Price Per Share
                
                
                Weighted Average
                  Remaining
                  Contractual Term
                  (Years)
                
                
                Aggregate
                  Intrinsic
                  ValueOutstanding,
      December 31, 2009
                
                
                1,864
                
                
                $
                19.66Granted
                
                
                160
                
                
                
                7.12Exercised
                
                
                —
                
                
                
                —Forfeited
                
                
                (147
                )
                
                
                19.10Expired
                
                
                (257
                )
                
                
                26.41Outstanding,
      September 30, 2010
                
                
                1,620
                
                
                $
                17.41
                
                
                
                4.2
                
                
                $
                44Options
      exercisable, September 30, 2010
                
                
                1,278
                
                
                $
                19.67
                
                
                
                3.1
                
                
                $
                —




13


The
weighted average fair value of stock options granted for the nine months ended
September 30, 2010 and 2009 was $3.05 and $3.74,
respectively.   As of September 30, 2010, there was $855 of total
unrecognized compensation cost related to non-vested stock options. That cost is
expected to be recognized over a weighted-average period of 2.4
years.




Employee
Stock Purchase Plan




During
the nine months ended September 30, 2010 and 2009, 88 and 49 shares,
respectively, were issued under the Company’s 1998 Employee Stock Purchase
Plan.




During
the nine months ended September 30, 2010 and 2009, cash received from stock
option exercises and employee stock purchases was $576 and $509,
respectively.  The actual tax benefit realized for the tax deductions
from stock option exercises and plan purchases was $0 and $5 during the nine
months ended September 30, 2010 and 2009, respectively.




Note
8 — Operating Segment Data




The
Company has organized its sales, marketing and production activities into the
DDS and LSM segments.  The Company’s management relies on an internal
management accounting system to report results of the segments. The system
includes revenue and cost information by segment. The Company’s chief operating
decision maker makes financial decisions and allocates resources based on the
information it receives from this internal system.




DDS
includes activities such as drug lead discovery, optimization, drug development
and small scale commercial manufacturing. LSM includes pilot to commercial scale
manufacturing of active pharmaceutical ingredients and intermediates and high
potency and controlled substance manufacturing, of our U.S. location is in
compliance with the Food and Drug Administration’s (“FDA”) current Good
Manufacturing Practices. Corporate activities include business development and
administrative functions, as well as research and development costs that have
not been allocated to the operating segments.




The
following table contains earnings data by operating segment, reconciled to
totals included in the unaudited condensed consolidated financial
statements:




Contract
                                                                  Revenue
                                                                
                                                                
                                                                Milestone &
                                                                  Recurring
                                                                  Royalty
                                                                  Revenue
                                                                
                                                                
                                                                Income
                                                                  (Loss)
                                                                  From
                                                                  Operations
                                                                
                                                                
                                                                Depreciation
                                                                  and
                                                                  AmortizationFor the three months ended September 30,
      2010DDS
                                                                
                                                                $
                                                                20,972
                                                                
                                                                
                                                                $
                                                                7,744
                                                                
                                                                
                                                                $
                                                                9,471
                                                                
                                                                
                                                                $
                                                                2,892LSM
                                                                
                                                                
                                                                21,901
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (11,347
                                                                )
                                                                
                                                                
                                                                1,773Corporate
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (13,390
                                                                )
                                                                
                                                                
                                                                —Total
                                                                
                                                                $
                                                                42,873
                                                                
                                                                
                                                                $
                                                                7,744
                                                                
                                                                
                                                                $
                                                                (15,266
                                                                )
                                                                
                                                                $
                                                                4,665For the three months ended September 30,
      2009DDS
                                                                
                                                                $
                                                                21,523
                                                                
                                                                
                                                                $
                                                                7,929
                                                                
                                                                
                                                                $
                                                                9,895
                                                                
                                                                
                                                                $
                                                                2,494LSM
                                                                
                                                                
                                                                18,214
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                3,116
                                                                
                                                                
                                                                
                                                                1,698Corporate
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (13,117
                                                                )
                                                                
                                                                
                                                                —Total
                                                                
                                                                $
                                                                39,737
                                                                
                                                                
                                                                $
                                                                7,929
                                                                
                                                                
                                                                $
                                                                (106
                                                                )
                                                                
                                                                $
                                                                4,192For the nine months ended September 30,
      2010DDS
                                                                
                                                                $
                                                                61,692
                                                                
                                                                
                                                                $
                                                                26,926
                                                                
                                                                
                                                                $
                                                                23,980
                                                                
                                                                
                                                                $
                                                                7,672LSM
                                                                
                                                                
                                                                60,805
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (6,238
                                                                )
                                                                
                                                                
                                                                5,286Corporate
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (38,848
                                                                )
                                                                
                                                                
                                                                —Total
                                                                
                                                                $
                                                                122,497
                                                                
                                                                
                                                                $
                                                                26,926
                                                                
                                                                
                                                                $
                                                                (21,106
                                                                )
                                                                
                                                                $
                                                                12,958For the nine months ended September 30,
      2009DDS
                                                                
                                                                $
                                                                63,662
                                                                
                                                                
                                                                $
                                                                31,239
                                                                
                                                                
                                                                $
                                                                37,938
                                                                
                                                                
                                                                $
                                                                7,560LSM
                                                                
                                                                
                                                                58,101
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                5,060
                                                                
                                                                
                                                                
                                                                5,110Corporate
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (40,124
                                                                )
                                                                
                                                                
                                                                —Total
                                                                
                                                                $
                                                                121,763
                                                                
                                                                
                                                                $
                                                                31,239
                                                                
                                                                
                                                                $
                                                                2,874
                                                                
                                                                
                                                                $
                                                                12,670




14




The
following table summarizes other information by segment as of September 30,
2010:




As of September 30, 2010DDS
                      
                      
                      LSM
                      
                      
                      TotalTotal
      assets
                      
                      $
                      196,560
                      
                      
                      $
                      172,550
                      
                      
                      $
                      369,110Goodwill
      included in total assets
                      
                      
                      14,161
                      
                      
                      
                      32,916
                      
                      
                      
                      47,077




The
following table summarizes other information by segment as of December 31,
2009:




As of December 31, 2009DDS
                      
                      
                      LSM
                      
                      
                      TotalTotal
      assets
                      
                      $
                      236,314
                      
                      
                      $
                      137,378
                      
                      
                      $
                      373,692Goodwill
      included in total assets
                      
                      
                      13,199
                      
                      
                      
                      4,352
                      
                      
                      
                      17,551




Note
9 — Financial Information by Customer Concentration and Geographic
Area




Total
contract revenue from DDS’s three largest customers represented approximately
17%, 8% and 7% of DDS’s total contract revenue for the three months ended
September 30, 2010, and 22%, 9% and 9% of DDS’s total contract revenue for the
three months ended September 30, 2009.  Total contract revenue from
DDS’s three largest customers represented approximately 20%, 9% and 8% of DDS’s
total contract revenue for the nine months ended September 30, 2010 and 20%, 10%
and 6% for the nine months ended September 30, 2009.  Total contract
revenue from LSM’s largest customer, GE Healthcare (“GE”), represented 40% and
28% of LSM’s total contract revenue for the three months ended September 30,
2010 and 2009, respectively.  Total contract revenue from GE
represented 35% and 28% of LSM’s total contract revenue for the nine months
ended September 30, 2010 and 2009, respectively.  GE accounted for
approximately 18% and 14% of the Company’s total contract revenue for the nine
months ended September 30, 2010 and 2009, respectively.  The increase
in GE sales in 2010 is primarily due to a return toward historical demand in
2010 as a result of GE’s 2009 inventory reduction efforts.  This is
expected to continue throughout 2010 causing full year 2010 sales to GE to be
above amounts recognized in 2009.  The DDS segment’s largest customer,
a large pharmaceutical company, represented approximately 10% and 11% of the
Company’s total contract revenue for the nine months ended September 30, 2010
and 2009, respectively.




The
Company’s total contract revenue for the three and nine months ended September
30, 2010 and 2009 was recognized from customers in the following geographic
regions:




Three Months Ended
                    September 30,
                  
                  
                  Nine Months Ended
                    September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009United
      States
                  
                  
                  63
                  %
                  
                  
                  56
                  %
                  
                  
                  66
                  %
                  
                  
                  60
                  %Europe
                  
                  
                  26
                  
                  
                  
                  32
                  
                  
                  
                  23
                  
                  
                  
                  23Asia
                  
                  
                  10
                  
                  
                  
                  11
                  
                  
                  
                  9
                  
                  
                  
                  15Other
                  
                  
                  1
                  
                  
                  
                  1
                  
                  
                  
                  2
                  
                  
                  
                  2Total
                  
                  
                  100
                  %
                  
                  
                  100
                  %
                  
                  
                  100
                  %
                  
                  
                  100
                  %




Note
10 — Comprehensive (Loss) Income




The
following table presents the components of the Company’s comprehensive loss for
the three and nine months ended September 30, 2010 and 2009:




Three Months Ended
                    September 30,
                  
                  
                  Nine Months Ended
                    September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Net
      (loss) income
                  
                  $
                  (9,891
                  )
                  
                  $
                  365
                  
                  
                  $
                  (13,751
                  )
                  
                  $
                  2,486Other
      comprehensive (loss) income:Change
      in unrealized gain (loss) on available-for-sale securities, net of
      taxes
                  
                  
                  (5
                  )
                  
                  
                  4
                  
                  
                  
                  (19
                  )
                  
                  
                  4Foreign
      currency translation adjustments
                  
                  
                  5,572
                  
                  
                  
                  1,076
                  
                  
                  
                  757
                  
                  
                  
                  1,677Net
      actuarial loss of pension and postretirement benefits
                  
                  
                  34
                  
                  
                  
                  9
                  
                  
                  
                  109
                  
                  
                  
                  22Total
      comprehensive (loss) income
                  
                  $
                  (4,290
                  )
                  
                  $
                  1,454
                  
                  
                  $
                  (12,904
                  )
                  
                  $
                  4,189




15




Note
11 — Legal Proceedings




The
Company, from time to time, may be involved in various claims and legal
proceedings arising in the ordinary course of business. Except as noted below in
regard to litigation relating to Allegra and Borregaard, the Company is not
currently a party to any such claims or proceedings which, if decided adversely
to the Company, would either individually or in the aggregate have a material
adverse effect on the Company’s business, financial condition, results of
operations or cash flows.




Allegra




The
Company, through its former subsidiary AMR Technology that has been merged into
the Company, along with Aventis Pharmaceuticals Inc., the U.S. pharmaceutical
business of sanofi-aventis S.A., has been involved in legal proceedings
with several companies seeking to market or which are currently marketing
generic versions of Allegra. Beginning in 2001, Barr Laboratories, Inc., Impax
Laboratories, Inc., Mylan Pharmaceuticals, Inc., Teva Pharmaceuticals USA, Dr.
Reddy’s Laboratories, Ltd./Dr. Reddy’s Laboratories, Inc., Ranbaxy Laboratories
Ltd./Ranbaxy Pharmaceuticals Inc., Sandoz Inc., Sun Pharma Global, Inc.,
Wockhardt, and Actavis Mid Atlantic LLC, and Aurolife Pharma LLC and Aurobindo
Pharma Ltd. filed Abbreviated New Drug Applications (“ANDAs”) with the Food and
Drug Administration (“FDA”) to produce and market generic versions of Allegra
products.




In
response to the filings described above, beginning in 2001, Aventis
Pharmaceuticals filed patent infringement lawsuits against Barr Laboratories,
Impax Laboratories, Mylan Pharmaceuticals, Teva Pharmaceuticals, Dr. Reddy’s
Laboratories, Ranbaxy Laboratories Ltd./Ranbaxy Pharmaceuticals Inc., Sandoz,
Wockhardt, Sun Pharma Global, Inc., Actavis Inc. and Actavis Mid Atlantic LLC,
and Aurolife Pharma LLC and Aurobindo Pharma Ltd.  Each of the
lawsuits was filed in the U.S. District Court in New Jersey and alleges
infringement of one or more patents owned by Aventis Pharmaceuticals. In
addition, beginning on November 14, 2006, Aventis filed two patent infringement
suits against Teva Pharmaceuticals USA, Barr Laboratories, Inc. and Barr
Pharmaceuticals, Inc. in the Eastern District of Texas based on patents owned by
Aventis.  Those lawsuits were transferred to the U.S. District Court
in New Jersey.




Further,
beginning on March 5, 2004, the Company, through its former subsidiary AMR
Technology, along with Aventis Pharmaceuticals, filed suit in the U.S. District
Court in New Jersey against Barr Laboratories, Impax Laboratories, Mylan
Pharmaceuticals, Teva Pharmaceuticals, Dr. Reddy’s Laboratories, Amino
Chemicals, Ltd., Ranbaxy Laboratories Ltd./Ranbaxy Pharmaceuticals Inc.,
DiPharma S.P.A., DiPharma Francis s.r.l., and Sandoz, asserting infringement of
U.S. Patent Nos. 5,581,011 and 5,750,703 that are exclusively licensed to
Aventis Pharmaceuticals relating to Allegra and Allegra-D
products.  On December 11, 2006, the Company through its former
subsidiary AMR Technology and sanofi-aventis U.S. LLC, an affiliate of Aventis
Pharmaceuticals, also filed a patent infringement lawsuit in the Republic of
Italy against DiPharma Francis s.r.l. and DiPharma S.P.A. based on European
Patent No. 703,902 which is owned by the Company and licensed to
sanofi-aventis.  In addition, on December 22, 2006, the Company
through its former subsidiary AMR Technology, filed a patent infringement
lawsuit in Canada against Novopharm Ltd., Teva Pharmaceutical Industries Ltd.,
Teva Pharmaceuticals USA, Inc., DiPharma S.P.A. and DiPharma s.r.l. based on
Canadian Patent No. 2,181,089. On March 20, 2007, the Company through its former
subsidiary AMR Technology filed a patent infringement lawsuit in Australia
against Alphapharm Pty Ltd based on Australian Patent No. 699,799.  On
September 28, 2007, the Company, through its former subsidiary AMR Technology,
filed a patent infringement lawsuit in Australia against Arrow Pharmaceuticals
Pty Ltd, Chemists’ Own Pty Ltd, and Sigma Pharmaceuticals Limited based on
Australian Patent No. 699,799.  On September 9, 2009, the Company
filed patent infringement lawsuits in the U.S. District Court in New Jersey
against Dr. Reddy’s Laboratories, Ltd, Dr. Reddy’s Laboratories, Inc., and
Sandoz, Inc. asserting infringement of U.S. Patent No. 7,390,906, seeking
statutory damages.




Aventis
Pharmaceuticals, the Company, and its former subsidiary AMR Technology have
entered into covenants not to sue on U.S. Patent No. 5,578,610 with defendants
other than Novopharm, DiPharma S.P.A., DiPharma Francis s.r.l., Alphapharm,
Arrow Pharmaceuticals Pty Ltd, Chemists’ Own Pty Ltd, and Sigma Pharmaceuticals
Limited.  Aventis Pharmaceuticals exclusively licenses U.S. Patent No.
5,578,610 from the Company, but that patent has not been asserted in the
litigations in the U.S.  However, the Company and Aventis
Pharmaceuticals have agreed that Aventis Pharmaceuticals will continue to pay
royalties to the Company based on that patent under the Company’s original
license agreement with Aventis Pharmaceuticals. Under the Company’s arrangements
with Aventis Pharmaceuticals, the Company will receive royalties until
expiration of the underlying patents (2013 for U.S. Patent No. 5,578,610 and
2015 for U.S. Patent No. 5,750,703) unless the patents are earlier determined to
be invalid.




16


On
November 18, 2008, the Company, its former subsidiary AMR Technology, Aventis
Pharmaceuticals, sanofi-aventis, Teva Pharmaceuticals, and Barr Laboratories
reached a settlement regarding the above-described patent infringement
litigations relating to Teva Pharmaceuticals and Barr
Laboratories.  As part of the settlement, the Company entered into an
amendment to its licensing agreement with sanofi-aventis to allow sanofi-aventis
to sublicense patents related to ALLEGRA®and
ALLEGRA®D-12 to
Teva Pharmaceuticals and Barr Laboratories in the United
States.  Subsequently, Teva Pharmaceuticals acquired Barr
Laboratories.  The Company received an upfront sublicense fee from
sanofi-aventis of $10 million, and sanofi-aventis will pay royalties to the
Company on the sale of products in the United States containing fexofenadine
hydrochloride (the generic name for the active ingredient in ALLEGRA®) and
products containing fexofenadine hydrochloride and pseudoephedrine hydrochloride
(generic ALLEGRA®D-12) by
Teva Pharmaceuticals through 2015, along with additional
consideration.  As provided in the settlement, Teva Pharmaceuticals
launched a generic version of Allegra D-12 in November 2009.  The
Company will receive quarterly royalties through July 2010 for the branded
Allegra D-12 equal to the royalties paid for the quarter ended June 30,
2009.  Thereafter, the royalty rate will revert to the rate in effect
prior to the signing of the sub-license amendment and the Company will also
receive a royalty on Teva’s sales of the generic D-12.  The Company
and Aventis Pharmaceuticals have also dismissed their claims against Ranbaxy
Laboratories Ltd./Ranbaxy Pharmaceuticals Inc. and Sandoz, Inc. without
prejudice.  The Company has also dismissed its claims against DiPharma
S.P.A. and DiPharma s.r.l. in Canada without prejudice.




On March
19, 2010, the Company and sanofi-aventis U.S. LLC filed a motion for a
preliminary injunction seeking to enjoin Dr. Reddy’s Laboratories, Ltd. and Dr.
Reddy’s Laboratories, Inc. from commercial distribution of a D-24
product.   On June 14, 2010, the Company and sanofi-aventis U.S.
LLC were granted a preliminary injunction restraining Dr. Reddy’s Laboratories,
Ltd. and Dr. Reddy’s Laboratories, Inc. from commercial distribution of a D-24
product.  Trial on the infringement claims relating to Dr. Reddy’s
D-24 product is currently scheduled for January 31, 2011.




Under
applicable federal law, marketing of an FDA-approved generic version of Allegra
may not commence until the earlier of a decision favorable to the generic
challenger in the patent litigation or 30 months after the date the patent
infringement lawsuit was filed. In general, the first generic filer is entitled
to a 180-day marketing exclusivity period upon FDA approval.  The
launch of a generic product is considered an “at-risk” launch if the launch
occurs while there is still on-going litigation.  Of the remaining
defendants in the pending litigation, Dr. Reddy’s Laboratories and Mylan
Pharmaceuticals have engaged in at-risk launches of generic fexofenadine
single-entity products.




Borregaard




On August
19, 2009, AMRI Rensselaer, Inc., the Company’s subsidiary in Rensselaer, New
York notified Borregaard Industries Limited, Borregaard Synthesis (“Borregaard”)
that it was cancelling the Purchase Agreement between the parties dated January
1, 2009 pursuant to a hardship clause of the agreement.  AMRI Rensselaer
took the position that the cancellation was a valid and effective termination of
the agreement under its terms while Borregaard contended that the cancellation
constituted repudiation of the contract for which Borregaard could recover
damages.  Borregaard commenced  arbitration in September 2009
with International Centre for Dispute Resolution ("ICDR") seeking damages for
AMRI Rensselaer’s alleged wrongful repudiation of the agreement in the total
amount of $9,278,000, consisting of $8,713,000 as lost profit and $565,000 as
labor cost.





On
October 13, 2010 ICDR issued an arbitration award in favor of Borregaard against
AMRI Rensselaer.   The arbitrator awarded Borregaard damages of
$8,713,000 plus interest at the rate of 9% starting from August 19,
2009.   AMRI accrued $9,626,000 for the award and related
interest expense in the quarter ended September 30, 2010.




AMRI
disagrees with the ruling of the arbitrator and believes that it properly
terminated the purchase agreement under the terms of the
agreement.  AMRI is currently exploring all options to resolve this
matter, including a potential settlement.




Note
12 — Income Taxes




A tax
position is a position in a previously filed tax return or a position expected
to be taken in a future tax filing that is reflected in measuring current or
deferred income tax assets and liabilities. Tax positions are recognized only
when it is more likely than not (likelihood of greater than 50%), based on
technical merits, that the position would be sustained upon examination by
taxing authorities. Tax positions that meet the more likely than not threshold
are measured using a probability-weighted approach as the largest amount of tax
benefit that is greater than 50% likely of being realized upon
settlement.





The
reserve balance at September 30, 2010 represents the amount of unrecognized tax
benefits that, if recognized, would favorably affect the effective tax rate for
future periods.





The
Company classifies interest expense and penalties related to unrecognized tax
benefits as a component of income tax expense.  As of September 30,
2010, the Company has not accrued any penalties related to its uncertain tax
position as it believes that it is more likely than not that there will not be
any assessment of penalties.  The total amount of accrued interest
resulting from such unrecognized tax benefits was $1 at September 30, 2010, none
of which was recognized in 2010.




The
Company files Federal income tax returns, as well as multiple state and foreign
jurisdiction tax returns. The Company’s Federal income tax returns have been
examined by the Internal Revenue Service through the year ended December 31,
2007.  All significant state and foreign matters have been concluded for
years through 2007. State tax examinations that commenced during 2009 are in
process.  Management of the Company believes that the reserves
associated with these tax positions are adequate to support any future tax
examinations.




17




The
Company intends to reinvest indefinitely any of its unrepatriated foreign
earnings. The Company has not provided for U.S. income taxes on these
undistributed earnings of its foreign subsidiaries because management considers
such earnings to be reinvested indefinitely outside of the U.S. If the
earnings were distributed, the Company may be subject to both foreign
withholding taxes and U.S. income taxes that may not be fully offset by
foreign tax credits.




Note
13 – Fair Value




The
Company uses a framework for measuring fair value in generally accepted
accounting principles and making disclosures about fair value
measurements.  A three-tiered fair value hierarchy has been
established, which prioritizes the inputs used in measuring fair
value.





These
tiers include:


Level 1 –
defined as quoted prices in active markets for identical
instruments;


Level 2 –
defined as inputs other than quoted prices in active markets that are either
directly or indirectly observable; and Level 3 – defined as unobservable inputs
in which little or no market data exists, therefore requiring an entity to
develop its own assumptions.




The
following table presents the fair value of marketable securities by type and
their determined level based on the three-tiered fair value hierarchy as of
September 30, 2010:





Fair Value Measurements as of September 30, 2010Marketable Securities
                          
                          Total
                          
                          
                          Level 1
                          
                          
                          Level 2
                          
                          
                          Level 3Obligations
      of states and political subdivisions
                          
                          $
                          16,916
                          
                          
                          $
                          —
                          
                          
                          $
                          16,916
                          
                          
                          $
                          —U.S.
      Government and agency obligations
                          
                          
                          404
                          
                          
                          
                          —
                          
                          
                          
                          404
                          
                          
                          
                          —Auction
      rate securities
                          
                          
                          2,100
                          
                          
                          
                          —
                          
                          
                          
                          2,100
                          
                          
                          
                          —Total
                          
                          $
                          19,420
                          
                          
                          $
                          —
                          
                          
                          $
                          19,420
                          
                          
                          $
                          —





The
Company’s marketable securities are fixed maturity securities and are valued
using pricing for similar securities, recently executed transactions, cash flow
models with yield curves, broker/dealer quotes and other pricing models
utilizing observable inputs. The valuation for the Company’s fixed maturity
securities is classified as Level 2.





The
Company determines its fair value of financial instruments using the following
methods and assumptions:





Cash and cash equivalents,
receivables, and accounts payable:The carrying amounts
reported in the consolidated balance sheets approximate their fair value because
of the short maturities of these instruments.




Investment securities: Investment securities’ fair
values are based on quoted market prices of comparable
instruments.  When necessary, the Company utilizes matrix pricing from
a third party pricing vendor to determine fair value pricing.  Matrix
prices are based on quoted prices for securities with similar coupons, ratings,
and maturities, rather than on specific bids and offers for the designated
security.




Long-term debt:The carrying value of
long-term debt was approximately equal to fair value at September 30, 2010 and
December 31, 2009 due to the resetting dates of the variable interest
rates.




Nonrecurring
Measurements:





Long-lived
assets held and used with a carrying amount of $4,518 were written down to their
fair values of $2,212, resulting in an impairment charge of
$2,306.   Additionally, long-lived assets with a carrying amount
of $2,542 were impaired as a result of the restructuring and written down to
$0.  These charges were included in the Company’s financial results
for the quarter ended June 30, 2010.  The fair market values of these
long-lived assets were determined using significant unobservable inputs (level
3) consisting of cash flow analysis over the expected period of use of the asset
group.  Key inputs related to the estimated cash inflows utilized were
the expected number of customer projects performed and revenue earned per
project.  Key inputs related to estimated cash outflows utilized costs
required to support the estimated volume of customer projects, including
scientific personnel costs, materials, facility costs, and selling and
administrative support costs.


18




Note
14 – Recently Issued Accounting Pronouncements





In April
2010, the FASB issued ASU 2010-17, “Milestone Method”, which provides guidance
on applying the milestone method to milestone payments for achieving specified
performance measures when those payments are related to uncertain future
events.  The scope of this ASU is limited to transactions involving
research or development and the milestone payment is to be recognized in its
entirety in the period the milestone is achieved.  ASU 2010-17 will be
effective prospectively for milestones achieved in fiscal years beginning on or
after June 15, 2010.  The FASB permits early adoption of ASU 2010-17,
applied retrospectively, to the beginning of the year of
adoption.  The Company is currently evaluating the impact on its
financial statements.





In
October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue
Arrangements”, which addresses how revenues should be allocated among all
products and services included in certain sales arrangements. It establishes a
selling price hierarchy for determining the selling price of each product or
service, with vendor-specific objective evidence (VSOE) at the highest level,
third-party evidence of VSOE at the intermediate level, and a best estimate at
the lowest level. It replaces “fair value” with “selling price” in revenue
allocation guidance. It also significantly expands the disclosure requirements
for such arrangements. ASU 2009-13 will be effective prospectively for sales
entered into or materially modified in fiscal years beginning on or after June
15, 2010.  The FASB permits early adoption of ASU 2009-13, applied
retrospectively, to the beginning of the year of adoption.  The
Company is currently evaluating the impact on its financial
statements.




19


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, GE Healthcare, the Company’s collaboration with
Bristol-Myers Squibb (“BMS”), recent and future acquisitions, earnings, contract
revenues, costs and margins, royalty revenues, patent protection and the ongoing
Allegra patent infringement litigation, Allegra royalty revenue, government
regulation, retention and recruitment of employees, customer spending and
business trends, foreign operations (including Singapore, India, Hungary and the
United Kingdom), clinical supply manufacturing, management’s strategic plans,
drug discovery, product commercialization, license arrangements, research and
development projects and expenses, selling, general and administrative expenses,
goodwill impairment, competition and tax rates. The Company’s actual results may
differ materially from such forward-looking statements as a result of numerous
factors, some of which the Company may not be able to predict and may not be
within the Company’s control. 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,
2009, as filed with the Securities and Exchange Commission on March 12,
2010, 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
provide contract services to many of the world’s leading pharmaceutical and
biotechnology companies. We derive our contract revenue from research and
development expenditures and commercial manufacturing demands of the
pharmaceutical and biotechnology industry.  We continue to execute our
long-term strategy to develop and grow an integrated global platform from which
we can provide these services.  We have research and/or manufacturing
facilities in the United States, Hungary, Singapore, India and the United
Kingdom.  In 2008, we purchased an additional large-scale
manufacturing site in India and completed a 10,000 square foot expansion of our
Singapore Research Center.  In 2009, we completed the expansion of our
Bothell, Washington and Budapest, Hungary facilities.  In February
2010, we acquired Excelsyn Ltd. (“AMRI UK”), which we believe is a well
recognized leader in providing chemical development and manufacturing services
to the pharmaceutical industry in Europe.  In June 2010, we acquired
Hyaluron, Inc. (“AMRI Burlington”), a formulation company whose capabilities
include cGMP manufacturing and sterile filling of parenteral
drugs.  AMRI Burlington provides high value-added contract
manufacturing services in sterile syringe and vial filling using specialized
technologies.  AMRI Burlington provides these services for both small
molecule drug products and biologicals, from clinical phase to commercial
scale.





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.  We seek
comprehensive research and/or supply agreements with our customers,
incorporating several of our service offerings and spanning across the entire
pharmaceutical research and development process.  Our research facilities
provide discovery, chemical development, analytical, and small-scale current
Good Manufacturing Practices (“cGMP”) manufacturing services.  Compounds
discovered and/or developed in our 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, the acquisition of AMRI Burlington
provides our Company with immediate entry into a new and strategically important
product offering.  We can now offer customers a fully integrated
manufacturing process for sterile injectable drugs including the development and
manufacture of the active pharmaceutical ingredient (“API”), the design of the
criteria to formulate the API into an injectable drug product, and the
manufacture of the final drug product.




We
believe that the ability to partner with a single provider of pharmaceutical
research and development services from discovery through commercial production
is of significant benefit to our customers.  Through our comprehensive
service offerings, we are able to provide customers 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.




20




Our
global platform has increased our market penetration and was developed in order
to allow us to maintain and grow margins.  In addition to our
globalization, we continue to implement process efficiencies, including our
continued efforts of process improvement and cost savings measures, along with
efforts to strengthen our sourcing.  We believe these factors will
lead to improved margins.




We
conduct proprietary research and development to discover new therapeutically
active lead compounds with commercial potential. We anticipate that we would
then license these compounds and underlying technology to third parties in
return for up-front and service fees and milestone payments, as well as
recurring royalty payments if these compounds are developed into new commercial
drugs.




Our total
revenue for the quarter ended September 30, 2010 was $50.6 million, as compared
to $47.7 million for the quarter ended September 30, 2009.




Contract
services revenue for the third quarter of 2010 was $42.9 million, compared to
$39.7 million for the same quarter in 2009.  Recurring royalty
revenues, which are based on the worldwide sales of fexofenadine HCl, marketed
as Allegra in the Americas and Telfast elsewhere, as well as on sales of
sanofi-aventis’ authorized generics and estimates of sales of Teva’s authorized
generics, were slightly lower in the third quarter of 2010 than in the same
period of 2009.  Consolidated gross margin was 1.8% for the quarter
ended September 30, 2010 as compared to 14.7% for the quarter ended September
30, 2009.




During
the nine months ended September 30, 2010, cash used in operations was $5.3
million.  The decrease in cash flow from operations of $34.5 million
when compared to the nine months ended September 30, 2009 resulted primarily
from the receipt of the $10.0 million sub-licensing fee from sanofi-aventis in
conjunction with the amended licensing agreement in the first quarter of 2009,
which resulted in an increase in deferred revenue, along with an increase in
accounts receivable and inventory in 2010, as well as lower net income in
2010.  We spent $18.3 million on the acquisition of AMRI UK, $27.1
million on the acquisition of AMRI Burlington, net of cash acquired and $8.3
million in capital expenditures, primarily related to modernization of our lab
and production equipment and expansion at some of our international
locations.  As of September 30, 2010, we had $42.2 million in cash,
cash equivalents and investments and $13.2 million in bank and other
related debt.




Results
of Operations – Three and Nine Months ended September 30, 2010 Compared to Three
and Nine Months Ended September 30, 2009




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
                    September 30,
                  
                  
                  Nine Months Ended
                    September 30,(in thousands)
                  
                  2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009DDS
                  
                  $
                  20,972
                  
                  
                  $
                  21,523
                  
                  
                  $
                  61,692
                  
                  
                  $
                  63,662LSM
                  
                  
                  21,901
                  
                  
                  
                  18,214
                  
                  
                  
                  60,805
                  
                  
                  
                  58,101Total
                  
                  $
                  42,873
                  
                  
                  $
                  39,737
                  
                  
                  $
                  122,497
                  
                  
                  $
                  121,763





DDS
contract revenues for the quarter ended September 30, 2010, decreased $0.6
million to $21.0 million from the same period in 2009.  This decrease
is due primarily to a decrease in contract revenue from development and
small-scale manufacturing services caused by lower demand from specialty
pharma/biotech customers for our U.S. services.  DDS contract revenues
for the nine months ended September 30, 2010 decreased $2.0 million to $61.7
million from the same period in 2009.  This decrease is primarily due
to a decrease in contract revenue from development and small-scale manufacturing
services of $2.7 million as discussed above, offset in part by higher demand for
these services at our international locations along with an increased demand for
our invitro biology services.





We
currently expect DDS contract revenue for the fourth quarter of 2010 to
approximate amounts recognized in the third quarter of 2010.





LSM
revenue for the quarter ended September 30, 2010 increased $3.7 million from the
same period in 2009 primarily due to  incremental revenues from the
AMRI UK and AMRI Burlington acquisitions taking place in the first half of
2010.  LSM contract revenues for the nine months ended September 30,
2010 increased $2.7 million to $60.8 million from the same period in
2009.  This increase is primarily a result of incremental revenues
from the acquisitions, along with an increase in the sales of commercial
products of $1.3 million, primarily due to an increase in commercial sales to GE
Healthcare (“GE”), LSM’s largest customer, as they return toward historical
levels after reducing their purchases from us in 2009 in an effort to reduce
their inventory levels.   These increases are offset, in part, by
a decrease of $5.7 million which was driven by the reduced demand for the
production of clinical supply material.




21


We expect
LSM contract revenue for the fourth quarter of 2010 to decrease slightly from
amounts recognized during the third quarter of 2010.




Recurring
royalty revenue




We earn
royalties under our licensing agreement with sanofi-aventis S.A. for the active
ingredient in Allegra.  Royalties were as follows:




Three Months Ended September 30,
                            
                            
                            Nine Months Ended September 30,2010
                            
                            
                            2009
                            
                            
                            2010
                            
                            
                            2009(in thousands)$
                            7,744
                            
                            
                            $
                            7,929
                            
                            
                            $
                            26,926
                            
                            
                            $
                            27,239




Recurring
royalties, which are based on the worldwide sales of Allegra®/Telfast, as well
as on sales of sanofi-aventis’ authorized generics, decreased $0.2 million for
the quarter ended September 30, 2010.  Recurring royalties decreased
$0.3 million for the nine months ended September 30, 2010 from the same period
in 2009 primarily due to decrease in sales of Allegra® in Japan during the first
quarter of 2010.




The
recurring royalties we receive on the sales of Allegra®/Telfast have
historically provided a material portion of our revenues, earnings and operating
cash flows.  Teva Pharmaceuticals launched a generic version of
Allegra D-12® in November 2009.  As part of our amended licensing
agreement with sanofi-aventis, we received quarterly royalties through July 2010
for the branded Allegra D-12® equal to the royalties paid for the quarter ended
June 30, 2009.  Thereafter, the royalty rate has reverted to the rate
in effect prior to the signing of the sub-license amendment and we also receive
a royalty on Teva Pharmaceuticals’ sales of generic Allegra D-12®.





Sanofi-aventis
announced their filing for the Allegra® Rx-to-OTC switch was submitted in the
U.S. and is expected to be available in the first quarter of
2011.  This could negatively impact our future royalty revenue
streams.





We
continue to develop our business in an effort to supplement the revenues,
earnings and operating cash flows that have historically been provided by
Allegra®/Telfast royalties.  We forcefully and vigorously defend our
intellectual property related to Allegra®, and we continue to pursue our
intellectual property rights as patent infringement litigation
progresses.





Milestone
revenue





Milestone
revenue is earned for achieving certain milestones included in licensing and
research agreements with certain customers.  Milestone revenues were
as follows:





Three Months Ended September 30,
                          
                          
                          Nine Months Ended September 30,2010
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2009(in thousands)$
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          4,000





During
the nine months ended September 30, 2009, milestone revenue of $4.0 million was
recognized as a result of the submission of a Clinical Trial Application in
conjunction with the our licensing and research agreement with BMS.




22


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:




Segment
                  
                  Three Months Ended
                    September 30,
                  
                  
                  Nine Months Ended
                    September 30,(in thousands)
                  
                  2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009DDS
                  
                  $
                  18,461
                  
                  
                  $
                  18,787
                  
                  
                  $
                  53,930
                  
                  
                  $
                  54,183LSM
                  
                  
                  23,622
                  
                  
                  
                  15,098
                  
                  
                  
                  57,430
                  
                  
                  
                  53,041Total
                  
                  $
                  42,083
                  
                  
                  $
                  33,885
                  
                  
                  $
                  111,360
                  
                  
                  $
                  107,224DDS
      Gross Margin
                  
                  
                  12.0
                  %
                  
                  
                  12.7
                  %
                  
                  
                  12.6
                  %
                  
                  
                  14.9
                  %LSM
      Gross Margin
                  
                  
                  (7.9
                  )%
                  
                  
                  17.1
                  %
                  
                  
                  5.6
                  %
                  
                  
                  8.7
                  %Total
      Gross Margin
                  
                  
                  1.8
                  %
                  
                  
                  14.7
                  %
                  
                  
                  9.1
                  %
                  
                  
                  11.9
                  %




DDS had a
contract revenue gross margin of 12.0% and 12.6% for the three and nine months
ended September 30, 2010, respectively, as compared to contract revenue gross
margin of 12.7% and 14.9% for the three and nine months ended September 30,
2009, respectively.  These decreases in gross margin resulted from
lower U.S. demand for these services in relation to our fixed
costs.




We
currently expect DDS contract margins for the fourth quarter of 2010 to
approximate amounts recognized in the third quarter of 2010.




LSM’s
contract revenue gross margin for the three and nine months ended September 30,
2010 was (7.9)% and 5.6%, respectively, as compared to contract revenue gross
margin for the three and nine months ended September 30, 2009 of 17.1% and 8.7%,
respectively.  The decrease in margins for the third quarter of 2010
was due to product mix at our Rensselaer facility.  Margins were
further negatively impacted in the third quarter of 2010 by lower revenues at
our Burlington facility in relation to its fixed cost base due to the pending
resolution of its FDA warning letter.  The decrease in margins for the
nine months ended September 30, 2010 from the same period of 2009 was primarily
due to AMRI Burlington’s lower revenues in relation to fixed costs, as discussed
above, along with unutilized capacity in our AMRI UK facility.





We expect
gross margins in the LSM segment for the fourth quarter of 2010 to decrease
slightly from percentages recognized in the third quarter of 2010.





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 Allegra 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,
our Chief Executive Officer and President of the Company. The incentive awards
were as follows:




Three Months Ended September 30,
                        
                        
                        Nine Months Ended September 30,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009(in thousands)$
                        775
                        
                        
                        $
                        790
                        
                        
                        $
                        2,693
                        
                        
                        $
                        2,815




The
decrease in technology incentive award expense for the three and nine months
ended September 30, 2010 from the same period in 2009 is primarily due to
Allegra royalty revenue.  Additionally, the decrease for the nine
months ended September 30, 2010 was partially due to an award in the second
quarter of 2009 in connection with milestone revenue recognized.  We
expect technology incentive award expense to generally fluctuate directionally
and proportionately with fluctuations in Allegra royalties in future
periods.




23




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 and other out of pocket costs and overhead costs.
We utilize our expertise in integrated drug discovery to perform our internal
R&D projects. The goal of these programs is to discover new compounds with
commercial potential. We would then seek to license these compounds to a third
party 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 is performed 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 30,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009(in thousands)$
                        2,873
                        
                        
                        $
                        4,075
                        
                        
                        $
                        8,449
                        
                        
                        $
                        12,061




R&D
expense decreased $1.2 million for the three months ended September 30, 2010 and
$3.6 million for the nine months ended September 30, 2010 from the same periods
in 2009.  This decrease is primarily due to lower compensation costs
in 2010 caused by a reduction of research and development scientific resources
and lower material costs, as we manage our costs by focusing on moving only our
most advanced programs forward.  Additionally, in 2009 we recognized
an increase in process R&D related to both improving the manufacturing
process for our generic API products as well as the manufacturing process for
our oncology compound, which was in Phase I clinical trials.




We
currently expect research and development expenses for the full year of 2010 to
decrease from amounts recognized in 2009, as we manage overall R&D
expenditures to move our most advanced programs forward.




Projecting
completion dates and anticipated revenue from our internal research programs is
not practical at this time due to the early stages of the projects and the
inherent risks related to the development of new drugs. Our proprietary amine
neurotransmitter reuptake inhibitor program, which was our most advanced project
at that time, was licensed to BMS in October 2005 in exchange for up-front
license fees, contracted research services, and the rights to future milestone
and royalty payments.  We also continue to utilize our proprietary
technologies to further advance other early to middle-stage internal research
programs in the fields of oncology, irritable bowel syndrome, obesity and CNS,
with a view to seeking a licensing partner for these programs at an appropriate
research or developmental stage.




We budget
and monitor our R&D costs by type or category, rather than by project on a
comprehensive or fully allocated basis. In addition, our R&D expenses are
not tracked by project as they benefit multiple projects or our overall
technology platform. Consequently, fully loaded R&D cost summaries by
project are not available.




Restructuring
and Impairment Charges




AMRI
U.S.





In May
2010, we initiated a restructuring of our AMRI U.S. locations.  As
part of our strategy to increase global competitiveness and continue to be
diligent in managing costs, we implemented significant cost reduction activities
at our operations in the U.S.  These cost reduction activities
included a reduction in the U.S. workforce, as well as the suspension of
operations at one of our research laboratory facilities in Rensselaer, New
York.  Employees and equipment from this facility will be consolidated
into our other nearby locations.





In
conjunction with the restructuring, we realigned the nature of our operating
activities in a nearby research laboratory facility.  As a result, we
evaluated the future economic benefit expected to be generated from the revised
operating activities in this facility against the carrying value of the
facility’s property and equipment and determined that these assets were
impaired.  We recorded a property and equipment impairment charge of
$2.3 million in the second quarter of 2010 to reduce the carrying value the
assets to their estimated fair market value.





Additionally,
we recorded a restructuring charge, including associated asset impairment
charges caused as a consequence of restructuring, of $5.8 million in the second
quarter of 2010.  This charge includes lease termination charges of
$2.2 million, termination benefits and personnel realignment costs of $0.8
million and facility and other costs of $0.3 million.  In addition,
asset impairment charges as a consequence of restructuring of $2.5 million were
recorded.


24




The
restructuring costs are included under the caption “Restructuring and impairment
charges” in the consolidated statement of operations for the three and nine
months ended September 30, 2010 and the restructuring liabilities are included
in “Accounts payable and accrued expenses” and “Accrued long-term restructuring”
on the consolidated balance sheet at September 30, 2010.




The
following table displays AMRI U.S.’ restructuring activity and liability
balances within our Discovery/Development/ Small Scale Manufacturing (“DDS”)
operating segment:





Balance at
                    January 1,
                    2010
                  
                  
                  Charges
                  
                  
                  Paid Amounts
                  
                  
                  Balance at
                    September 30,
                    2010(in thousands)Termination
      benefits and personnel realignment
                  
                  $
                  —
                  
                  
                  $
                  855
                  
                  
                  $
                  (749
                  )
                  
                  $
                  106Lease
      termination charges
                  
                  
                  —
                  
                  
                  
                  2,182
                  
                  
                  
                  (163
                  )
                  
                  
                  2,019Facility
      and other costs
                  
                  
                  —
                  
                  
                  
                  250
                  
                  
                  
                  (166
                  )
                  
                  
                  84Total
                  
                  $
                  —
                  
                  
                  $
                  3,287
                  
                  
                  $
                  (1,078
                  )
                  
                  $
                  2,209




Termination
benefits and personnel realignment costs relate to severance packages,
outplacement services, and career counseling for employees affected by this
restructuring.   Lease termination charges relate to costs
associated with exiting the current facility.  Facility and other
costs are charges associated with consolidating into other nearby Company
locations.





Anticipated
cash outflows related to the AMRI U.S. restructuring for the remainder of 2010
is approximately $0.3 million, which primarily consists of lease termination
charges and termination benefits.





AMRI
India




In
December 2009, we initiated a restructuring of our AMRI India locations which
consisted of closing and consolidating our Mumbai administrative office into our
Hyderabad location as part of our goal to streamline operations and eliminate
duplicate administrative functions.  We recorded a restructuring
charge of approximately $0.4 million in the fourth quarter of 2009, including
lease termination charges of $0.2 million, leasehold improvement abandonment
charges of $0.1 million and administrative costs of less than $0.1
million.




The
restructuring costs are included under the caption “Restructuring charge” in the
consolidated statement of operations for the year ended December 31, 2009 and
the restructuring liabilities are included in “Accounts payable and accrued
expenses” on the consolidated balance sheet at September 30, 2010 and December
31, 2009.




The AMRI
India restructuring activity was recorded in the Large Scale Manufacturing
(“LSM”) operating segment.  The following table displays AMRI India’s
restructuring activity and liability balances within our LSM operating
segment:





Balance at
                    January 1,
                    2010
                  
                  
                  Paid
                    Amounts
                  
                  
                  Foreign
                    Currency
                    Translation
                    Adjustments
                  
                  
                  Balance at
                    September 30,
                    2010(in thousands)Lease
      termination charges
                  
                  $
                  215
                  
                  
                  $
                  (165
                  )
                  
                  $
                  4
                  
                  
                  $
                  54Administrative
      costs associated with restructuring
                  
                  
                  11
                  
                  
                  
                  (7
                  )
                  
                  
                  —
                  
                  
                  
                  4Total
                  
                  $
                  226
                  
                  
                  $
                  (172
                  )
                  
                  $
                  4
                  
                  
                  $
                  58





Lease
termination charges and leasehold improvement abandonment charges relate to
costs associated with exiting the current facility.





The net
cash outflow related to the AMRI India restructuring for the nine months ended
September 30, 2010 was $0.2 million.  Anticipated cash outflows
related to the AMRI India restructuring for the remainder of 2010 is
approximately $0.1 million, which primarily consists of lease termination
charges.





AMRI
Hungary





In May
2008, we initiated a restructuring of our Hungary location.  The goal
of the restructuring was to realign the business model for these operations to
better support our long-term strategy for providing discovery services in the
European marketplace.  We recorded a restructuring charge of
approximately $1.8 million in the second quarter of 2008, including termination
benefits and personnel realignment costs of approximately $0.9 million, losses
on grant contracts of approximately $0.4 million, lease termination charges of
approximately $0.5 million and administrative costs associated with the
restructuring plan of less than 0.1 million.


25





During
August 2009, we closed and consolidated our Balaton, Hungary facility into the
new facility in Budapest, Hungary as part of our goal to streamline operations
and to consolidate locations, equipment and operating costs.  As a
result, we recorded a restructuring charge of approximately $0.3 million in the
second quarter of 2009, including termination benefits and personnel realignment
costs of approximately $0.1 million, lease termination charges of $0.2 million
and administrative costs associated with the restructuring plan of les than $0.1
million.




The
restructuring costs are included under the caption “Restructuring and impairment
charges” in the consolidated statement of operations for the nine months ended
September 30, 2010 and the year ended December 31, 2009 and the restructuring
liabilities are included in “Accounts payable and accrued expenses” on the
consolidated balance sheet at September 30, 2010 and December 31,
2009.




The
following table displays AMRI Hungary’s restructuring activity and liability
balances within our DDS operating segment:





Balance at
                  January 1,
                  2010
                
                
                Charges/
                  (reversals)
                
                
                Paid
                  Amounts
                
                
                Foreign
                  Currency
                  Translation
                  Adjustments
                
                
                Balance at
                  September 30,
                  2010(in thousands)Termination
      benefits and personnel realignment
                
                $
                55
                
                
                
                112
                
                
                $
                (24
                )
                
                $
                (7
                )
                
                $
                136Losses
      on grant contracts
                
                
                246
                
                
                
                —
                
                
                
                (135
                )
                
                
                (17
                )
                
                
                94Lease
      termination charges
                
                
                275
                
                
                
                (262
                )
                
                
                —
                
                
                
                (13
                )
                
                
                —Administrative
      costs associated with restructuring
                
                
                12
                
                
                
                17
                
                
                
                (1
                )
                
                
                —
                
                
                
                28Total
                
                $
                588
                
                
                $
                (133
                )
                
                $
                (160
                )
                
                $
                (37
                )
                
                $
                258





Termination
benefits and personnel realignment costs relate to severance packages,
outplacement services, and career counseling for employees affected by this
restructuring.  Losses on grant contracts represent estimated
contractual losses that will be incurred in performing grant-based work under
Hungary’s legacy business model.  Lease termination charges relate to
costs associated with exiting the current facility.





Anticipated
cash outflows related to the Hungary restructuring for the remainder of 2010 is
approximately $0.1 million, which primarily consists of the termination benefits
and incurring losses on grant contracts.




Selling,
general and administrative




Selling,
general and administrative (“SG&A”) expenses consist of compensation and
related fringe benefits for 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 30,2010
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2009(in thousands)$
                          10,517
                          
                          
                          $
                          9,042
                          
                          
                          $
                          30,399
                          
                          
                          $
                          28,063




SG&A
expenses increased $1.5 million for the three months ended September 30, 2010 as
compared to the same period in 2009.  This increase is primarily due
to incremental SG&A costs from the purchase of AMRI UK and AMRI Burlington
during the first half of 2010.  SG&A expenses increased $2.3
million for the nine months ended September 30, 2010 as compared to the same
period in 2009.  This increase is due primarily to transaction costs
associated with the AMRI UK and AMRI Burlington acquisitions of $1.6 million in
the first half of 2010, as well as incremental SG&A costs from these new
operations.  These increases were partially offset by cost savings
from reorganization of our U.S. locations in May 2010 and our large-scale India
operations in December 2009.




SG&A
expenses for the full year 2010 are expected to slightly increase with amounts
recognized in 2009 primarily due to the addition of incremental AMRI Burlington
and AMRI UK SG&A expenses, along with the one time transaction costs
associated with the acquisitions.  These increases will be partially
offset by cost savings associated with the restructurings.




26


Arbitration
reserve




On August
19, 2009, AMRI Rensselaer notified Borregaard that it was cancelling the
Purchase Agreement between the parties dated January 1, 2009 pursuant to a
hardship clause of the agreement.  AMRI Rensselaer took the position that
the cancellation was a valid and effective termination of the agreement under
its terms while Borregaard contended that the cancellation constituted
repudiation of the contract for which Borregaard could recover damages. 
Borregaard commenced arbitration in September 2009 with International Centre for
Dispute Resolution ("ICDR") seeking damages for AMRI Rensselaer’s alleged
wrongful repudiation of the agreement in the total amount of $9.3 million,
consisting of $8.7 million as lost profit and $0.6 million as labor
cost.





On October 13, 2010 the ICDR issued an
arbitration award in favor of Borregaard Industries against AMRI
Rensselaer.  The arbitrator awarded Borregaard damages of $8.7 million
plus interest at the rate of 9% starting from August 19,
2009.   AMRI accrued $9.6 million for the award and related
interest expense in the quarter ended September 30, 2010.




AMRI
disagrees with the ruling of the arbitrator and believes that it properly
terminated the purchase agreement under the terms of the
agreement.  AMRI is currently exploring all options to resolve this
matter, including a potential settlement.




Interest
income, net




Three Months Ended
                      September 30,
                    
                    
                    Nine Months Ended
                      September 30,(in thousands)
                    
                    2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Interest
      expense
                    
                    $
                    (48
                    )
                    
                    $
                    (63
                    )
                    
                    $
                    (122
                    )
                    
                    $
                    (219
                    )Interest
      income
                    
                    
                    101
                    
                    
                    
                    156
                    
                    
                    
                    284
                    
                    
                    
                    523Interest
      income, net
                    
                    $
                    53
                    
                    
                    $
                    93
                    
                    
                    $
                    162
                    
                    
                    $
                    304




Net
interest income decreased for the three and nine months ended September 30, 2010
from the same period in 2009 due to a decrease in balances of interest bearing
assets and overall decreased interest rates on our interest bearing
liabilities.




Other
income (loss), net




Three Months Ended September 30,
                        
                        
                        Nine Months Ended September 30,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009(in thousands)$
                        (650
                        )
                        
                        $
                        98
                        
                        
                        $
                        (612
                        )
                        
                        $
                        (91
                        )




Other
loss for the three and nine months ended September 30, 2010 increased from the
same periods in 2009 primarily due to changes in rates associated with foreign
currency transactions.




Income
tax (benefit) expense




Three Months Ended September 30,
                        
                        
                        Nine Months Ended September 30,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009(in thousands)$
                        (5,972
                        )
                        
                        $
                        (280
                        )
                        
                        $
                        (7,805
                        )
                        
                        $
                        601




The
fluctuations in income tax (benefit) expense for the three and nine months ended
September 30, 2010, when compared to the same periods in 2009 are due primarily
to the decrease in pre-tax income, along with changes in the composition of
taxable income in relation to the applicable tax rates at our various
international locations in 2010.  The effective tax rate was lower in
2009 due to the release of previously established reserves for uncertain tax
positions, along with tax credits that expired at the end of the 2009 tax
year.




27


Liquidity
and Capital Resources




We have
historically funded our business through operating cash flows, proceeds from
borrowings and the issuance of equity securities. During the first nine months
of 2010, we used cash of $5.3 million in operating activities.




During
the first nine months of 2010, we used $43.9 million in investing activities,
resulting primarily from the use of $18.5 million for the acquisition of AMRI UK
in February 2010 and $27.1 million for the acquisition of AMRI Burlington, net
of cash acquired in June 2010, along with $8.3 million for the acquisition of
property and equipment.  These uses of cash were offset, in part, by
the proceeds from sales of securities of $10.4 million.




Working
capital was $85.6 million at September 30, 2010 as compared to $149.7 million as
of December 31, 2009.  This decrease is primarily the result of
the use of cash and cash equivalents on our acquisition of AMRI UK and AMRI
Burlington, the purchases of property and equipment and the repurchase of
treasury stock.  There have been no significant changes in future
maturities on our long-term debt since December 31, 2009.




We
currently have a revolving line of credit in the amount of $45.0 million which
has a maturity date in June 2013.  The line of credit bears interest
at a variable rate based on our Company’s leverage ratio. As of September 30,
2010, the balance outstanding on the line of credit was $9.7 million, bearing
interest at a rate of 1.44%.  The credit facility contains certain
financial covenants, including a maximum leverage ratio, a minimum required
operating cash flow coverage ratio, a minimum earnings before interest, taxes,
depreciation and amortization and a minimum current ratio, as amended by Exhibit
10.3 to this document.  Other covenants include limits on asset
disposals and the payment of dividends.  As of September 30, 2010 and
2009, we were in compliance with our covenants under the credit
facility.




The
disclosure of payments we have committed to make under our contractual
obligations is set forth under the heading “Management’s Discussion and Analysis
of Financial Condition and Results of Operations—Liquidity and Capital
Resources” under Item 7 of our Annual Report on Form 10-K for the fiscal
year ended December 31, 2009.  There have been no material changes to
our contractual obligations since December 31, 2009, although the ultimate
resolution of the Borregaard matter could impact the contractual obligations
previously disclosed.  As of September 30, 2010, we had no off-balance
sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange
Commission’s Regulation S-K.




We
continue to pursue the expansion of our operations through internal growth and
strategic acquisitions.  In February 2010, we acquired Excelsyn Ltd. a
chemical development and large scale manufacturing services company in North
Wales, UK.  Under the terms of the agreement, AMRI has purchased all
of the outstanding shares of AMRI UK for $18.5 million in
cash.  Additionally, in June 2010, we acquired Hyaluron Inc., a
formulation company located in Burlington, Massachusetts.  Under the
terms of the agreement, AMRI has purchased all of the outstanding shares of AMRI
Burlington for $27.9 million in cash.  Both 2010 acquisitions were
funded from existing cash and cash equivalents.  We expect that
additional expansion activities will be funded from existing cash and cash
equivalents, cash flow from operations and/or the issuance of debt or equity
securities and borrowings.  Future acquisitions, if any, could be
funded with cash on hand, cash from operations, borrowings under our credit
facility and/or the issuance of equity or debt securities.  There can
be no assurance that attractive acquisition opportunities will be available to
us or will be available at prices and upon such other terms that are attractive
to us.  We regularly evaluate potential acquisitions of other
businesses, products and product lines and may hold discussions regarding such
potential acquisitions.  As a general rule, we will publicly announce
such acquisitions only after a definitive agreement has been
signed.  In addition, in order to meet our long-term liquidity needs
or consummate future acquisitions, we may incur additional indebtedness or issue
additional equity or debt securities, subject to market and other
conditions.  There can be no assurance that such additional financing
will be available on terms acceptable to us or at all.  The failure to
raise the funds necessary to finance our future cash requirements or consummate
future acquisitions could adversely affect our ability to pursue our strategy
and could negatively affect our operations in future periods.




Critical
Accounting Policies and Estimates




Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation
of these consolidated financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to
inventories, goodwill, long-lived assets, pension and postretirement benefit
plans, income taxes and contingencies. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.




28


We refer
to the policies and estimates set forth in the section “Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Critical
Accounting Estimates” of our Annual Report on Form 10-K for the fiscal year
ended December 31, 2009.  There have been no material changes or
modifications to the policies since December 31, 2009.




Item 3.
Quantitative and Qualitative Disclosures about Market Risk




There
have been no material changes with respect to the information on Quantitative
and Qualitative Disclosures about Market Risk appearing in Part II,
Item 7A to the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2009.




Item 4.
Controls and Procedures




Disclosure
Controls and Procedures




As
required by rule 13a-15(b) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), as of the end of the Company’s last fiscal quarter our
management conducted an evaluation with the participation of our Chief Executive
Officer and Chief Financial Officer regarding the effectiveness of our
disclosure controls and procedures. In designing and evaluating our disclosure
controls and procedures, we recognize that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and our management was required to
apply its judgment in evaluating and implementing possible controls and
procedures. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of the Company’s last
fiscal quarter, our disclosure controls and procedures were effective in that
they provide reasonable assurance that information required to be disclosed by
us in the reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms, including ensuring that
such information is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer as appropriate to allow
timely decisions regarding required disclosure. We intend to review and document
our disclosure controls and procedures, including our internal controls and
procedures for financial reporting, on an ongoing basis, and may from time to
time make changes aimed at enhancing their effectiveness and to ensure that our
systems evolve with our business.




Internal
Control over Financial Reporting




There
were no changes in the Company’s internal control over financial reporting
identified in connection with the evaluation of such internal control that
occurred during the Company’s last fiscal quarter that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.




29


PART II
- OTHER INFORMATION




Item
1. Legal Proceedings




In
September 2010, Aurolife Pharma LLC and Aurobindo Pharma Ltd. filed ANDA’s with
the FDA to produce and market generic versions of Allegra
products.  In response to this, Aventis Pharmaceuticals filed suit
against Aurolife Pharma LLC and Aurobindo Pharma Ltd. in November
2010.  In relation to the release of generic Allegra products, trial
on the infringement claims relating to Dr. Reddy’s D-24 product is currently
scheduled for January 31, 2011.




On August
19, 2009, AMRI Rensselaer notified Borregaard Industries Limited, Borregaard
Synthesis (“Borregaard”) that it was cancelling the Purchase Agreement between
the parties dated January 1, 2009 pursuant to a hardship clause of the
agreement.  AMRI Rensselaer took the position that the cancellation was a
valid and effective termination of the agreement under its terms while
Borregaard contended that the cancellation constituted repudiation of the
contract for which Borregaard could recover damages.  Borregaard commenced
arbitration in September 2009 with International Centre for Dispute Resolution
("ICDR") seeking damages for AMRI Rensselaer’s alleged wrongful repudiation of
the agreement in the total amount of $9.3 million.





On
October 13, 2010 the ICDR issued an arbitration award in favor of Borregaard
against AMRI Rensselaer.  The arbitrator awarded Borregaard damages of
$8.7 million plus interest at the rate of 9% starting from August 19,
2009.   AMRI accrued $9.6 million for the award and related
interest expense in the quarter ended September 30, 2010.




AMRI
disagrees with the ruling of the arbitrator and believes that it properly
terminated the purchase agreement under the terms of the
agreement.  AMRI is currently exploring all options to resolve this
matter, including a potential settlement.





Please
refer to Part 1 – Note 11 for further details and history on these
litigations.




Item
1A. Risk Factors




In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 1A Risk Factors in our Annual
Report on Form 10-K for the year ended December 31, 2009, which could materially
affect our business, financial condition or future results. The risks described
in our Annual Report on Form 10-K are not the only risks facing our
Company.  Additional risks and uncertainties not currently known to us
or that we currently deem to be immaterial also may materially adversely affect
our business, financial condition and/or operating results.  The
following risk factors have been revised or updated since the filing of our
annual report on Form 10-K for the year ended December 31, 2009:




If
we fail to meet strict regulatory requirements, we could be required to pay
fines or even close our facilities.




All
facilities and manufacturing techniques used to manufacture drugs in the United
States must conform to standards that are established by the FDA. The FDA
conducts unscheduled periodic inspections of our facilities to monitor our
compliance with regulatory standards. If the FDA finds that we fail to comply
with the appropriate regulatory standards, it may impose fines on us or, if the
FDA determines that our non-compliance is severe, it may close our facilities.
Any adverse action by the FDA could have a material adverse effect on our
operations.




On August
18, 2010, we received a warning letter from the U.S. Food and Drug
Administration (“FDA”) following the agency's inspection
of our manufacturing facility in Burlington, MA in March 2010,
which identified three significant violations of Current Good Manufacturing
Practice (“cGMP”) regulations for Finished Pharmaceuticals.  According
to the warning letter, these violations caused our drug product(s) to be
adulterated in that the methods used in, or the facilities or controls used for,
their manufacture, processing, packing or holding do not conform to, or are not
operated or administered in conformity with cGMP.  A copy of the
warning letter is available on the FDA website at www.fda.gov.  We
acquired the facility on June 14, 2010. The warning letter does not restrict
production or shipment of products from the facility.




We are
working with the FDA to resolve the issues identified in the warning
letter.  There can be no assurance that the FDA will be satisfied
with our response. Failure to promptly correct these violations as
required by the FDA may results in legal action without further notice
including, without limitation, seizure and injunction.  Other federal
agencies may take the FDA warning letter into account when considering the award
of contracts.  Additionally, the FDA may withhold approval of requests
for export certificates, or approval of pending drug applications listing our
Burlington facility, until the above violations are corrected.  Any
such actions could significantly disrupt our business and operations and have a
material adverse impact on our financial position and operating
results.




30




If
we fail to meet our credit facility’s financial covenants, our business and
financial conditions could be adversely affected.




We
currently have a revolving line of credit in the amount of $45 million which has
a maturity date of June 2013.  The credit facility contains certain
financial covenants, including but not limited to, a maximum leverage ratio, a
minimum required operating cash flow coverage ratio, a minimum earnings before
interest, taxes, depreciation and amortization and a minimum current
ratio.  As of September 30, 2010 our balance outstanding on the line
of credit was $9.7 million and $2.6 million outstanding in letters of
credit.  As of September 30, 2010 we were in compliance with the
current financial covenant requirements.




There is
no assurance that we will continue to be in compliance with all of the
covenants.  If at any point, we fail to meet our credit facility’s
financial covenants, the credit facility can demand immediate repayment of our
outstanding balance and deny future borrowings under the remaining line of
credit.  This could have a negative impact on our liquidity, thereby
reducing the availability of cash flow for other purposes.




Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds




On June
21, 2010, the Company’s Board of Directors approved a stock repurchase program,
which authorized the Company to purchase up to $10 million of the issued and
outstanding shares of the Company’s Common Stock in the open market or in
private transactions.  Shares may be repurchased from time to time and
in such amounts as market conditions warrant, subject to price ranges set by
management and regulatory conditions.  The following table represents
share repurchases during the three months ended September 30, 2010:




Period
                  
                  (a)
                    Total Number
                    of Shares
                    Purchased (1)
                  
                  
                  (b)
                    Average Price
                    Paid Per
                    Share
                  
                  
                  (c)
                    Total Number of
                    Shares
                    Purchased as
                    Part of Publicly
                    Announced
                    Plans or
                    Programs
                  
                  
                  (d)
                    Maximum Dollar
                    Value of Shares
                    that May Yet Be
                    Purchased Under
                    the ProgramJuly
      1, 2010 – July 31, 2010
                  
                  
                  667,225
                  
                  
                  $
                  6.07
                  
                  
                  
                  667,225
                  
                  
                  $
                  5,789,289August
      1, 2010 – August 31, 2010
                  
                  
                  528,742
                  
                  
                  
                  6.53
                  
                  
                  
                  528,742
                  
                  
                  
                  2,338,797September
      1, 2010 – September 30, 2010
                  
                  
                  360,012
                  
                  
                  
                  6.50
                  
                  
                  
                  360,012
                  
                  
                  
                  6Total
                  
                  
                  1,555,979
                  
                  
                  $
                  6.32
                  
                  
                  
                  1,555,979





(1)
            No
      shares were purchased in the third quarter of 2010 other than through our
      publicly announced stock buyback program described
  above.


31


Item
6.  Exhibits




ExhibitNumber
                
                Description10.1
                
                Research/Manufacturing
      Agreement between Schering Corporation and Albany Molecular Research, Inc.
      dated January 13, 2006 (filed in redacted form since confidential
      treatment was requested pursuant to Rule 24b-2 for certain portions
      thereof).10.2
                
                Seventh
      Amendment dated July 14, 2010 to the Research/Manufacturing Agreement
      between Schering Corporation and Albany Molecular Research, Inc. dated
      January 13, 2006 (filed in redacted form since confidential treatment was
      requested pursuant to Rule 24b-2 for certain portions
      thereof).10.3
                
                Sixth
      Amendment to Credit Agreement, dated as of November 5, 2010, by and among
      Albany Molecular Research, Inc., Bank of America, N.A., JP Morgan Chase
      Bank, N.A. and RBS Citizens, National Association31.1
                
                Certification
      of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
      Securities Exchange Act of 1934.31.2
                
                Certification
      of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
      Securities Exchange Act of 1934.32.1
                
                Certification
      of the Chief Executive Officer pursuant to 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 18 U.S.C. Section 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.


32


SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.




ALBANY
      MOLECULAR RESEARCH, INC.Date:
      November 9, 2010
                By:
                /s/ Mark T. FrostMark
      T. FrostSenior Vice President, Administration, Chief Financial Officer
                  and
      Treasurer
                  (Duly
      Authorized Officer and Principal Financial
  Officer)




33