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 September 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   o




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




Yes    ̈
            
            No    ̈




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




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




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




Yes   o
            
            No   x




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




Class
            
            Outstanding at October
      31, 2009Common
      Stock, $.01 par value
            
            31,643,768,
      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
      1.
              
              Legal
      Proceedings
              
              26Item
      1A.
              
              Risk
      Factors
              
              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
                
                
                Nine Months Ended(Dollars in thousands, except for per share
      data)
                
                September 30,
                  2009
                
                
                September 30,
                  2008
                
                
                September 30,
                  2009
                
                
                September 30,
                  2008Contract
      revenue
                
                $
                39,737
                
                
                $
                54,142
                
                
                $
                121,763
                
                
                $
                145,841Recurring
      royalties
                
                
                7,929
                
                
                
                5,723
                
                
                
                27,239
                
                
                
                21,529Milestone
      revenue
                
                
                —
                
                
                
                1,500
                
                
                
                4,000
                
                
                
                5,500Total
      revenue
                
                
                47,666
                
                
                
                61,365
                
                
                
                153,002
                
                
                
                172,870Cost
      of contract revenue
                
                
                33,885
                
                
                
                38,759
                
                
                
                107,224
                
                
                
                108,518Technology
      incentive award
                
                
                790
                
                
                
                568
                
                
                
                2,815
                
                
                
                2,224Research
      and development
                
                
                4,075
                
                
                
                3,610
                
                
                
                12,061
                
                
                
                9,454Selling,
      general and administrative
                
                
                9,042
                
                
                
                9,681
                
                
                
                28,063
                
                
                
                28,790Restructuring
                
                
                (20
                )
                
                
                —
                
                
                
                (35
                )
                
                
                1,833Total
      operating expenses
                
                
                47,772
                
                
                
                52,618
                
                
                
                150,128
                
                
                
                150,819(Loss)
      income from operations
                
                
                (106
                )
                
                
                8,747
                
                
                
                2,874
                
                
                
                22,051Interest
      income, net
                
                
                93
                
                
                
                212
                
                
                
                304
                
                
                
                990Other
      income(expense), net
                
                
                98
                
                
                
                536
                
                
                
                (91
                )
                
                
                685Income
      before income taxes
                
                
                85
                
                
                
                9,495
                
                
                
                3,087
                
                
                
                23,726Income
      tax (benefit) expense
                
                
                (280
                )
                
                
                2,492
                
                
                
                601
                
                
                
                6,307Net
      income
                
                $
                365
                
                
                $
                7,003
                
                
                $
                2,486
                
                
                $
                17,419Basic
      earnings per share
                
                $
                0.01
                
                
                $
                0.22
                
                
                $
                0.08
                
                
                $
                0.55Diluted
      earnings per share
                
                $
                0.01
                
                
                $
                0.22
                
                
                $
                0.08
                
                
                $
                0.55




See
notes to unaudited condensed consolidated financial statements.




3


Albany
Molecular Research, Inc.


Condensed
Consolidated Balance Sheets


(unaudited)


(Dollars and
      shares in thousands, except for per share data)
                
                September 30,
                  2009
                
                
                December 31,
                  2008AssetsCurrent
      assets:Cash
      and cash equivalents
                
                $
                77,765
                
                
                $
                60,400Investment
      securities, available-for-sale
                
                
                25,383
                
                
                
                27,070Accounts
      receivable, net
                
                
                35,712
                
                
                
                38,529Royalty
      income receivable
                
                
                7,249
                
                
                
                6,670Inventory
                
                
                23,228
                
                
                
                28,670Unbilled
      services
                
                
                493
                
                
                
                159Prepaid
      expenses and other current assets
                
                
                8,990
                
                
                
                8,944Deferred
      income taxes
                
                
                4,355
                
                
                
                4,073Total
      current assets
                
                
                183,175
                
                
                
                174,515Property
      and equipment, net
                
                
                169,559
                
                
                
                167,502Goodwill
                
                
                40,527
                
                
                
                40,272Intangible
      assets and patents, net
                
                
                2,273
                
                
                
                2,018Equity
      investment in unconsolidated affiliates
                
                
                956
                
                
                
                956Other
      assets
                
                
                3,243
                
                
                
                5,421Total
      assets
                
                $
                399,733
                
                
                $
                390,684Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Accounts
      payable and accrued expenses
                
                $
                19,820
                
                
                $
                22,564Deferred
      revenue
                
                
                10,728
                
                
                
                7,300Accrued
      pension benefits
                
                
                145
                
                
                
                500Income
      taxes payable
                
                
                1,900
                
                
                
                3,198Current
      installments of long-term debt
                
                
                270
                
                
                
                260Total
      current liabilities
                
                
                32,863
                
                
                
                33,822Long-term
      liabilities:Long-term
      debt, excluding current installments
                
                
                13,212
                
                
                
                13,482Deferred
      licensing fees
                
                
                7,500
                
                
                
                —Deferred
      rent
                
                
                1,552
                
                
                
                1,156Deferred
      income taxes
                
                
                4,923
                
                
                
                9,142Pension
      and postretirement benefits
                
                
                6,550
                
                
                
                6,211Environmental
      liabilities
                
                
                191
                
                
                
                191Total
      liabilities
                
                
                66,791
                
                
                
                64,004Commitments
      and contingenciesStockholders’
      equity:Common
      stock, $0.01 par value, 100,000 shares authorized, 35,469 shares
      issued as of September 30, 2009, and 35,278 shares issued as of December
      31, 2008
                
                
                355
                
                
                
                353Additional
      paid-in capital
                
                
                201,091
                
                
                
                199,020Retained
      earnings
                
                
                193,302
                
                
                
                190,816Accumulated
      other comprehensive loss, net
                
                
                (4,918
                )
                
                
                (6,621
                )389,830
                
                
                
                383,568Less,
      treasury shares at cost, 3,825 shares as of September 30, 2009 and
      December 31, 2008
                
                
                (56,888
                )
                
                
                (56,888
                )Total
      stockholders’ equity
                
                
                332,942
                
                
                
                326,680Total
      liabilities and stockholders’ equity
                
                $
                399,733
                
                
                $
                390,684




See
notes to unaudited condensed consolidated financial statements.




4


Albany
Molecular Research, Inc.


Condensed
Consolidated Statements of Cash Flows


(unaudited)




Nine Months Ended(Dollars in thousands)
                  
                  September 30, 2009
                  
                  
                  September 30, 2008Operating
      activitiesNet
      income
                  
                  $
                  2,486
                  
                  
                  $
                  17,419Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                  
                  
                  12,670
                  
                  
                  
                  13,471Deferred
      income tax (benefit) expense
                  
                  
                  (4,523
                  )
                  
                  
                  1,428Loss
      (gain) on disposal of property, plant and equipment
                  
                  
                  279
                  
                  
                  
                  (7
                  )(Recovery)
      provision for bad debts
                  
                  
                  (243
                  )
                  
                  
                  140Stock-based
      compensation expense
                  
                  
                  1,559
                  
                  
                  
                  1,323Provision
      for obsolete inventories
                  
                  
                  4,278
                  
                  
                  
                  1,308Decrease
      (increase) in:Accounts
      receivable
                  
                  
                  3,060
                  
                  
                  
                  (13,857
                  )Royalty
      income receivable
                  
                  
                  (579
                  )
                  
                  
                  390Inventory,
      prepaid expenses and other assets
                  
                  
                  2,910
                  
                  
                  
                  (10,521
                  )(Decrease)
      increase in:Accounts
      payable and accrued expenses
                  
                  
                  (2,744
                  )
                  
                  
                  5,826Income
      tax payable
                  
                  
                  (1,298
                  )
                  
                  
                  2,139Deferred
      revenue and licensing fees
                  
                  
                  10,928
                  
                  
                  
                  (1,658
                  )Pension
      and postretirement benefits
                  
                  
                  21
                  
                  
                  
                  (449
                  )Other
      long-term liabilities
                  
                  
                  396
                  
                  
                  
                  —Net
      cash provided by operating activities
                  
                  
                  29,200
                  
                  
                  
                  16,952Investing
      activitiesPurchases
      of investment securities
                  
                  
                  (7,782
                  )
                  
                  
                  (25,757
                  )Proceeds
      from sales of investment securities
                  
                  
                  9,273
                  
                  
                  
                  56,499Purchase
      of businesses, net of cash acquired
                  
                  
                  (12
                  )
                  
                  
                  (1,729
                  )Purchases
      of property, plant and equipment
                  
                  
                  (13,573
                  )
                  
                  
                  (14,417
                  )Proceeds
      from disposal of property, plant and equipment
                  
                  
                  143
                  
                  
                  
                  71Payments
      for patent applications and other costs
                  
                  
                  (442
                  )
                  
                  
                  (353
                  )Net
      cash (used in) provided by investing activities
                  
                  
                  (12,393
                  )
                  
                  
                  14,314Financing
      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
                  
                  
                  509
                  
                  
                  
                  1,258Tax
      benefit of stock option exercises
                  
                  
                  5
                  
                  
                  
                  56Net
      cash provided by (used in) financing activities
                  
                  
                  254
                  
                  
                  
                  (15,141
                  )Effect
      of exchange rate changes on cash flows
                  
                  
                  304
                  
                  
                  
                  (1,617
                  )Increase
      in cash and cash equivalents
                  
                  
                  17,365
                  
                  
                  
                  14,508Cash
      and cash equivalents at beginning of period
                  
                  
                  60,400
                  
                  
                  
                  45,506Cash
      and cash equivalents at end of period
                  
                  $
                  77,765
                  
                  
                  $
                  60,014




See
notes to unaudited condensed consolidated financial statements.




5


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




Note
1 — Summary of Operations and Significant Accounting Policies




Nature
of Business and Operations




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




Basis
of Presentation




The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. In accordance with Rule 10-01, the unaudited condensed
consolidated financial statements do not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete
consolidated financial statements. The year-end condensed consolidated balance
sheet data was derived from audited financial statements but does not include
all disclosures required by U.S. generally accepted accounting principles. In
the opinion of management, all adjustments (consisting of normal recurring
accruals and adjustments) considered necessary for a fair statement of the
results for the interim period have been included. Operating results for the
three and nine months ended September 30, 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 FASB’s
Accounting Standards Codification (“ASC”) 605-25, “Revenue Arrangements with
Multiple Deliverables,” and ASC Topic 13 (formerly Staff Accounting Bulletin
(“SAB”) 104), “Revenue Recognition”. Allocation of revenue to individual
elements that qualify for separate accounting is based on the 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 ASC 360-10,“Accounting for the Impairment or Disposal of Long-Lived Assets”, the
Company assesses the impairment of long-lived assets whenever events or changes
in circumstances indicate that their carrying value may not be recoverable.
Factors the Company considers important 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 ASC 350, “Goodwill and Other Intangible Assets”, 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 in the
fourth 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 September 30, 2009 was $40,527 comprised of
$13,386 from the Company’s Discovery/Development/Small Scale Manufacturing
(“DDS”) operating segment and $27,141 from the Company’s Large-Scale
Manufacturing (“LSM”) segment.




Stock
Compensation




In
accordance with ASC 718 “Stock Compensation”, 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.




Subsequent
Events




The
Company has evaluated its subsequent events through the filing date and has
determined there were no material events since the balance sheet date of this
report.




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




8




Pro forma
financial information for the three and nine months ended September 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.




Note
3 — Earnings Per Share




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




Three Months Ended
                    September 30,
                  
                  
                  Nine Months Ended
                    September 30,(in thousands)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Weighted
      average common shares outstanding
                  
                  
                  31,007
                  
                  
                  
                  31,176
                  
                  
                  
                  30,981
                  
                  
                  
                  31,517Dilutive
      effect of stock options
                  
                  
                  —
                  
                  
                  
                  135
                  
                  
                  
                  —
                  
                  
                  
                  53Dilutive
      effect of restricted stock
                  
                  
                  182
                  
                  
                  
                  211
                  
                  
                  
                  152
                  
                  
                  
                  189Weighted
      average common shares outstanding
                  
                  
                  31,189
                  
                  
                  
                  31,522
                  
                  
                  
                  31,133
                  
                  
                  
                  31,759




The
Company has excluded certain outstanding stock options and non-vested restricted
shares from the calculation of diluted earnings per share for the three and nine
months ended September 30, 2009 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 1,949 and 972 for the
three months ended September 30, 2009 and 2008, respectively and 1,951 and 1,593
for the nine months ended September 30, 2009 and 2008,
respectively.  These amounts are not included in the calculation of
weighted average common shares outstanding.




ASC 260,
“Earnings Per Share”,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.




Note
4 — Inventory




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




September 30,
                    2009
                  
                  
                  December 31,
                    2008Raw
      materials
                  
                  $
                  7,983
                  
                  
                  $
                  8,996Work
      in process
                  
                  
                  3,228
                  
                  
                  
                  3,396Finished
      goods
                  
                  
                  12,017
                  
                  
                  
                  16,278Total
                  
                  $
                  23,228
                  
                  
                  $
                  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
August 2009, the Company closed and consolidated its Balaton, Hungary facility
into the new facility in Budapest, Hungary as part of the Company’s goal to
streamline operations and to consolidate locations, equipment and operating
costs.  As a result 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 nine months
ended September 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 September 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
                  September 30,
                  2009Termination
      benefits and personnel realignment
                
                $
                325
                
                
                $
                134
                
                
                $
                (62
                )
                
                
                (305
                )
                
                $
                (10
                )
                
                $
                82Losses
      on grant contracts
                
                
                266
                
                
                
                —
                
                
                
                (15
                )
                
                
                —
                
                
                
                2
                
                
                
                253Lease
      abandonment charges
                
                
                262
                
                
                
                182
                
                
                
                (141
                )
                
                
                —
                
                
                
                5
                
                
                
                308Administrative
      costs associated with restructuring
                
                
                40
                
                
                
                11
                
                
                
                —
                
                
                
                (37
                )
                
                
                (2
                )
                
                
                12Total
                
                $
                893
                
                
                $
                327
                
                
                $
                (218
                )
                
                
                (342
                )
                
                $
                (5
                )
                
                $
                655





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 $278, 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 September 30, 2009 and December 31, 2008 are as follows:




DDS
                  
                  
                  LSM
                  
                  
                  TotalSeptember
      30, 2009
                  
                  $
                  13,386
                  
                  
                  $
                  27,141
                  
                  
                  $
                  40,527December 31,
      2008
                  
                  $
                  13,208
                  
                  
                  $
                  27,064
                  
                  
                  $
                  40,272




The
increase in goodwill within the DDS segment from December 31, 2008 to September
30, 2009 is due to the impact of foreign currency translation.  The
slight increase in goodwill within the LSM segment from December 31, 2008 to
September 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
                          PeriodSeptember 30, 2009Patents
      and Licensing Rights
                        
                        $
                        3,610
                        
                        
                        $
                        (1,337
                        )
                        
                        $
                        2,273
                        
                        2-16
      yearsDecember 31, 2008Patents
      and Licensing Rights
                        
                        $
                        3,181
                        
                        
                        $
                        (1,163
                        )
                        
                        $
                        2,018
                        
                        2-16
      years




Amortization
expense related to intangible assets was $70 and $75 for the three months ended
September 30, 2009 and 2008, respectively and $187 and $576 for the nine months
ended September 30, 2009 and 2008, respectively.


10




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




Year  ending December 31,2009
      (remaining)
                  
                  $
                  752010
                  
                  
                  2242011
                  
                  
                  2032012
                  
                  
                  2032013
                  
                  
                  192Thereafter
                  
                  
                  1,376




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
                    September 30,
                  
                  
                  Three Months
                    Ended
                    September 30,
                  
                  
                  Nine Months
                    Ended
                    September 30,
                  
                  
                  Nine Months
                    Ended
                    September 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Service
      cost
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  19
                  
                  
                  $
                  17
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  57
                  
                  
                  $
                  41Interest
      cost
                  
                  
                  339
                  
                  
                  
                  332
                  
                  
                  
                  16
                  
                  
                  
                  18
                  
                  
                  
                  965
                  
                  
                  
                  942
                  
                  
                  
                  47
                  
                  
                  
                  38Expected
      return on plan assets
                  
                  
                  (361
                  )
                  
                  
                  (397
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (1,085
                  )
                  
                  
                  (1,169
                  )
                  
                  
                  —
                  
                  
                  
                  —Amortization
      of prior service cost
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Recognized
      net loss
                  
                  
                  18
                  
                  
                  
                  —
                  
                  
                  
                  6
                  
                  
                  
                  4
                  
                  
                  
                  18
                  
                  
                  
                  —
                  
                  
                  
                  19
                  
                  
                  
                  8Net
      periodic benefit (income) cost
                  
                  $
                  (4
                  )
                  
                  $
                  (65
                  )
                  
                  $
                  41
                  
                  
                  $
                  39
                  
                  
                  $
                  (102
                  )
                  
                  $
                  (227
                  )
                  
                  $
                  123
                  
                  
                  $
                  87Recognized
      in Accumulated Other Comprehensive Income (“AOCI”):Net
      actuarial loss
                  
                  
                  18
                  
                  
                  
                  —
                  
                  
                  
                  6
                  
                  
                  
                  4
                  
                  
                  
                  18
                  
                  
                  
                  —
                  
                  
                  
                  19
                  
                  
                  
                  8Total
      recognized in AOCI, pre-tax
                  
                  $
                  18
                  
                  
                  $
                  —
                  
                  
                  $
                  6
                  
                  
                  $
                  4
                  
                  
                  $
                  18
                  
                  
                  $
                  —
                  
                  
                  $
                  19
                  
                  
                  $
                  8




Employer
Contributions




The
Company does not currently anticipate making any contributions during
2009.




Note
8 — Share-Based Compensation




During
the three and nine months ended September 30, 2009, the Company recognized total
share based compensation cost of $533 and $1,559, respectively as compared to
total share based compensation cost for the three and nine months ended
September 30, 2008 of $480 and $1,321 respectively.




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




Restricted
Stock




A summary
of unvested restricted stock activity as of September 30, 2009 and changes
during the nine 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
                  
                  
                  (104
                  )
                  
                  $
                  9.79Forfeited
                  
                  
                  (38
                  )
                  
                  $
                  10.33Outstanding,
      September 30, 2009
                  
                  
                  531
                  
                  
                  $
                  10.11




11




The
weighted average fair value of restricted shares per share granted during the
nine months ended September 30, 2009 and 2008 was $8.42 and $11.47,
respectively.  As of September 30, 2009, there was $3,706 of total
unrecognized compensation cost related to non-vested restricted shares. That
cost is expected to be recognized over a weighted-average period of 3.6
years.




Stock
Options




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




For the Nine Months EndedSeptember 30, 2009
                  
                  
                  September 30, 2008Expected
      life in years
                  
                  
                  5
                  
                  
                  
                  5Risk
      free interest rate
                  
                  
                  1.98
                  %
                  
                  
                  2.90
                  %Volatility
                  
                  
                  48
                  %
                  
                  
                  41
                  %Dividend
      yield
                  
                  
                  —
                  
                  
                  
                  —




A summary
of stock option activity under the Company’s Stock Option and Incentive Plans as
of September 30, 2009 and changes during the nine month period then ended is
presented below:




Number of
                  Shares
                
                
                Weighted
                  Exercise
                  Price Per Share
                
                
                Weighted Average
                  Remaining
                  Contractual Term
                  (Years)
                
                
                Aggregate
                  Intrinsic
                  ValueOutstanding,
      December 31, 2008
                
                
                1,868
                
                
                $
                20.34Granted
                
                
                129
                
                
                
                8.54Exercised
                
                
                (4
                )
                
                
                10.00Forfeited
                
                
                (43
                )
                
                
                22.13Expired
                
                
                (45
                )
                
                
                11.46Outstanding,
      September 30, 2009
                
                
                1,905
                
                
                $
                19.72
                
                
                
                4.1
                
                
                $
                24Options
      exercisable, September 30, 2009
                
                
                1,512
                
                
                $
                22.03
                
                
                
                2.9
                
                
                $
                —




The
weighted average fair value of stock options granted for the nine months ended
September 30, 2009 and 2008 was $3.74 and $4.85,
respectively.   As of September 30, 2009, there was $1,229 of
total unrecognized compensation cost related to non-vested stock options. That
cost is expected to be recognized over a weighted-average period of 2.4
years.




Employee
Stock Purchase Plan




During
the nine months ended September 30, 2009 and 2008, 49 and 29 shares,
respectively, were issued under the Company’s 1998 Employee Stock Purchase
Plan.




During
the nine months ended September 30, 2009 and 2008, cash received from stock
option exercises and employee stock purchases was $509 and $1,258,
respectively.  The actual tax benefit realized for the tax deductions
from stock option exercises and plan purchases was $5 and $56 during the nine
months ended September 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.  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.




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


12




Contract
                              Revenue
                            
                            
                            Milestone &
                              Recurring
                              Royalty
                              Revenue
                            
                            
                            Operating
                              income
                            
                            
                            Depreciation
                              and
                              AmortizationFor the three months ended September 30,
      2009DDS
                            
                            $
                            21,523
                            
                            
                            $
                            7,929
                            
                            
                            $
                            9,895
                            
                            
                            $
                            2,494LSM
                            
                            
                            18,214
                            
                            
                            
                            —
                            
                            
                            
                            3,116
                            
                            
                            
                            1,698Corporate
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (13,117
                            )
                            
                            
                            —Total
                            
                            $
                            39,737
                            
                            
                            $
                            7,929
                            
                            
                            $
                            (106
                            )
                            
                            $
                            4,192For the three months ended September 30,
      2008DDS
                            
                            $
                            30,985
                            
                            
                            $
                            7,223
                            
                            
                            $
                            18,082
                            
                            
                            $
                            2,673LSM
                            
                            
                            23,157
                            
                            
                            
                            —
                            
                            
                            
                            3,956
                            
                            
                            
                            1,675Corporate
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (13,291
                            )
                            
                            
                            —Total
                            
                            $
                            54,142
                            
                            
                            $
                            7,223
                            
                            
                            $
                            8,747
                            
                            
                            $
                            4,348For the nine months ended September 30,
      2009DDS
                            
                            $
                            63,662
                            
                            
                            $
                            31,239
                            
                            
                            $
                            37,938
                            
                            
                            $
                            7,560LSM
                            
                            
                            58,101
                            
                            
                            
                            —
                            
                            
                            
                            5,060
                            
                            
                            
                            5,110Corporate
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (40,124
                            )
                            
                            
                            —Total
                            
                            $
                            121,763
                            
                            
                            $
                            31,239
                            
                            
                            $
                            2,874
                            
                            
                            $
                            12,670For the nine months ended September 30,
      2008DDS
                            
                            $
                            87,642
                            
                            
                            $
                            27,029
                            
                            
                            $
                            53,708
                            
                            
                            $
                            8,247LSM
                            
                            
                            58,199
                            
                            
                            
                            —
                            
                            
                            
                            6,587
                            
                            
                            
                            5,224Corporate
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (38,244
                            )
                            
                            
                            —Total
                            
                            $
                            145,841
                            
                            
                            $
                            27,029
                            
                            
                            $
                            22,051
                            
                            
                            $
                            13,471




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




As of September 30, 2009DDS
                      
                      
                      LSM
                      
                      
                      TotalTotal
      assets
                      
                      $
                      240,243
                      
                      
                      $
                      159,490
                      
                      
                      $
                      399,733Goodwill
      included in total assets
                      
                      
                      13,386
                      
                      
                      
                      27,141
                      
                      
                      
                      40,527




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 9% of DDS’s total contract revenue for the three months ended
September 30, 2009, and 11%, 8% and 8% of DDS’s total contract revenue for the
three months ended September 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 nine months ended September 30, 2009 and 11%, 10%
and 7% for the nine months ended September 30, 2008.  Total contract
revenue from LSM’s largest customer, GE Healthcare (“GE”), represented 28% and
42% of LSM’s total contract revenue for the three months ended September 30,
2009 and 2008, respectively.  Total contract revenue from GE
represented 28% and 44% of LSM’s total contract revenue for the nine months
ended September 30, 2009 and 2008, respectively. GE accounted for approximately
14% and 18% of the Company’s total contract revenue for the nine months ended
September 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 its 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
segment’s largest customer, a large pharmaceutical company, represented
approximately 11% and 7% of the Company’s total contract revenue for the nine
months ended September 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 nine months ended September
30, 2009 and 2008 was recognized from customers in the following geographic
regions:




Three Months Ended
                    September 30,
                  
                  
                  Nine Months Ended
                    September 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008United
      States
                  
                  
                  56
                  %
                  
                  
                  68
                  %
                  
                  
                  60
                  %
                  
                  
                  68
                  %Europe
                  
                  
                  32
                  
                  
                  
                  23
                  
                  
                  
                  23
                  
                  
                  
                  22Asia
                  
                  
                  11
                  
                  
                  
                  5
                  
                  
                  
                  15
                  
                  
                  
                  6Other
                  
                  
                  1
                  
                  
                  
                  4
                  
                  
                  
                  2
                  
                  
                  
                  4Total
                  
                  
                  100
                  %
                  
                  
                  100
                  %
                  
                  
                  100
                  %
                  
                  
                  100
                  %




Note
11 — Comprehensive Income




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




Three Months Ended
                    September 30,
                  
                  
                  Nine Months Ended
                    September 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Net
      income
                  
                  $
                  365
                  
                  
                  $
                  7,003
                  
                  
                  $
                  2,486
                  
                  
                  $
                  17,419Other
      comprehensive loss:Change
      in unrealized gain(loss) on available-for-sale securities, net of
      taxes
                  
                  
                  4
                  
                  
                  
                  (35
                  )
                  
                  
                  4
                  
                  
                  
                  (17
                  )Change
      in unrealized loss on interest rate swap, net of taxes
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (5
                  )Foreign
      currency translation gain (loss)
                  
                  
                  1,076
                  
                  
                  
                  (4,784
                  )
                  
                  
                  1,677
                  
                  
                  
                  (4,809
                  )Net
      actuarial loss of pension and postretirement benefits, net of
      tax
                  
                  
                  9
                  
                  
                  
                  4
                  
                  
                  
                  22
                  
                  
                  
                  8Total
      comprehensive income
                  
                  $
                  1,454
                  
                  
                  $
                  2,188
                  
                  
                  $
                  4,189
                  
                  
                  $
                  12,596




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




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




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.  As provided in the settlement, Teva Pharmaceuticals
launched a generic version of Allegra D-12 in November 2009.  The
Company will receive quarterly royalties through July 2010 for the branded
Allegra D-12 equal to the royalties paid for the quarter ended June 30,
2009.  Thereafter, the royalty rate will revert to the rate in effect
prior to the signing of the sub-license amendment and the Company will also
receive a royalty on Teva’s sales of the generic D-12.  The Company
and Aventis Pharmaceuticals have also dismissed their claims against Ranbaxy
Laboratories Ltd./Ranbaxy Pharmaceuticals Inc. 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.


15


Note
13 — Income Taxes




ASC
740-10-25 and ASC 740-10-30, provides recognition criteria and a related
measurement model for tax positions taken by companies. In accordance with these
subtopics, 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.





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
                  
                  
                  (778
                  )
                  
                  
                  (64
                  )
                  
                  
                  (842
                  )Increases
      in interest related to prior year tax position
                  
                  
                  —
                  
                  
                  
                  22
                  
                  
                  
                  22Increases
      related to current year tax position
                  
                  
                  142
                  
                  
                  
                  —
                  
                  
                  
                  142Balance
      at September 30, 2009
                  
                  $
                  590
                  
                  
                  $
                  12
                  
                  
                  $
                  602





Income
tax expense for the three and nine months ended September 30, 2009 includes a
reduction for uncertain tax positions in the amount of $842 due to various
reasons, including the lapse of statue of limitations, the effective settlement
with a tax authority and a change in judgment relating to prior year
positions.





Additions
to, and the remainder of, the reserve for the quarter ended September 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.  As of September 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
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 2005.  Tax examinations commenced in
2009.  Management of the Company believes that the reserves associated
with 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




ASC 820,
“Fair Value Measurements,” 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
September 30, 2009:





Fair Value Measurements as of September 30, 2009Marketable Securities
                  
                  Total
                  
                  
                  Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3Obligations
      of states and political subdivisions
                  
                  $
                  23,083
                  
                  
                  $
                  —
                  
                  
                  $
                  23,083
                  
                  
                  $
                  —Auction
      rate securities
                  
                  
                  2,300
                  
                  
                  
                  —
                  
                  
                  
                  2,300
                  
                  
                  
                  —Total
                  
                  $
                  25,383
                  
                  
                  $
                  —
                  
                  
                  $
                  25,383
                  
                  
                  $
                  —




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
  In
October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue
Arrangements”, which addresses how revenues should be allocated among all
products and services included in our sales arrangements. It establishes a
selling price hierarchy for determining the selling price of each product or
service, with vendor-specific objective evidence (VSOE) at the highest level,
third-party evidence of VSOE at the intermediate level, and a best estimate at
the lowest level. It replaces “fair value” with “selling price” in revenue
allocation guidance. It also significantly expands the disclosure requirements
for such arrangements. ASU 2009-13 will be effective prospectively for sales
entered into or materially modified in fiscal years beginning on or after June
15, 2010.  The FASB permits early adoption of ASU 2009-13, applied
retrospectively, to the beginning of the year of adoption.  The
Company is currently evaluating the impact on its financial
statements.
 In
September 2009, the Company adopted 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.  The Company began to use the new guidelines and
numbering system prescribed by the Codification when referring to GAAP in this
filing.  As the Codification was not intended to change or alter
existing GAAP, it did not have any impact on the Company’s consolidated
financial statements.
 
 In June
2009, the FASB issued ASC 810, “Amendments to FASB Interpretation
No. 46R.” This 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.  The Company is currently reviewing
the impact of this statement on its financial statements.
 
 In
December 2008, the FASB issued ASC 715, “Employers’ Disclosures about
Postretirement Benefit Plan Assets”,which is intended to provide
guidance on an employer’s disclosures about plan assets of a defined benefit
pension or other postretirement plan.  Additionally, it requires an
employer to disclose more information about how investment allocation decisions
are made, more information about major categories of plan assets, including
concentrations of risk and fair-value measurements and the fair-value techniques
and inputs use to measure plan assets.  These disclosure requirements
are effective for years ending after December 15, 2009.  The Company
is currently evaluating the impact on its 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”), 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), 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 us 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 September 30, 2009 was $47.7 million, as compared
to $61.4 million for the quarter ended September 30, 2008.
  Contract
services revenue for the third quarter of 2009 was $39.7 million, compared to
$54.1 million for the third 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 third quarter of 2009 than in the third quarter of
2008.  Consolidated gross margin was 14.7% for the quarter ended
September 30, 2009, compared to 28.4% for the quarter ended September 30,
2008.
  During
the nine months ended September 30, 2009, cash provided by operations was $29.2
million.  The increase of $12.2 million in cash flow from operations
from the nine months ended September 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 $13.6
million in capital expenditures, primarily related to expansion in Bothell,
Washington and Budapest, Hungary.  As of September 30, 2009, we had
$103.1 million in cash, cash equivalents and investments and $13.5 million
in bank and other related debt.
  Results
of Operations – Three and Nine months ended September 30, 2009 Compared to Three
and Nine Months Ended September 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
                          September 30,
                        
                        
                        Nine Months Ended
                          September 30,(in thousands)
                        
                        2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008DDS
                        
                        $
                        21,523
                        
                        
                        $
                        30,985
                        
                        
                        $
                        63,662
                        
                        
                        $
                        87,642LSM
                        
                        
                        18,214
                        
                        
                        
                        23,157
                        
                        
                        
                        58,101
                        
                        
                        
                        58,199Total
                        
                        $
                        39,737
                        
                        
                        $
                        54,142
                        
                        
                        $
                        121,763
                        
                        
                        $
                        145,841
 
 DDS
contract revenues for the quarter ended September 30, 2009, decreased $9.5
million to $21.5 million as compared to $31.0 million for the same quarter in
the prior year.  DDS contract revenues for the nine months ended
September 30, 3009 decreased $24.0 million to $63.6 million as compared to $87.6
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 $4.9 million for the quarter ended September 30, 2009
and a decrease of $14.3 million for the nine months ended September 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 $4.6 million for the quarter ended
September 30, 2009 and decreased $9.7 million for the nine months ended
September 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 fourth quarter of 2009 to remain consistent with amounts
recognized in the third quarter of 2009.
 
 LSM
revenue for the quarter ended September 30, 2009 decreased $4.9 million from the
same period in 2008 primarily due to a decrease of $4.3 million caused by lower
demand from GE Healthcare due to its 2009 inventory reduction efforts and a
decrease of $3.0 million primarily driven by the reduced demand for the
production of clinical supply material.  These decreases were offset,
in part by an increase in commercial sales of $3.3 million resulting from an
increase in demand for existing commercial products.   LSM
revenue for the nine months ended September 30, 2009 decreased slightly by $0.1
million from the same period in 2008.  This decrease was due primarily
to decreases in demand from GE Healthcare and timing of customer requirements of
$9.7 million, as well as a decrease of $2.7 million for the reduced demand of
clinical supply material, offset in part by an increase in commercial sales of
$14.4 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.  We expect LSM contract revenue for the full  year of
2009 to decrease from amounts recognized in 2008, primarily due to lower demand
from GE Healthcare due to 2009 inventory reduction efforts and additionally as a
result of 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 September 30,
                    
                    
                    Nine Months Ended September 30,2009
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008(in thousands)$               7,929
                    
                    $
                    5,723
                    
                    
                    $
                    27,239
                    
                    
                    $
                    21,529
  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 nine months ended September 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.  As provided in
the settlement, Teva Pharmaceuticals launched a generic version of Allegra D-12
in November 2009.  We will receive quarterly royalties through July
2010 for the branded Allegra D-12 equal to the royalties paid for the quarter
ended June 30, 2009.  Thereafter, the royalty rate will revert to the
rate in effect prior to the signing of the sub-license amendment and we will
also receive a royalty on Teva’s sales of the generic of Allegra
D-12.
 
 We
continue to develop our business in an effort to supplement the revenues,
earnings and operating cash flows that have historically been provided by
Allegra/Telfast royalties.  We forcefully and vigorously defend our
intellectual property related to Allegra, and we continue to pursue our
intellectual property rights as patent infringement litigation
progresses.
  Milestone
revenue
 
 Milestone
revenue is earned for achieving certain milestones included in licensing and
research agreements with certain customers.  Milestone revenues were
as follows:
 
 Three Months Ended September 30,
                    
                    
                    Nine Months Ended September 30,2009
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008(in thousands)$                    —
                    
                    $
                    1,500
                    
                    
                    $
                    4,000
                    
                    
                    $
                    5,500
 
 During
the nine months ended September 30, 2009, milestone revenue of $4.0 million was
recognized as a result of the submission of a Clinical Trial Application in
conjunction with the our licensing and research agreement with
BMS.  During the three months ended September 30, 2008, milestone
revenue of $1.5 million was recognized for advancing a second compound into
pre-clinical development in conjunction with our licensing and research
agreement with BMS.  An additional $4.0 million was recognized during
the nine months ended September 30, 2008, 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.
 
 In
November 2009, we announced that milestone revenue of $0.8 million will be
recognized in the fourth quarter of 2009.  This milestone revenue will
be received due to advancing a third compound into preclinical development under
our licensing agreement with BMS.
  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
                      September 30,
                    
                    
                    Nine Months Ended
                      September 30,(in thousands)
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008DDS
                    
                    $
                    18,787
                    
                    
                    $
                    19,558
                    
                    
                    $
                    54,183
                    
                    
                    $
                    56,905LSM
                    
                    
                    15,098
                    
                    
                    
                    19,201
                    
                    
                    
                    53,041
                    
                    
                    
                    51,613Total
                    
                    $
                    33,885
                    
                    
                    $
                    38,759
                    
                    
                    $
                    107,224
                    
                    
                    $
                    108,518DDS
      Gross Margin
                    
                    
                    12.7
                    %
                    
                    
                    36.9
                    %
                    
                    
                    14.9
                    %
                    
                    
                    35.1
                    %LSM
      Gross Margin
                    
                    
                    17.1
                    %
                    
                    
                    17.1
                    %
                    
                    
                    8.7
                    %
                    
                    
                    11.3
                    %Total
      Gross Margin
                    
                    
                    14.7
                    %
                    
                    
                    28.4
                    %
                    
                    
                    11.9
                    %
                    
                    
                    25.6
                    %
  DDS had a
contract revenue gross margin of 12.7% for the three months ended September 30,
2009 compared to contract revenue gross margin of 36.9% for the same period in
2008 and gross margin of 14.9% for the nine months ended September 30, 2009 as
compared to 35.1% 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 fourth quarter of 2009 to remain flat from the
percentage realized in the third quarter of 2009.
  LSM’s
contract revenue gross margin remained flat at 17.1% for the three months ended
September 30, 2009 compared to the same period in 2008 and decreased to 8.7% for
the nine months ended September 30, 2009 as compared to 11.3% for the same
period in 2008.  This decrease in gross margin is primarily due to
non-cash inventory write-downs primarily related to slower moving quantities of
a legacy generic product of $1.9 million and higher capacity charges due to
lower utilization.  We expect gross margins in the LSM segment for the
fourth quarter of 2009 to decrease to a negative margin due to decreased
utilization and increased capacity charges.
 
 Technology
incentive award
  We
maintain a Technology Development Incentive Plan, the purpose of which is to
stimulate and encourage novel innovative technology developments by our
employees.  This plan allows eligible participants to share in a
percentage of the net revenue earned by us relating to patented technology with
respect to which the eligible participant is named as an inventor or made a
significant intellectual contribution. To date, the royalties from Allegra are
the main driver of the awards.  Accordingly, as the creator of the
technology, the award is currently payable primarily to Dr. Thomas D’Ambra,
our Chief Executive Officer and President of the Company. The incentive awards
were as follows:
  Three Months Ended September 30,
                    
                    
                    Nine Months Ended September 30,2009
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008(in thousands)$           
             790
                    
                    $
                    568
                    
                    
                    $
                    2,815
                    
                    
                    $
                    2,224
  The
increase in technology incentive award expense for the three and nine months
ended September 30, 2009 from the same periods ended September 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 September 30,
                    
                    
                    Nine Months Ended September 30,2009
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008(in thousands)$           
           4,075
                    
                    $
                    3,610
                    
                    
                    $
                    12,061
                    
                    
                    $
                    9,454
  R&D
expense increased to $4.1 million for the quarter ended September 30, 2009 from
$3.6 million in the quarter ended September 30, 2008.  This increase
is primarily due to manufacturing clinical quantities of an API for an internal
R&D project and an increase in process R&D related to both improving the
manufacturing process for our generic Active Pharmaceutical Ingredient (“API”)
products as well as the manufacturing process for our oncology
compound.  R&D expense increased $2.6 million to $12.1 million for
the nine months ended September 30, 2009 as compared to the same period in
2008.  This increase is 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 along with
improving the manufacturing process for our generic API products.  We
currently expect research and development expenses for the fourth quarter of
2009 to decrease from amounts recognized in the third quarter of 2009, as well
as to decrease from those amounts recognized in the fourth quarter of
2008.  However, we expect the full year of 2009 R&D expense to
remain above amounts recognized in 2008.  This increase is related to
the above mentioned increase in process R&D used for both improving the
manufacturing process for our generic API products as well as the manufacturing
process for our Phase I clinical trial oncology compound, along with increased
costs associated with the selection and advancement of our MCH-1 pre-clinical
candidate from our existing program.
  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 September 30,
                    
                    
                    Nine Months Ended September 30,2009
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008(in thousands)$        
              9,042
                    
                    $
                    9,681
                    
                    
                    $
                    28,063
                    
                    
                    $
                    28,790
  22
  SG&A
expenses for the three months ended September 30, 2009 decreased $0.6 million
from the three months ended September 30, 2008 and decreased $0.7 million for
the nine months ended September 30, 2009 from the same period in
2008.  These decreases are primarily attributable to a decrease in
employee relocation and recruitment expenses due to a reduction in new hires in
2009, along with overall cost savings measures, including cost savings from a
reorganization of our large-scale India operations.  Additionally,
these decreases are due to a reversal of bad debt expense from the collections
of previously written-off receivables, offset in part by incremental costs
associated with investments in business development that were made throughout
2008.  SG&A expenses for the full year 2009 are expected to
decrease from amounts recognized in 2008 primarily due to cost savings
measures.
 
 Interest
income, net
  Three Months Ended
                            September 30,
                          
                          
                          Nine Months Ended
                            September 30,(in thousands)
                          
                          2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008Interest
      expense
                          
                          $
                          (63
                          )
                          
                          $
                          (139
                          )
                          
                          $
                          (219
                          )
                          
                          $
                          (372
                          )Interest
      income
                          
                          
                          156
                          
                          
                          
                          351
                          
                          
                          
                          523
                          
                          
                          
                          1,362Interest
      income, net
                          
                          $
                          93
                          
                          
                          $
                          212
                          
                          
                          $
                          304
                          
                          
                          $
                          990
  Net
interest income decreased $0.1 for the quarter ended September 30, 2009 from the
same period in 2008 and decreased $0.7 million for the nine months ended
September 30, 2009 from $1.0 million for the same period in 2008 due to overall
decreased interest rates on our interest bearing assets and
liabilities.
  Income
tax (benefit) expense
  Three Months Ended September 30,
                    
                    
                    Nine Months Ended September 30,2009
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008(in thousands)$          
            (280 )
                    
                    $
                    2,492
                    
                    
                    $
                    601
                    
                    
                    $
                    6,307
  Income
tax expense decreased for the three and nine months ended September 30, 2009,
due primarily to the decrease in pre-tax income as compared to amounts in 2008,
as well as the release of previously established reserves for uncertain tax
positions.  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 nine months
of 2009, we generated cash of $29.2 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 nine months of 2009, we used $12.4 million in investing activities,
resulting primarily from the use of $13.6 million for the acquisition of
property and equipment, offset in part by the net proceeds from the sale of
investment securities of $1.5 million.
  Working
capital was $150.3 million at September 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 our Company’s leverage ratio. As of September 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 September 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
September 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 1.
Legal Proceedings
  In
addition to existing lawsuits we have previously filed related to Allegra patent
infringement, on September 9, 2009, we filed patent infringement lawsuits in the
U.S. District Court in New Jersey against Dr. Reddy’s Laboratories, Ltd, Dr.
Reddy’s Laboratories, Inc., and Sandoz, Inc. asserting infringement of U.S.
Patent No. 7,390,906, seeking statutory damages.  Please refer to Part
1 – Note 12 for further details and history on this litigation.
  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
      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:
      November 9, 2009
                        By:
                        /s/ Mark T. FrostMark
      T. FrostSenior
      Vice President, Administration, Chief Financial Officer
                          and
      Treasurer
                          (Authorized
      Officer and Principal Financial
Officer)
  27