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 1934For
      the Quarterly Period Ended June 30, 2009 ̈
              
              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)
464-0279


(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    ̈




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  ̈
            
            Accelerated
      filer xNon-accelerated
      filer  ̈
            
            Smaller
      reporting company  ̈




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




Yes    ̈
            
            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 July
      31, 2009Common
      Stock, $.01 par value
            
            31,658,811,
      excluding treasury shares of 3,824,593





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
                                18Item
      3.
                                Quantitative
      and Qualitative Disclosures About Market Risk
                                25Item
      4.
                                Controls
      and Procedures
                                25Part
      II.
                                Other
      Information
                                26Item
      1A.
                                Risk
      Factors
                                26Item
      4.
                                Submission
      of Matters to a Vote of Security Holders
                                26Item
      6.
                                Exhibits
                                26Signatures
                                27Exhibit
      Index




2


PART I
— FINANCIAL INFORMATION




Item
1.  Condensed Consolidated Financial Statements
(Unaudited)




Albany
Molecular Research, Inc.


Condensed
Consolidated Statements of Operations


(unaudited)




Three Months Ended
                  
                  
                  Six Months Ended(Dollars in thousands, except for per share
      data)
                  
                  June 30, 2009
                  
                  
                  June 30, 2008
                  
                  
                  June 30, 2009
                  
                  
                  June 30, 2008Contract
      revenue
                  
                  $
                  38,782
                  
                  
                  $
                  46,362
                  
                  
                  $
                  82,026
                  
                  
                  $
                  91,699Recurring
      royalties
                  
                  
                  8,524
                  
                  
                  
                  7,573
                  
                  
                  
                  19,310
                  
                  
                  
                  15,806Milestone
      revenue
                  
                  
                  4,000
                  
                  
                  
                  4,000
                  
                  
                  
                  4,000
                  
                  
                  
                  4,000Total
      revenue
                  
                  
                  51,306
                  
                  
                  
                  57,935
                  
                  
                  
                  105,336
                  
                  
                  
                  111,505Cost
      of contract revenue
                  
                  
                  36,696
                  
                  
                  
                  33,531
                  
                  
                  
                  73,339
                  
                  
                  
                  69,759Technology
      incentive award
                  
                  
                  920
                  
                  
                  
                  837
                  
                  
                  
                  2,025
                  
                  
                  
                  1,656Research
      and development
                  
                  
                  4,601
                  
                  
                  
                  2,935
                  
                  
                  
                  7,986
                  
                  
                  
                  5,844Selling,
      general and administrative
                  
                  
                  8,719
                  
                  
                  
                  9,812
                  
                  
                  
                  19,021
                  
                  
                  
                  19,109Restructuring
                  
                  
                  (15
                  )
                  
                  
                  1,833
                  
                  
                  
                  (15
                  )
                  
                  
                  1,833Total
      operating expenses
                  
                  
                  50,921
                  
                  
                  
                  48,948
                  
                  
                  
                  102,356
                  
                  
                  
                  98,201Income
      from operations
                  
                  
                  385
                  
                  
                  
                  8,987
                  
                  
                  
                  2,980
                  
                  
                  
                  13,304Interest
      income, net
                  
                  
                  100
                  
                  
                  
                  256
                  
                  
                  
                  211
                  
                  
                  
                  778Other
      (expense) income, net
                  
                  
                  (517
                  )
                  
                  
                  208
                  
                  
                  
                  (189
                  )
                  
                  
                  149(Loss)
      income before income taxes
                  
                  
                  (32
                  )
                  
                  
                  9,451
                  
                  
                  
                  3,002
                  
                  
                  
                  14,231Income
      tax (benefit) expense
                  
                  
                  (211
                  )
                  
                  
                  3,774
                  
                  
                  
                  881
                  
                  
                  
                  3,815Net
      income
                  
                  $
                  179
                  
                  
                  $
                  5,677
                  
                  
                  $
                  2,121
                  
                  
                  $
                  10,416Basic
      earnings per share
                  
                  $
                  0.01
                  
                  
                  $
                  0.18
                  
                  
                  $
                  0.07
                  
                  
                  $
                  0.33Diluted
      earnings per share
                  
                  $
                  0.01
                  
                  
                  $
                  0.18
                  
                  
                  $
                  0.07
                  
                  
                  $
                  0.33




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)
                
                June 30,
                  2009
                
                
                December 31,
                  2008AssetsCurrent
      assets:Cash
      and cash equivalents
                
                $
                78,512
                
                
                $
                60,400Investment
      securities, available-for-sale
                
                
                21,849
                
                
                
                27,070Accounts
      receivable, net
                
                
                32,052
                
                
                
                38,529Royalty
      income receivable
                
                
                8,388
                
                
                
                6,670Inventory
                
                
                25,657
                
                
                
                28,670Unbilled
      services
                
                
                432
                
                
                
                159Prepaid
      expenses and other current assets
                
                
                8,752
                
                
                
                8,944Deferred
      income taxes
                
                
                4,164
                
                
                
                4,073Total
      current assets
                
                
                179,806
                
                
                
                174,515Property
      and equipment, net
                
                
                171,400
                
                
                
                167,502Goodwill
                
                
                40,060
                
                
                
                40,272Intangible
      assets and patents, net
                
                
                2,120
                
                
                
                2,018Equity
      investment in unconsolidated affiliates
                
                
                956
                
                
                
                956Other
      assets
                
                
                4,452
                
                
                
                5,421Total
      assets
                
                $
                398,794
                
                
                $
                390,684Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Accounts
      payable and accrued expenses
                
                $
                21,147
                
                
                $
                22,564Deferred
      revenue
                
                
                9,768
                
                
                
                7,300Accrued
      pension benefits
                
                
                500
                
                
                
                500Income
      taxes payable
                
                
                1,527
                
                
                
                3,198Current
      installments of long-term debt
                
                
                270
                
                
                
                260Total
      current liabilities
                
                
                33,212
                
                
                
                33,822Long-term
      liabilities:Long-term
      debt, excluding current installments
                
                
                13,212
                
                
                
                13,482Deferred
      licensing fees
                
                
                8,214
                
                
                
                —Deferred
      rent
                
                
                1,578
                
                
                
                1,156Deferred
      income taxes
                
                
                5,466
                
                
                
                9,142Pension
      and postretirement benefits
                
                
                6,184
                
                
                
                6,211Environmental
      liabilities
                
                
                191
                
                
                
                191Total
      liabilities
                
                
                68,057
                
                
                
                64,004Commitments
      and contingenciesStockholders’
      equity:Common
      stock, $0.01 par value, 100,000 shares authorized, 35,455 shares
      issued as of June 30, 2009, and 35,278 shares issued as of December 31,
      2008
                
                
                355
                
                
                
                353Additional
      paid-in capital
                
                
                200,340
                
                
                
                199,020Retained
      earnings
                
                
                192,937
                
                
                
                190,816Accumulated
      other comprehensive loss, net
                
                
                (6,007
                )
                
                
                (6,621
                )387,625
                
                
                
                383,568Less,
      treasury shares at cost, 3,825 shares as of June 30, 2009 and December 31,
      2008
                
                
                (56,888
                )
                
                
                (56,888
                )Total
      stockholders’ equity
                
                
                330,737
                
                
                
                326,680Total
      liabilities and stockholders’ equity
                
                $
                398,794
                
                
                $
                390,684




See
notes to unaudited condensed consolidated financial statements.


4


Albany
Molecular Research, Inc.


Condensed
Consolidated Statements of Cash Flows


(unaudited)




Six Months Ended(Dollars in thousands)
                    
                    June 30, 2009
                    
                    
                    June 30, 2008Operating
      activitiesNet
      income
                    
                    $
                    2,121
                    
                    
                    $
                    10,416Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                    
                    
                    8,478
                    
                    
                    
                    9,123Deferred
      income tax (benefit) expense
                    
                    
                    (3,767
                    )
                    
                    
                    819Loss
      (gain) on disposal of property, plant and equipment
                    
                    
                    316
                    
                    
                    
                    (7
                    )(Recovery)
      provision for bad debts
                    
                    
                    (130
                    )
                    
                    
                    40Stock-based
      compensation expense
                    
                    
                    1,025
                    
                    
                    
                    844Provision
      for obsolete inventories
                    
                    
                    2,753
                    
                    
                    
                    744Decrease
      (increase) in:Accounts
      receivable
                    
                    
                    6,607
                    
                    
                    
                    (6,189
                    )Royalty
      income receivable
                    
                    
                    (1,718
                    )
                    
                    
                    (1,097
                    )Inventory,
      prepaid expenses and other assets
                    
                    
                    1,114
                    
                    
                    
                    (9,569
                    )(Decrease)
      increase in:Accounts
      payable and accrued expenses
                    
                    
                    (1,417
                    )
                    
                    
                    4,102Income
      tax payable
                    
                    
                    (1,671
                    )
                    
                    
                    1,541Deferred
      revenue and licensing fees
                    
                    
                    10,682
                    
                    
                    
                    1,397Pension
      and postretirement benefits
                    
                    
                    (14
                    )
                    
                    
                    (408
                    )Other
      long-term liabilities
                    
                    
                    422
                    
                    
                    
                    —Net
      cash provided by operating activities
                    
                    
                    24,801
                    
                    
                    
                    11,756Investing
      activitiesPurchases
      of investment securities
                    
                    
                    (1,564
                    )
                    
                    
                    (19,237
                    )Proceeds
      from sales of investment securities
                    
                    
                    6,652
                    
                    
                    
                    52,671Purchase
      of businesses, net of cash acquired
                    
                    
                    (12
                    )
                    
                    
                    (1,729
                    )Purchase
      of property, plant and equipment
                    
                    
                    (11,920
                    )
                    
                    
                    (9,585
                    )Proceeds
      from disposal of property, plant and equipment
                    
                    
                    143
                    
                    
                    
                    71Payments
      for patent applications and other costs
                    
                    
                    (219
                    )
                    
                    
                    (257
                    )Net
      cash (used in) provided by investing activities
                    
                    
                    (6,920
                    )
                    
                    
                    21,934Financing
      activitiesPurchases
      of treasury stock
                    
                    
                    —
                    
                    
                    
                    (16,217
                    )Principal
      payments on long-term debt
                    
                    
                    (260
                    )
                    
                    
                    (9,643
                    )Borrowings
      on line of credit
                    
                    
                    —
                    
                    
                    
                    9,405Proceeds
      from sale of common stock
                    
                    
                    297
                    
                    
                    
                    179Net
      cash provided by (used in) financing activities
                    
                    
                    37
                    
                    
                    
                    (16,276
                    )Effect
      of exchange rate changes on cash flows
                    
                    
                    194
                    
                    
                    
                    (613
                    )Increase
      in cash and cash equivalents
                    
                    
                    18,112
                    
                    
                    
                    16,801Cash
      and cash equivalents at beginning of period
                    
                    
                    60,400
                    
                    
                    
                    45,506Cash
      and cash equivalents at end of period
                    
                    $
                    78,512
                    
                    
                    $
                    62,307




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 six months ended June 30, 2009 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2009. 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, 2008.




The
accompanying unaudited condensed consolidated financial statements include the
accounts of Albany Molecular Research, Inc. 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.
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 Emerging
Issues Task Force (“EITF”) No. 00-21, “Revenue Arrangements with Multiple
Deliverables,” and Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition”.
Allocation of revenue to individual elements that qualify for separate
accounting is based on the estimated fair value of the respective
elements.




The
Company generates contract revenue on the following basis:




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.


6




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 Royalty 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.




Long-lived
Assets




In
accordance with the provisions of Statement of Financial Accounting Standards
(“SFAS”) No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
No. 144”), 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 which 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.




Goodwill




In
accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible
Assets” (“SFAS No. 142”), 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 fair value of the related reporting unit. If goodwill is determined to
be impaired in the future the Company would be required to record a charge to
its results of operations. Factors the Company considers important that could
result in an impairment include the following:


7




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




·
            significant
      negative industry or economic trends;
and




·
            market
      capitalization relative to net book
value.




The
Company performs its annual goodwill assessment of its reporting units as of the
end of the third quarter.  If management’s expectations of future
operating results change, or if there are changes to other assumptions, the
estimate of the fair value of the Company’s reporting units could change
significantly. Such a change could result in goodwill impairment charges in
future periods, which could have a significant impact on the Company’s
consolidated financial statements. Total goodwill recorded on the Company’s
unaudited condensed consolidated balance sheet at June 30, 2009 was $40,060
comprised of $12,916 from the Company’s Discovery/Development/Small Scale
Manufacturing (“DDS”) operating segment and $27,144 from the Company’s
Large-Scale Manufacturing (“LSM”) segment.




Stock
Compensation




In
accordance with SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No.
123 (R)”), the Company records the cost resulting from all share-based payment
transactions in the financial statements based on the fair value of the
share-based payment. The Company establishes fair value as the measurement
objective in accounting for share-based payment transactions with employees,
except for equity instruments held by employee share ownership
plans.




Note
2 — Business Combination




Acquisition
of FineKem




On
January 17, 2008, the Company, through a wholly-owned subsidiary, completed the
purchase of FineKem, a manufacturing facility located in Aurangabad,
India.  The aggregate purchase price of $1,713 included cash payments
totaling $1,665 and capitalized costs related to the acquisition, primarily
professional fees, of $48.




The
following table summarizes the final allocation of the purchase price to the
estimated fair value of the net assets acquired.




January 17, 2008Assets
      AcquiredAccounts
      receivable, net
                  
                  $
                  42Inventory
                  
                  
                  139Prepaid
      expenses and other current assets
                  
                  
                  26Property
      and equipment, net
                  
                  
                  556Goodwill
                  
                  
                  1,154Total
      assets acquired
                  
                  $
                  1,917Liabilities
      AssumedAccounts
      payable and accrued expenses
                  
                  $
                  204Total
      liabilities assumed
                  
                  $
                  204Net
      assets acquired
                  
                  $
                  1,713




Pro forma
financial information for the three and six months ended June 30, 2008, as if
the FineKem acquisition had been completed as of January 1, 2008, has been
excluded due to the immateriality of the operating results of FineKem in
relation to the Company’s consolidated operating results as a
whole.




8


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 June 30,
                  
                  
                  Six Months Ended June 30,(in thousands)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Weighted
      average common shares outstanding
                  
                  
                  30,975
                  
                  
                  
                  31,401
                  
                  
                  
                  30,969
                  
                  
                  
                  31,781Dilutive
      effect of stock options
                  
                  
                  —
                  
                  
                  
                  37
                  
                  
                  
                  —
                  
                  
                  
                  20Dilutive
      effect of restricted stock
                  
                  
                  169
                  
                  
                  
                  162
                  
                  
                  
                  137
                  
                  
                  
                  174Weighted
      average common shares outstanding
                  
                  
                  31,144
                  
                  
                  
                  31,600
                  
                  
                  
                  31,106
                  
                  
                  
                  31,975




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 six
months ended June 30, 2009 and 2008 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 1,919 and 1,604 for the three months
ended June 30, 2009 and 2008, respectively and 1,934 and 1,662 for the six
months ended June 30, 2009 and 2008, respectively.  These amounts are
not included in the calculation of weighted average common shares
outstanding.




Effective
January 1, 2009, the Company adopted FASB Staff Position EITF 03-6-1,
"Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities" ("EITF 03-6-1"), which classifies unvested share-based
payment awards that contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) as participating securities and requires
them to be included in the computation of earnings per share pursuant to the
two-class method described in SFAS No. 128, "Earnings per Share." This Staff
Position is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those years.  The
adoption of this Staff Position did not have a material impact on our
consolidated financial statements.




Note
4 — Inventory




Inventory
consisted of the following at June 30, 2009 and December 31,
2008:




June 30, 2009
                  
                  
                  December 31,
                    2008Raw
      materials
                  
                  $
                  10,497
                  
                  
                  $
                  8,996Work
      in process
                  
                  
                  2,918
                  
                  
                  
                  3,396Finished
      goods
                  
                  
                  12,242
                  
                  
                  
                  16,278Total
                  
                  $
                  25,657
                  
                  
                  $
                  28,670




Note
5 — Restructuring




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
abandonment charges of approximately $463 and administrative costs associated
with the restructuring plan of $80.





During
June 2009, the Company decided to close and consolidate 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 of this restructuring, 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 abandonment charges of $182 and administrative costs
associated with the restructuring plan of $11.




The
restructuring costs are included under the caption “Restructuring” in the
consolidated financial statement of operations during the three and six months
ended June 30, 2009 and the year ended December 31, 2008 and the restructuring
liabilities are included in “Accounts payable and accrued expenses” on the
consolidated balance sheet at June 30, 2009 and December 31,
2008.  The Hungary restructuring activity was recorded in the
Company’s DDS operating segment.


9




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


Balance at
                  January 1,
                  2009
                
                
                Charges
                
                
                Incurred
                  Amounts
                
                
                Reversals
                
                
                Foreign
                  Currency
                  Translation
                  Adjustments
                
                
                Balance at
                  June 30 2009Termination
      benefits and personnel realignment
                
                $
                325
                
                
                $
                134
                
                
                $
                —
                
                
                
                (305
                )
                
                $
                (20
                )
                
                $
                134Losses
      on grant contracts
                
                
                266
                
                
                
                —
                
                
                
                (9
                )
                
                
                —
                
                
                
                (9
                )
                
                
                248Lease
      abandonment charges
                
                
                262
                
                
                
                182
                
                
                
                (111
                )
                
                
                —
                
                
                
                (15
                )
                
                
                318Administrative
      costs associated with restructuring
                
                
                40
                
                
                
                11
                
                
                
                —
                
                
                
                (37
                )
                
                
                (3
                )
                
                
                11Total
                
                $
                893
                
                
                $
                327
                
                
                $
                (120
                )
                
                
                (342
                )
                
                $
                (47
                )
                
                $
                711





Termination
benefits and personnel realignment costs relate to severance packages,
relocation, 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 abandonment charges relate to
costs associated with exiting the current facility.





Anticipated
cash outflows related to the Hungary restructuring for the remainder of 2009 is
approximately $414, which primarily consists of the payment of termination
benefits and personnel realignment and incurring losses on grant contracts and
lease abandonment.





Note
6 — Goodwill and Intangible Assets




The
carrying amounts of goodwill, by the Company’s DDS and LSM operating segments,
as of June 30, 2009 and December 31, 2008 are as follows:




DDS
                  
                  
                  LSM
                  
                  
                  TotalJune
      30, 2009
                  
                  $
                  12,916
                  
                  
                  $
                  27,144
                  
                  
                  $
                  40,060December 31,
      2008
                  
                  $
                  13,208
                  
                  
                  $
                  27,064
                  
                  
                  $
                  40,272




The
decrease in goodwill within the DDS segment from December 31, 2008 to June 30,
2009 is due to the impact of foreign currency translation.  The
increase in goodwill within the LSM segment from December 31, 2008 to June 30,
2009 is primarily due to the impact of foreign currency translation, along with
a small amount of transaction costs associated with the final valuation of the
FineKem acquisition.




The
components of intangible assets are as follows:




Cost
                    
                    
                    Accumulated
                      Amortization
                    
                    
                    Net
                    
                    Amortization
                      PeriodJune 30, 2009Patents
      and Licensing Rights
                    
                    $
                    3,400
                    
                    
                    $
                    (1,280
                    )
                    
                    $
                    2,120
                    
                    2-16
      yearsDecember 31, 2008Patents
      and Licensing Rights
                    
                    $
                    3,181
                    
                    
                    $
                    (1,163
                    )
                    
                    $
                    2,018
                    
                    2-16
      years




Amortization
expense related to intangible assets was $57 and $346 for the three months ended
June 30, 2009 and 2008, respectively and $117 and $501 for the six months ended
June 30, 2009 and 2008, respectively.




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


10





Year  ending
      December 31,2009
      (remaining)
                    
                    $
                    1412010
                    
                    
                    2092011
                    
                    
                    1892012
                    
                    
                    1882013
                    
                    
                    177Thereafter
                    
                    
                    1,216







Note
7 - Defined Benefit and Postretirement Welfare Plan




AMRI
Rensselaer previously provided retirement benefits under two non-contributory
defined benefit plans and a non-contributory, unfunded post-retirement welfare
plan. Future benefits under the defined benefit plans and for salaried
participants in the post-retirement welfare plan have been frozen.




Components
of Net Periodic Benefit Cost




Pension
                  Benefits
                
                
                Postretirement
                  Benefits
                
                
                Pension
                  Benefits
                
                
                Postretirement
                  BenefitsThree Months
                  Ended June 30,
                
                
                Three Months
                  Ended June 30,
                
                
                Six Months
                  Ended June 30,
                
                
                Six Months
                  Ended June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008Service
      cost
                
                $
                —
                
                
                $
                —
                
                
                $
                18
                
                
                $
                12
                
                
                $
                —
                
                
                $
                —
                
                
                $
                38
                
                
                $
                24Interest
      cost
                
                
                313
                
                
                
                305
                
                
                
                15
                
                
                
                10
                
                
                
                626
                
                
                
                610
                
                
                
                31
                
                
                
                20Expected
      return on plan assets
                
                
                (362
                )
                
                
                (386
                )
                
                
                —
                
                
                
                —
                
                
                
                (724
                )
                
                
                (772
                )
                
                
                —
                
                
                
                —Amortization
      of prior service cost
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Recognized
      net loss
                
                
                —
                
                
                
                —
                
                
                
                7
                
                
                
                2
                
                
                
                —
                
                
                
                —
                
                
                
                13
                
                
                
                4Net
      periodic benefit (income) cost
                
                $
                (49
                )
                
                $
                (81
                )
                
                $
                40
                
                
                $
                24
                
                
                $
                (98
                )
                
                $
                (162
                )
                
                $
                82
                
                
                $
                48Recognized
      in Accumulated Other Comprehensive Income (“AOCI”):Net
      actuarial loss
                
                
                —
                
                
                
                —
                
                
                
                7
                
                
                
                2
                
                
                
                —
                
                
                
                —
                
                
                
                13
                
                
                
                4Total
      recognized in AOCI, pre-tax
                
                $
                —
                
                
                $
                —
                
                
                $
                7
                
                
                $
                2
                
                
                $
                —
                
                
                $
                —
                
                
                $
                13
                
                
                $
                4




Employer
Contributions




The
Company previously disclosed in its consolidated financial statements for the
year ended December 31, 2008 that it expected to contribute $500 to its
pension plan in 2009.  As of June 30, 2009, no contributions have been
made.




Note
8 — Share-Based Compensation




During
the three and six months ended June 30, 2009, the Company recognized total share
based compensation cost of $500 and $1,025, respectively as compared to total
share based compensation cost for the three and six months ended June 30, 2008
of $422 and $844, 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 June 30, 2009 and changes during the
six months then ended is presented below:




Number of
                            Shares
                          
                          
                          Weighted
                            Average Grant Date
                            Fair Value Per
                            ShareOutstanding,
      December 31, 2008
                          
                          
                          509
                          
                          
                          $
                          10.61Granted
                          
                          
                          164
                          
                          
                          $
                          8.42Vested
                          
                          
                          (98
                          )
                          
                          $
                          9.63Forfeited
                          
                          
                          (21
                          )
                          
                          $
                          10.09Outstanding,
      June 30, 2009
                          
                          
                          554
                          
                          
                          $
                          10.15




11


The
weighted average fair value of restricted shares per share granted during the
six months ended June 30, 2009 and 2008 was $8.42 and $11.28,
respectively.  As of June 30, 2009, there was $4,206 of total
unrecognized compensation cost related to non-vested restricted shares. That
cost is expected to be recognized over a weighted-average period of 3.8
years.  During the six months ended June 30, 2009, 98 restricted
shares vested.




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 Six Months EndedJune 30, 2009
                  
                  
                  June 30, 2008Expected
      life in years
                  
                  
                  5
                  
                  
                  
                  5Risk
      free interest rate
                  
                  
                  1.98
                  %
                  
                  
                  2.92
                  %Volatility
                  
                  
                  48
                  %
                  
                  
                  41
                  %Dividend
      yield
                  
                  
                  —
                  
                  
                  
                  —





A summary
of stock option activity under the Company’s Stock Option and Incentive Plans as
of June 30, 2009 and changes during the six 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, 2008
                
                
                1,868
                
                
                $
                20.34Granted
                
                
                129
                
                
                
                8.54Exercised
                
                
                (4
                )
                
                
                10.00Forfeited
                
                
                (31
                )
                
                
                24.04Expired
                
                
                (42
                )
                
                
                11.40Outstanding,
      June 30, 2009
                
                
                1,920
                
                
                $
                19.71
                
                
                
                4.4
                
                
                $
                6Options
      exercisable, June 30, 2009
                
                
                1,525
                
                
                $
                21.99
                
                
                
                3.2
                
                
                $
                —




The
weighted average fair value of stock options granted for the six months ended
June 30, 2009 and 2008 was $3.74 and $4.85, respectively.   As of
June 30, 2009, there was $1,417 of total unrecognized compensation cost related
to non-vested stock options. That cost is expected to be recognized over a
weighted-average period of 2.7 years.




Employee
Stock Purchase Plan




During
the six months ended June 30, 2009 and 2008, 19 and 14 shares, respectively,
were issued under the Company’s 1998 Employee Stock Purchase
Plan.  During the six months ended June 30, 2009 and 2008, cash
received from stock option exercises and employee stock purchases was $297 and
$179, respectively.  The actual tax benefit realized for the tax
deductions from stock option exercises and plan purchases was $5 and $0 during
the six months ended June 30, 2009 and 2008, respectively.




Note
9 — Operating Segment Data




The
Company has organized its sales, marketing and production activities into the
DDS and LSM segments based on the criteria set forth in SFAS No. 131,
“Disclosures about Segments of an Enterprise and Related Information”. 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, intermediates and other
compounds of commercial interest, and includes specialized high potency and
controlled substance manufacturing.  Many of the activities of the LSM
component are 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.


12




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
                          
                          
                          Operating
                            income
                          
                          
                          Depreciation
                            and
                            AmortizationFor the three months ended June 30,
      2009DDS
                          
                          $
                          19,615
                          
                          
                          $
                          12,524
                          
                          
                          $
                          14,218
                          
                          
                          $
                          2,425LSM
                          
                          
                          19,167
                          
                          
                          
                          —
                          
                          
                          
                          (513
                          )
                          
                          
                          1,722Corporate
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (13,320
                          )
                          
                          
                          —Total
                          
                          $
                          38,782
                          
                          
                          $
                          12,524
                          
                          
                          $
                          385
                          
                          
                          $
                          4,147For the three months ended June 30,
      2008DDS
                          
                          $
                          30,064
                          
                          
                          $
                          11,573
                          
                          
                          $
                          19,638
                          
                          
                          $
                          2,882LSM
                          
                          
                          16,298
                          
                          
                          
                          —
                          
                          
                          
                          2,096
                          
                          
                          
                          1,636Corporate
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (12,747
                          )
                          
                          
                          —Total
                          
                          $
                          46,362
                          
                          
                          $
                          11,573
                          
                          
                          $
                          8,987
                          
                          
                          $
                          4,518For the six months ended June 30,
      2009DDS
                          
                          $
                          42,139
                          
                          
                          $
                          23,310
                          
                          
                          $
                          28,043
                          
                          
                          $
                          5,066LSM
                          
                          
                          39,887
                          
                          
                          
                          —
                          
                          
                          
                          1,944
                          
                          
                          
                          3,412Corporate
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (27,007
                          )
                          
                          
                          —Total
                          
                          $
                          82,026
                          
                          
                          $
                          23,310
                          
                          
                          $
                          2,980
                          
                          
                          $
                          8,478For the six months ended June 30,
      2008DDS
                          
                          $
                          56,657
                          
                          
                          $
                          19,806
                          
                          
                          $
                          35,626
                          
                          
                          $
                          5,574LSM
                          
                          
                          35,042
                          
                          
                          
                          —
                          
                          
                          
                          2,631
                          
                          
                          
                          3,549Corporate
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (24,953
                          )
                          
                          
                          —Total
                          
                          $
                          91,699
                          
                          
                          $
                          19,806
                          
                          
                          $
                          13,304
                          
                          
                          $
                          9,123




The
following table summarizes other information by segment as of June 30,
2009:




As of June 30,
    2009DDS
                    
                    
                    LSM
                    
                    
                    TotalTotal
      assets
                    
                    $
                    243,677
                    
                    
                    $
                    155,117
                    
                    
                    $
                    398,794Goodwill
      included in total assets
                    
                    
                    12,916
                    
                    
                    
                    27,144
                    
                    
                    
                    40,060




The
following table summarizes other information by segment as of December 31,
2008:




As of December 31,
      2008DDS
                    
                    
                    LSM
                    
                    
                    TotalTotal
      assets
                    
                    $
                    235,043
                    
                    
                    $
                    155,641
                    
                    
                    $
                    390,684Goodwill
      included in total assets
                    
                    
                    13,208
                    
                    
                    
                    27,064
                    
                    
                    
                    40,272




Note
10 — Financial Information by Customer Concentration and Geographic
Area




Total
contract revenue from DDS’s three largest customers represented approximately
22%, 9% and 6% of DDS’s total contract revenue for the three months ended June
30, 2009, and 11%, 7% and 6% of DDS’s total contract revenue for the three
months ended June 30, 2008.  Total contract revenue from DDS’s three
largest customers represented approximately 20%, 10% and 6% of DDS’s total
contract revenue for the six months ended June 30, 2009 and 11%, 7% and 7% for
the six months ended June 30, 2008.  Total contract revenue from LSM’s
largest customer, GE Healthcare (“GE”), represented 28% and 37% of LSM’s total
contract revenue for the three months ended June 30, 2009 and 2008,
respectively.  Total contract revenue from GE represented 30% and 46%
of LSM’s total contract revenue for the six months ended June 30, 2009 and 2008,
respectively. GE accounted for approximately 14% and 17% of the Company’s total
contract revenue for the six months ended June 30, 2009 and 2008,
respectively.  The decrease in GE Healthcare sales in 2009 is
primarily due to lower demand from GE Healthcare as a result of their 2009
inventory reduction efforts.  Full year 2009 sales to GE Healthcare
are expected to be below amounts recognized in 2008 primarily due to lower
demand from GE as discussed above.  The DDS segments largest customer,
a large pharmaceutical company, represented approximately 10% and 7% of the
Company’s total contract revenue for the six months ended June 30, 2009 and
2008, respectively.  The increase in revenues from this customer  as a
percentage of total contract revenue in 2009 are due to the expansion of the
Company’s contract with this customer, combined with the decrease in total
contract revenue from 2008 to 2009.


13




The
Company’s total contract revenue for the three and six months ended June 30,
2009 and 2008 was recognized from customers in the following geographic
regions:




Three Months Ended June 30,
                  
                  
                  Six Months Ended June 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008United
      States
                  
                  
                  59
                  %
                  
                  
                  75
                  %
                  
                  
                  57
                  %
                  
                  
                  70
                  %Europe
                  
                  
                  19
                  
                  
                  
                  19
                  
                  
                  
                  19
                  
                  
                  
                  23Asia
                  
                  
                  14
                  
                  
                  
                  5
                  
                  
                  
                  18
                  
                  
                  
                  5Other
                  
                  
                  8
                  
                  
                  
                  1
                  
                  
                  
                  6
                  
                  
                  
                  2Total
                  
                  
                  100
                  %
                  
                  
                  100
                  %
                  
                  
                  100
                  %
                  
                  
                  100
                  %




Note
11 — Comprehensive Income




The
following table presents the components of the Company’s comprehensive income
for the three and six months ended June 30, 2009 and 2008:




Three Months Ended June 30,
                  
                  
                  Six Months Ended June 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Net
      income
                  
                  $
                  179
                  
                  
                  $
                  5,677
                  
                  
                  $
                  2,121
                  
                  
                  $
                  10,416Other
      comprehensive loss:Change
      in unrealized (loss) gain on available-for-sale securities, net of
      taxes
                  
                  
                  (15
                  )
                  
                  
                  (21
                  )
                  
                  
                  —
                  
                  
                  
                  18Change
      in unrealized loss on interest rate swap, net of taxes
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (5
                  )Foreign
      currency translation gain (loss)
                  
                  
                  5,584
                  
                  
                  
                  (574
                  )
                  
                  
                  601
                  
                  
                  
                  (25
                  )Net
      actuarial loss of pension and postretirement benefits
                  
                  
                  7
                  
                  
                  
                  2
                  
                  
                  
                  13
                  
                  
                  
                  4Total
      comprehensive income
                  
                  $
                  5,755
                  
                  
                  $
                  5,084
                  
                  
                  $
                  2,735
                  
                  
                  $
                  10,408




Note
12 — 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
regards to litigation relating to Allegra, 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.




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., and
Wockhardt filed Abbreviated New Drug Applications (“ANDAs”) with the 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, and Sun Pharma Global, Inc.  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.


14




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
two of our U.S. patents 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.




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 us, 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 our arrangements with Aventis Pharmaceuticals, we 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.




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.  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 and Barr Laboratories through 2015, along with additional
consideration.  While the settlement affords the option for a launch
of 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.   The Company and Aventis Pharmaceuticals
have also dismissed their claims against Ranbaxy Laboratories Ltd./Ranbaxy
Pharmaceuticals Inc. without prejudice.




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
products.





Note
13 — Income Taxes




FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109” (“FIN 48”) provides recognition
criteria and a related measurement model for tax positions taken by companies.
In accordance with FIN 48, 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 adoption of FIN 48 did not
result in a change to the liability of unrecognized benefits.


15





A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:





Reserve
                  
                  
                  Tax-effected
                    Interest
                  
                  
                  Total ReserveBalance
      at January 1, 2009
                  
                  $
                  1,226
                  
                  
                  $
                  54
                  
                  
                  $
                  1,280Decreases
      related to prior year tax positions
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Increases
      related to current year tax position
                  
                  
                  114
                  
                  
                  
                  17
                  
                  
                  
                  131Settlements
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Lapse
      of statute
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Balance
      at June 30, 2009
                  
                  $
                  1,340
                  
                  
                  $
                  71
                  
                  
                  $
                  1,411





Additions
to, and the remainder of, the reserve for the quarter ended June 30, 2009
represent 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.  This policy did not
change with adoption of FIN 48.  As of June 30, 2009, 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 $110 at June 30, 2009, of which $84 was recognized
in prior years.




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,
2005.  All significant state and foreign matters have been concluded for
years through 2003.  Tax examinations commenced in
2009.  Management of the Company believes that the reserves associated
with FIN 48 tax positions are adequate to support any future tax
examinations.




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
14 – Fair Value




In
September 2006, SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157), was
issued.  This statement defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements.  This statement applies
under other accounting pronouncements that require or permit fair value
measurements.  FASB Staff Position (“FSP”) 157-2 amended SFAS No. 157
to delay the effective date of SFAS No. 157 for all nonfinancial assets and
nonfinancial liabilities to fiscal years beginning after November 15,
2008.





The
adoption of SFAS No. 157 did not have a material impact on the Company’s
consolidated financial position, results of operations or cash
flows.





SFAS No.
157 establishes a three-tiered fair value hierarchy, 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 June
30, 2009:





Fair Value Measurements as of June 30,
      2009Marketable Securities
                  
                  Total
                  
                  
                  Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3Obligations
      of states and political subdivisions
                  
                  $
                  19,549
                  
                  
                  $
                  —
                  
                  
                  $
                  19,549
                  
                  
                  $
                  —Auction
      rate securities
                  
                  
                  2,300
                  
                  
                  
                  —
                  
                  
                  
                  2,300
                  
                  
                  
                  —Total
                  
                  $
                  21,849
                  
                  
                  $
                  —
                  
                  
                  $
                  21,849
                  
                  
                  $
                  —




16




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.




Note
15 – Recently Issued Accounting Pronouncements




On April
9, 2009, the FASB issued three FASB Staff Positions (“FSP”) intended to provide
additional guidance and enhanced disclosures regarding fair value measurements
and other-than-temporary impairments of securities:




·
            FSP FAS 157-4,
      “Determining Fair Value When the Volume and Level of Activity for the
      Asset or Liability Have Significantly Decreased and Identifying
      Transactions That Are Not Orderly,”provides guidelines for making
      fair value measurements more consistent with the principles presented in
      FASB Statement No. 157,“Fair Value
      Measurements.”FSP
      FAS 157-4 must be applied prospectively and retrospective application is
      not permitted. FSP FAS 157-4 was adopted April 1,
    2009.




·
            FSP FAS 115-2 and FAS 124-2,“Recognition
      and Presentation of Other-Than-Temporary Impairments,”provides additional guidance
      designed to create greater clarity and consistency in accounting for and
      presenting impairment losses on debt securities. FSP FAS 115-2 and FAS
      124-2 were adopted April 1,
2009.




·
            FSP FAS 107-1 and APB 28-1,“Interim
      Disclosures about Fair Value of Financial Instruments,”enhances consistency in
      financial reporting by increasing the frequency of fair value disclosures.
      FSP 107-1 and APB 28-1 were adopted April 1,
    2009.




The
Company adopted the above FASB staff positions and the adoption did not have a
material impact on the consolidated financial statements.




Effective
April 1, 2009, the Company adopted SFAS No. 165, “Subsequent Events” (“SFAS
165”). The standard modifies the names of the two types of subsequent events
either as recognized subsequent events (previously referred to in practice as
Type I subsequent events) or non-recognized subsequent events (previously
referred to in practice as Type II subsequent events). In addition, the standard
modifies the definition of subsequent events to refer to events or transactions
that occur after the balance sheet date, but before the financial statements are
issued (for public entities) or available to be issued (for nonpublic entities).
It also requires the disclosure of the date through which subsequent events have
been evaluated. The Company has evaluated its subsequent events through the
filing date.  The standard did not result in significant changes in
the practice of subsequent event disclosures or the related accounting thereof,
and therefore the adoption did not have any impact on the Company’s consolidated
financial statements.





In June
2009, the FASB issued Statement of Financial Accounting Standards No. 167 (“SFAS
167”), “Amendments to FASB
Interpretation No. 46R.” SFAS 167 revises FIN 46R by eliminating the
exemption for qualifying special purpose entities, by establishing a new
approach for determining who should consolidate a variable-interest entity and
by changing when it is necessary to reassess who should consolidate a
variable-interest entity.  This statement is effective for annual
reporting periods beginning after November 15, 2009.  We are currently
reviewing the impact of SFAS 167 on our financial statements.





In
June 2009, the FASB issued Statement of Financial Accounting Standards No.
168 (“SFAS No. 168”),“The “FASB Accounting Standards Codification” and the Hierarchy of Generally
Accepted Accounting Principles”.  SFAS 168 replaces SFAS
No. 162,“The
Hierarchy of Generally Accepted Accounting Principles” and establishes only two
levels of U.S. generally accepted accounting principles (“GAAP”), authoritative
and nonauthoritative. The FASB Accounting Standards Codification (the
“Codification”) will become the source of authoritative, nongovernmental GAAP,
except for rules and interpretive releases of the SEC, which are sources of
authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC
accounting literature not included in the Codification will become
nonauthoritative.  This standard is effective for financial statements
for interim or annual reporting periods ending after September 15,
2009. The Company will begin to use the new guidelines and numbering system
prescribed by the Codification when referring to GAAP in the third quarter of
2009.  As the Codification was not intended to change or alter
existing GAAP, it should not have any impact on the Company’s consolidated
financial statements.


17


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”), the expected results of the Company’s
restructuring of AMRI Hungary, the acquisition of FineKem Laboratories Pvt.
Limited (“FineKem”), 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 and Hungary), the effect of the
purchase of assets from Ariane Orgachem Private Limited and Ferico Laboratories
Limited, collectively known as AMRI India Pvt. Ltd. (“AMRI India”), including
increasing options and solutions for customers, business growth and the
expansion of the Company’s global market, clinical supply manufacturing,
management’s strategic plans, drug discovery, product commercialization, license
arrangements, research and development projects and expenses, 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, 2008, as filed with the Securities and Exchange
Commission on March 13, 2009, 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 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 and India.  We
purchased an additional large-scale manufacturing site in India in January 2008
and completed a 10,000 square foot expansion of our Singapore Research Center in
2008.  Additionally, in 2009 we consolidated existing facilities at
both our Hungary and Bothell, Washington locations in order to improve
operational efficiencies of staff and services as well as provide capacity for
future growth.




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.  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.




Our
global platform has increased our market share 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
implementation of a process improvement and cost savings campaign
(“Lean-to-Excellence”), along with efforts to strengthen our
sourcing.  We believe these factors will lead to improved margins in
the long-term, as well as helping the Company to remain competitive during the
current challenging economic environment.




18




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 June 30, 2009 was $51.3 million, as compared to
$57.9 million for the quarter ended June 30, 2008.




Contract
services revenue for the second quarter of 2009 was $38.8 million, compared to
$46.4 million for the second quarter of 2008.  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 higher in the second quarter of 2009 than in the quarter ended
June 30, 2008.  Consolidated gross margin was 5.4% for the quarter
ended June 30, 2009, compared to 27.7% for the quarter ended June 30,
2008.




During
the six months ended June 30, 2009, cash provided by operations was $24.8
million.  The increase of $13.0 million in cash flow from operations
from the six months ended June 30, 2008 resulted primarily from an increase in
deferred revenue due to the receipt of the $10.0 million sub-licensing fee from
sanofi-aventis in conjunction with the amended licensing agreement entered into
in the fourth quarter of 2008.  We spent $11.9 million in capital
expenditures, primarily related to expansion in Bothell, Washington and
Budapest, Hungary.  As of June 30, 2009, we had $100.4 million in
cash, cash equivalents and investments and $13.5 million in bank and other
related debt.




Results
of Operations – Three and Six Months ended June 30, 2009 Compared to Three and
Six Months Ended June 30, 2008




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 DDS and LSM segments
were as follows:




Three Months Ended June 30,
                  
                  
                  Six Months Ended June 30,(in thousands)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008DDS
                  
                  $
                  19,615
                  
                  
                  $
                  30,064
                  
                  
                  $
                  42,139
                  
                  
                  $
                  56,657LSM
                  
                  
                  19,167
                  
                  
                  
                  16,298
                  
                  
                  
                  39,887
                  
                  
                  
                  35,042Total
                  
                  $
                  38,782
                  
                  
                  $
                  46,362
                  
                  
                  $
                  82,026
                  
                  
                  $
                  91,699




DDS
contract revenues for the quarter ended June 30, 2009, decreased $10.4 million
to $19.6 million as compared to $30.1 million for the same quarter in the prior
year.  DDS contract revenues for the six months ended June 30, 3009
decreased $14.5 million to $42.1 million as compared to $56.7 million for the
same period in the prior year.  These decreases are due primarily to a
decrease in contract revenue from development and small-scale manufacturing
services of $7.3 million for the quarter ended June 30, 2009 and a decrease of
$9.6 million for the six months ended June 30, 2009 from the same periods in
2008.  These decreases are primarily due to lower demand from
specialty pharma/biotech customers and more competitive pricing in the overall
current economic downturn.  In addition, discovery services contract
revenue decreased $3.1 million for the quarter ended June 30, 2009 and decreased
$4.9 million for the six months ended June 30, 2009, as compared to the same
periods in 2008, due primarily to the completion in October 2008 of the funded
research component of our on-going collaboration with BMS and the completion of recognition
of access fees related to the preliminary screening phase of an on-going natural
products collaboration, as well as lower customer
demand.  We currently expect
discovery services and development and small-scale manufacturing services
revenue for the second half of 2009 to remain flat with or increase slightly
from amounts recognized in the first half of 2009.





LSM
revenue for the quarter ended June 30, 2009 increased from the same period in
2008 primarily due to an increase in commercial sales of $4.7 million resulting
from an increase in demand for existing commercial
products.   This increase was offset, in part, by a decrease of
$0.8 million caused by lower demand from GE Healthcare due to 2009 inventory
reduction efforts and a decrease of $0.6 million primarily driven by the reduced
demand for the production of clinical supply material.  LSM revenue
for the six months ended June 30, 2009 increased $4.8 million from the same
period in 2008.  This increase was due primarily to an increase in
commercial sales of $10.9 million resulting from an increase in demand for
existing commercial products as mentioned above, along with shipments of an
additional commercial product under supply agreements entered into in the third
quarter of 2008.  In addition, there was an increase in sales from the
production of clinical supply materials.  These increases were offset
in part by lower demand from GE Healthcare due to 2009 inventory reduction
efforts and timing of customer requirements.  We expect LSM contract
revenue for the second half of 2009 to decrease from amounts recognized in the
first half of 2009 primarily due to lower demand from GE Healthcare due to 2009
inventory reduction efforts and reduced demand for the production of clinical
supply material.


19


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 June 30,
                      
                      
                      Six Months Ended June 30,2009
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008(in thousands)$
                      8,524
                      
                      $
                      7,573
                      
                      
                      $
                      19,310
                      
                      
                      $
                      15,806




Recurring
royalties, 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 and Teva Pharmaceuticals Industries Ltd’s (“Teva”) authorized
generics, increased for the three and six months ended June 30, 2009 from the
same periods in 2008, primarily due to an increase in international sales of
Allegra by sanofi-aventis as well as the addition of royalties on the sale of
authorized generics by Teva, an increased royalty rate on one Allegra product
and the recognition of sublicensing fees received under the amended agreement
with sanofi-aventis.




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.  We currently expect royalty revenues for 2009 to increase from
amounts recognized in 2008, which will be driven by the new royalty stream we
will be earning on Teva’s sales of fexofenadine as well as the amortization of
the sub-license fee we received from sanofi-aventis. While the settlement
affords the option for a launch of a generic version of Allegra D-12 in November
2009, the Company will receive quarterly royalties for Allegra D-12 through July
2010 equal to the royalties paid for the quarter ended June 30,
2009.





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 June 30,
                    
                    
                    Six Months Ended June 30,2009
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008(in thousands)$
                    4,000
                    
                    $
                    4,000
                    
                    
                    $
                    4,000
                    
                    
                    $
                    4,000





During
the three months ended June 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.  During the three months ended June 30, 2008, milestone revenue
of $4.0 million was recognized for reaching the second milestone in conjunction
with our licensing and research agreement with BMS.  The milestone
payment was triggered by BMS’s submission of an application to initiate Phase 1
clinical studies on a compound.




20




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 June 30,
                  
                  
                  Six Months Ended June 30,(in thousands)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008DDS
                  
                  $
                  17,016
                  
                  
                  $
                  19,328
                  
                  
                  $
                  35,396
                  
                  
                  $
                  37,347LSM
                  
                  
                  19,680
                  
                  
                  
                  14,203
                  
                  
                  
                  37,943
                  
                  
                  
                  32,412Total
                  
                  $
                  36,696
                  
                  
                  $
                  33,531
                  
                  
                  $
                  73,339
                  
                  
                  $
                  69,759DDS
      Gross Margin
                  
                  
                  13.3
                  %
                  
                  
                  35.7
                  %
                  
                  
                  16.0
                  %
                  
                  
                  34.1
                  %LSM
      Gross Margin
                  
                  
                  (2.7
                  )
      %
                  
                  
                  12.9
                  %
                  
                  
                  4.9
                  %
                  
                  
                  7.5
                  %Total
      Gross Margin
                  
                  
                  5.4
                  %
                  
                  
                  27.7
                  %
                  
                  
                  10.6
                  %
                  
                  
                  23.9
                  %




DDS had a
contract revenue gross margin of 13.3% for the three months ended June 30, 2009
compared to contract revenue gross margin of 35.7% for the same period in 2008
and gross margin of 16% for the six months ended June 30, 2009 as compared to
34.1% for the same period in 2008.  The decrease in gross margin
resulted from lower demand for these services in relation to our fixed costs, as
well as the completion of the recognition of revenue and access fees associated
with the preliminary screening phase of an on-going natural products
collaboration project at our Bothell Research facility and the funded research
component of our on-going collaboration with BMS.  We currently expect
DDS contract margins for the second half of 2009 to remain flat or decrease
slightly from the percentage realized in the first half of 2009.




LSM’s
contract revenue gross margin decreased to (2.7)% for the three months ended
June 30, 2009 compared to 12.9% for the same period in 2008 and decreased to
4.9% for the six months ended June 30, 2009 as compared to 7.5% for the same
period in 2008.  This decrease in gross margin is primarily due to
lower demand for products which historically have generated higher margins along
with non-cash inventory write-downs primarily related to slower moving
quantities of a legacy generic product of $1.9 million, an impact of 10% on
gross margin.  We expect gross margins in the LSM segment for second
half of 2009 to increase from amounts recognized in the first half of 2009 due
to product mix and the impact of the inventory write-down in the first half of
2009.





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




Three Months Ended June 30,
                          
                          
                          Six Months Ended June 30,2009
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008(in thousands)$
                          920
                          
                          $
                          837
                          
                          
                          $
                          2,025
                          
                          
                          $
                          1,656




The
increase in technology incentive award expense for the three and six months
ended June 30, 2009 from the same periods ended June 30, 2008 is due to the
increase in Allegra royalty revenue.  We expect technology incentive
award expense to generally fluctuate directionally and proportionately with
fluctuations in Allegra royalties in future periods.




21




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 small molecule chemistry, biocatalysis and natural
product technologies 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 June 30,
                      
                      
                      Six Months Ended June 30,2009
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008(in thousands)$
                      4,601
                      
                      $
                      2,935
                      
                      
                      $
                      7,986
                      
                      
                      $
                      5,844




R&D
expense increased $1.7 million for the quarter ended June 30, 2009 from $2.9
million in the quarter ended June 30, 2008 and increased $2.1 million for the
six months ended June 30, 2009 as compared to the same period in
2008.  These increases are due primarily to the advancement of our
oncology compound through Phase I clinical trials and the transition of research
staff to our MCH-1 obesity research program upon completion of the funded
component of the collaboration with BMS.  In addition, the increase is
further caused by the continued establishment of R&D activities at our
Singapore facility, including in-vitro biology research
capabilities.  We currently expect research and development expenses
to increase in 2009 from amounts recognized in 2008, related to the items
previously mentioned, as well as 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 is currently in Phase I
clinical trials.  Additionally, we expect increased costs associated
with the selection and advancement of two pre-clinical candidates from our
existing programs.




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.




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 June 30,
                      
                      
                      Six Months Ended June 30,2009
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008(in thousands)$
                      8,719
                      
                      $
                      9,812
                      
                      
                      $
                      19,021
                      
                      
                      $
                      19,109




The
decrease in SG&A expenses for the three months ended June 30, 2009 from the
three months ended June 30, 2008 is primarily attributable to a decrease in
relocation expenses due to a reduction in new hires in 2009 along with overall
cost savings measures.  Additionally, the decrease is due to a
reversal of bad debt expense from the collections of previously written-off
receivables.  SG&A expenses remained flat for the six months ended
June 30, 2009 as compared with the same period in the prior year due primarily
to the incremental costs associated with investments in business development and
information technology personnel and resources that were made throughout 2008,
offset by cost savings measures.  SG&A expenses for the full year
2009 are expected to remain flat from amounts recognized in 2008 primarily due
to the increases in salaries and benefits discussed above, offset by cost
savings measures.




22




Interest
income, net




Three Months Ended June 30,
                  
                  
                  Six Months Ended June 30,(in thousands)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Interest
      expense
                  
                  $
                  (65
                  )
                  
                  $
                  (107
                  )
                  
                  $
                  (156
                  )
                  
                  $
                  (233
                  )Interest
      income
                  
                  
                  165
                  
                  
                  
                  363
                  
                  
                  
                  367
                  
                  
                  
                  1,011Interest
      income, net
                  
                  $
                  100
                  
                  
                  $
                  256
                  
                  
                  $
                  211
                  
                  
                  $
                  778




Net
interest income decreased to $0.1 million for the quarter ended June 30, 2009
from $0.3 million for the same period in 2008 and decreased to $0.2 million for
the six months ended June 30, 2009 from $0.8 million for the same period in 2008
due to overall decreased interest rates on the Company’s interest bearing assets
and liabilities.




Income
tax expense




Three Months Ended June 30,
                      
                      
                      Six Months Ended June 30,2009
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008(in thousands)$
                      (211
      )
                      
                      $
                      3,774
                      
                      
                      $
                      881
                      
                      
                      $
                      3,815




Income
tax expense decreased for the three and six months ended June 30, 2009, due
primarily to the decrease in pre-tax income as compared to amounts in
2008.  Additionally the decrease is due to a lower effective tax rate
which is partially due to the Credit for Increasing Research
Activities.


23


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 six months of
2009, we generated cash of $24.8 million from operating activities. The primary
sources of operating cash flows resulted primarily from the receipt of the $10.0
million sub-licensing fee from sanofi-aventis in conjunction with the amended
licensing agreement entered into in the fourth quarter of 2008 and decreases in
accounts receivable due to timing of cash collections.




During
the first six months of 2009, we used $7.0 million in investing activities,
resulting primarily from the use of $11.9 million for the acquisition of
property and equipment, offset in part by the net proceeds from the sale of
investment securities of $5.1 million.




Working
capital was $146.6 million at June 30, 2009 as compared to $140.7 million as of
December 31, 2008.  There have been no significant changes in
future maturities on our long-term debt since December 31,
2008.




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 the Company’s leverage ratio. As of June 30, 2009,
the balance outstanding on the line of credit was $9.7 million, bearing interest
at a rate of 2.19%.  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 and taxes to interest
ratio and a minimum current ratio. Other covenants include limits on asset
disposals and the payment of dividends.  As of June 30, 2009 and 2008,
we were in compliance with all of the 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, 2008.  There have been no material changes to
our contractual obligations since December 31, 2008.  As of June
30, 2009, 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. We expect that such 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 bad debts,
inventories, intangible assets, equity investments, unbilled revenue, income
taxes, pension and postretirement benefit plans, 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.




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, 2008.  There have been no material changes or
modifications to the policies since December 31, 2008.


24




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, 2008.




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 necessarily 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.


25


PART II
- OTHER INFORMATION




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, 2008, 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.




Item
4.  Submission of Matters to a Vote of Security Holders




The
Company held its Annual Meeting of Stockholders (the “Annual Meeting”) on June
3, 2009.  The following are the results of the votes taken on the
various matters presented to the Company’s stockholders at the
meeting.




At the
Annual Meeting, stockholders of the Company voted to elect Paul S. Anderson,
Ph.D. and Kevin O’Connor to serve as Class II Directors of the Company for
three-year terms.  Such terms will continue until the Annual Meeting
of Stockholders in 2012 and until their respective successors are duly elected
and qualified or until their earlier resignation or removal.  The
votes cast for, and withheld from, the election of the aforementioned Directors
are listed below:




For
                        
                        
                        WithheldPaul
      S. Anderson, Ph.D.
                        
                        
                        28,180,412
                        
                        
                        
                        300,831Kevin
      O’Connor
                        
                        
                        27,386,534
                        
                        
                        
                        1,094,709





The
following individuals continued as directors following the Annual
Meeting:  Thomas E. D’Ambra, Ph.D., Veronica G.H. Jordan, Ph.D.,
Arthur Roth, Una S. Ryan, Ph.D., O.B.E., Anthony P. Tartaglia, M.D.





The
proposal to ratify the appointment of KPMG LLP as the independent auditor was
passed with the following vote:




For
                      
                      Against
                      
                      
                      Abstain28,173,408
                      
                      
                      269,767
                      
                      
                      
                      38,068





Item
      6.
            Exhibits




(a)
            Exhibits.




31.1
            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.




26


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:
      August 6, 2009
                    By:
                    /s/
      Mark T. FrostMark
      T. FrostSenior
      Vice President, Administration, Chief Financial Officer
                      and
      Treasurer
                      (Authorized
      Officer and Principal Financial
Officer)




27