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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
OR
|_| 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 0-15313
SAVIENT PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3033811
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE TOWER CENTER, EAST BRUNSWICK, NEW JERSEY 08816
(Address of principal executive offices)
(732) 418-9300
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES |X| NO |_|
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
The number of shares outstanding of the registrant's Common Stock, par value
$.01 per share, as of May 6, 2005 was 60,777,197.
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SAVIENT PHARMACEUTICALS, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2005
TABLE OF CONTENTS
PAGE
----
PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements .................................................. 1
Consolidated Balance Sheets at March 31, 2005 and December 31, 2004 ................ 1
Consolidated Statements of Operations for the three months ended March 31, 2005
and 2004.......................................................................... 2
Consolidated Statement of Changes in Stockholders' Equity for the three months
ended March 31, 2005 3
Consolidated Statements of Cash Flows for the three months ended March 31, 2005
and 2004.......................................................................... 4
Notes to Consolidated Financial Statements ......................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 14
Risk Factors That May Affect Results ............................................... 23
Item 3. Quantitative and Qualitative Disclosures about Market Risk ......................... 38
Item 4. Controls and Procedures ............................................................ 38
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings .................................................................. 40
Item 6. Exhibits ........................................................................... 40
Signatures ......................................................................... 41
Exhibit Index ...................................................................... 42
i
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SAVIENT PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2005 DECEMBER 31, 2004
-------------- -----------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents ............... $ 24,793 $ 22,447
Short-term investments .................. 1,875 2,835
Accounts receivable, net ................ 1,185 6,118
Inventories, net ........................ 12,870 15,317
Prepaid expenses and other current
assets.................................. 2,492 3,444
Assets held for sale .................... 75,616 79,268
-------- --------
Total current assets................... 118,831 129,429
Property and equipment, net ............. 6,851 6,985
Goodwill ................................ 40,121 40,121
Other intangibles, net .................. 70,675 71,688
Other assets (including restricted cash
of $1,280 at March 31, 2005 and
December 31, 2004)..................... 1,365 2,946
-------- --------
Total assets........................... $237,843 $251,169
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable (including income tax
payable of $518 at March 31, 2005 and
$1,599 at December 31, 2004)........... $ 9,749 $ 9,972
Current portion of long-term debt ....... 4,144 5,903
Current portion of deferred revenues .... 1,068 1,089
Other current liabilities ............... 12,732 18,938
Liabilities held for sale ............... 11,954 12,742
-------- --------
Total current liabilities.............. 39,647 48,644
Deferred revenues ........................ 9,917 10,180
Other long-term liabilities .............. 37 --
Negative goodwill ........................ 16,028 16,028
Deferred income taxes .................... 21,331 21,649
-------- --------
Total liabilities...................... $ 86,960 $ 96,501
-------- --------
Commitments and contingent liabilities
(Note 7)
Stockholders' Equity:
Preferred stock - $.01 par value; 4,000
shares authorized; no shares issued..... -- --
Common stock - $.01 par value; 150,000
shares authorized; issued: 60,609 at
March 31, 2005 and 60,457 at
December 31, 2004....................... 606 606
Additional paid-in capital .............. 219,030 218,699
Accumulated deficit ..................... (71,068) (67,203)
Accumulated other comprehensive income .. 2,315 2,566
-------- --------
Total stockholders' equity............. 150,883 154,668
-------- --------
Total liabilities and stockholders'
equity............................... $237,843 $251,169
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
1
SAVIENT PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS
ENDED MARCH 31,
2005 2004
------- -------
Revenues:
Product sales, net ....................................... $22,615 $32,201
Contract fees ............................................ 291 230
Royalties ................................................ -- 932
Other revenues ........................................... 75 40
------- -------
Total revenues.......................................... 22,981 33,403
------- -------
Expenses:
Cost of product sales .................................... 8,721 8,651
Research and development ................................. 6,282 8,664
Marketing and sales ...................................... 5,154 6,666
General and administrative ............................... 6,177 5,372
Amortization of intangibles associated with acquisition .. 1,013 1,013
Commissions and royalties ................................ 1,224 1,403
------- -------
Total expenses.......................................... 28,571 31,769
------- -------
Operating (loss) income ................................... (5,590) 1,634
Other income, net ......................................... 2,057 73
------- -------
(Loss) income before income tax ........................... (3,533) 1,707
Income taxes .............................................. 332 529
------- -------
Net (loss) income ......................................... $(3,865) $ 1,178
======= =======
Basic (loss) earnings per share:
------- -------
Basic (loss) earnings per share .......................... $ (0.06) $ 0.02
======= =======
Diluted (loss) earnings per share:
------- -------
Diluted (loss) earnings per share ........................ $ (0.06) $ 0.02
======= =======
Weighted average number of common and common equivalent
shares:
Basic .................................................... 60,545 59,734
======= =======
Diluted .................................................. 60,545 60,331
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
2
SAVIENT PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
COMMON STOCK ACCUMULATED
------------------- ADDITIONAL OTHER
PAID-IN ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES PAR VALUE CAPITAL DEFICIT (LOSS) INCOME EQUITY
------ --------- ---------- ----------- ------------- -------------
BALANCE, DECEMBER 31, 2004 ..................... 60,457 $606 $218,699 $(67,203) $2,566 $154,668
Comprehensive loss:
Net loss for three months
ended March 31, 2005......................... (3,865) (3,865)
Unrealized loss on
Marketable securities, net................... (33) (33)
Currency translation Adjustment ............... (218) (218)
--------
Total comprehensive loss ....................... (4,116)
Issuance of common stock ....................... 138 304 304
Exercise of stock options ...................... 14 27 27
------ ---- -------- -------- ------ --------
BALANCE, MARCH 31, 2005 ........................ 60,609 $606 $219,030 $(71,068) $2,315 $150,883
====== ==== ======== ======== ====== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
SAVIENT PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS
ENDED MARCH 31,
-----------------
2005 2004
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ........................................ $(3,865) $ 1,178
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization ............................ 604 585
Amortization of intangible assets associated with
acquisition............................................. 1,013 1,013
Deferred revenues ........................................ (284) 287
Deferred income taxes .................................... (318) (306)
Unrealized (gain) loss on investments .................... 224 --
Loss on sales of short-term investments .................. 27 --
Proceeds from sales of short-term investments ............ 676 --
Provision for inventory reserve .......................... 1,714 (270)
Common stock issued as payment for services .............. 38 20
Restricted stock grant issuance .......................... 37 --
Provision for sales returns .............................. 2,388 1,005
Changes in: Accounts receivables ......................... 2,545 (1,648)
Inventories....................................... 733 (442)
Prepaid expenses and other current assets......... 952 115
Assets held for sale.............................. 3,652 5,327
Accounts payable.................................. (223) 1,370
Liabilities held for sale......................... (788) (1,039)
Other changes in other current liabilities........ (6,206) (1,866)
------- -------
Net cash provided by operating activities ................ 2,919 5,329
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Short-term investments ................................... -- (519)
Capital expenditures ..................................... (578) (1,098)
Changes in other long-term assets ........................ (44) (497)
Proceeds from sale of investment in Omrix ................ 1,625 --
Proceeds from sales of short-term investments ............ -- 471
------- -------
Net cash provided by (used in) investing activities ...... 1,003 (1,643)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt .............................. (1,759) (1,668)
Proceeds from issuance of common stock ................... 293 424
------- -------
Net cash used in financing activities .................... (1,466) (1,244)
------- -------
Effect of exchange rate changes .......................... (110) 438
------- -------
Net increase in cash and cash equivalents ................ 2,346 2,880
Cash and cash equivalents at beginning of period ......... 22,447 17,218
------- -------
Cash and cash equivalents at end of period ............... $24,793 $20,098
======= =======
SUPPLEMENTARY INFORMATION
Other information:
Income tax paid......................................... $ 115 $ 1,063
Interest paid........................................... $ 59 $ 77
The accompanying notes are an integral part of these consolidated financial
statements.
4
SAVIENT PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 -- BASIS OF PRESENTATION
On March 23, 2005, the Company announced the signing of a definitive
agreement to sell its global biologics manufacturing business to certain
subsidiaries of Ferring Holding SA, a privately owned specialty pharmaceutical
company headquartered in Lausanne, Switzerland ("Ferring"). Effective in the
first quarter of 2005, the assets and liabilities of the global biologics
manufacturing business have been segregated on the balance sheet as "assets
held for sale". See Note 7 "Commitments and Contingencies", Note 8 "Assets and
Liabilities Held for Sale" and Note 9 "Segment Information".
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, the unaudited
interim financial statements furnished herein include all adjustments
necessary for a fair presentation of the Company's financial position at March
31, 2005 and the results of its operations and cash flows for the three month
periods ended March 31, 2005 and 2004. Interim financial statements are
prepared on a basis consistent with the Company's annual financial statements,
other than the changes in recognition of royalty revenue and the method for
recording obsolescence. Results of operations for the three-month period ended
March 31, 2005 are not necessarily indicative of the operating results that
may be expected for the year ending December 31, 2005.
The consolidated balance sheet as of December 31, 2004 was derived from the
audited financial statements at that date but does not include all of the
information and notes required by accounting principles generally accepted in
the United States of America for complete financial statements.
For further information, refer to the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2004.
In the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2004, the Company reported that, as a result of the execution of
a definitive agreement to sell the Company's global biologics manufacturing
business, the Company would reclassify that business as discontinued
operations in accordance with Statement of Financial Accounting Standards
("SFAS") No. 144. Upon further analysis, the Company has concluded that the
global biologics manufacturing business should be reclassified only as "assets
held for sale" in accordance with Emerging Issues Task Force ("EITF") Issue
No. 03-13 "Applying the Conditions in Paragraph 42 of SFAS No. 144
in Determining Whether to Report Discontinued Operations". This
reclassification is reflected in this Quarterly Report on Form 10-Q.
Certain prior period amounts have been reclassified to conform to current
year presentations. This reclassification includes the assets and liabilities
held for sale.
2 -- INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the weighted-average method. If inventory costs exceed expected market
value due to obsolescence or quantities in excess of expected demand, reserves
are recorded for the difference between the cost and the market value. These
reserves are determined based on estimates. For the three months ended March
31, 2005, the Company provided for additional obsolescence in the amount of
$1,714,000. This increased the reserve to $3,765,000 as of March 31, 2005. In
addition, loss contract reserves of $885,000 are included in other current
liabilities for outstanding purchase orders and the resolution of other
commitments that will be in excess of expected demand.
The Company's inventories include Oxandrin inventories that the Company
believes would potentially be in excess of expected product demand if the U.S.
Food and Drug Administration, or FDA, approves a generic form of the product
in the near term. The amount of such potential excess will vary depending upon
the timing of the approval of a generic product, the number of generic
products that are approved and the rate by
5
SAVIENT PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2 -- INVENTORIES -- (CONTINUED)
which generic sales reduce demand for branded Oxandrin. If generic approval
occurs during the second quarter of 2005, the Company estimates that such
potential excess may be up to $6.7 million.
Inventories at March 31, 2005 and December 31, 2004 are summarized below:
MARCH 31, 2005 DECEMBER 31, 2004
-------------- -----------------
(UNAUDITED)
(IN THOUSANDS)
Raw material ............................. $ 3,589 $ 3,996
Work in process .......................... 1,130 678
Finished goods ........................... 11,916 12,694
Inventory reserves ....................... (3,765) (2,051)
------- -------
Total ................................... $12,870 $15,317
======= =======
3 -- REVENUE RECOGNITION
Product sales are recognized when title to the product has transferred to
the Company's customers in accordance with the terms of the sale, and when
collectability is probable, net of discounts, sales incentives, sales
allowances and sales returns. Under the terms of sale that the Company offers
to its customers, title may transfer upon delivery to the customer, upon
delivery to the customer's shipper or carrier or upon shipment. Contract fees
consist mainly of license of marketing and distribution rights and research
and development projects. In accordance with Staff Accounting Bulletin 101,
"Revenue Recognition in Financial Statements," as amended by SAB 104, issued
by the Securities and Exchange Commission in December 1999, contract fee
revenues are recognized over the estimated term of the related agreements,
which range from 5 to 16 years. Revenue related to performance milestones is
recognized based upon the achievement of the milestone, as defined in the
respective agreements, and when collectability is probable. Advance payments
received in excess of amounts earned are included in deferred revenue.
Royalties are recognized as earned once agreement exists, the sale is made,
and upon receipt of confirmation from the contracting parties.
Through December 31, 2003, sales returns had been minimal and insignificant
to the Company's results of operations. In the first quarter of 2004, the
Company became aware that its wholesalers and their retail customers were
preparing to return product, primarily Oxandrin 2.5-mg and 10-mg, which had
reached the end of its shelf life. Historically, the Company had experienced
virtually no returns of the 2.5-mg tablet because of the product's five-year
shelf life. The 10-mg tablet, which was introduced in September 2002, has a
two-year shelf life. On the basis of the actual returns received primarily in
the second and third quarters of 2004, the Company estimated the total cost of
future product returns and provided a provision for future returns.
In the first quarter of 2005, the Company issued credits to its wholesalers
in the amount of $511,000. The Company also determined that the rate of
product returns was greater than that estimated in the previous quarter. On
the basis of this information, the Company increased its estimates for future
product returns and recorded an additional provision totalling $2,899,000 in
the first quarter of 2005. As of March 31, 2005, the aggregate reserve for
future product returns was $11,807,000 as compared to $9,419,000 as of
December 31, 2004.
Periodically the Company will evaluate the effectiveness of the reserve for
returns based on actual returns and make any necessary adjustments. The
Company regularly reviews the factors that influence its estimates including
(i) actual returns experience; (ii) the demand for the Company's products;
(iii) estimated inventory levels of its wholesaler customers; and (iv) other
relevant factors. If necessary, the Company makes adjustments when it believes
that actual product returns may differ from established reserves. Changes in
facts and circumstances and the demand for the Company's products could result
in material changes in the amount of returned product, and actual results may
differ materially from the Company's estimates.
6
SAVIENT PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4 -- EARNINGS PER SHARE OF COMMON STOCK
The Company has applied SFAS No. 128, "Earnings Per Share" in its
calculation and presentation of earnings per share - "basic" and "diluted".
Basic earnings per share are computed by dividing income available to common
stockholders (the numerator) by the weighted average number of common shares
(the denominator) for the period. The computation of diluted earnings per
share is similar to basic earnings per share, except that the denominator is
increased to include the number of additional common shares that would have
been outstanding if the potentially dilutive common shares had been issued.
The numerator in calculating both basic and diluted earnings per common
share for each period presented is the reported net income (loss). The
denominator is based on the following weighted average number of common
shares:
THREE MONTHS
ENDED MARCH 31,
---------------
2005 2004
------ ------
(UNAUDITED)
(IN THOUSANDS)
Basic ....................................................... 60,545 59,734
Incremental shares for assumed conversion of options ........ -- 597
------ ------
Diluted ..................................................... 60,545 60,331
====== ======
The difference between basic and diluted weighted average common shares
resulted from the assumption that the dilutive stock options outstanding were
exercised. For the three months ended March 31, 2004, options to purchase
6,298,000 shares of our common stock were not included in the diluted earnings
per share calculation as their effect would have been anti-dilutive. For the
three months ended March 31, 2005, options to purchase 5,953,000 shares of our
common stock, representing all outstanding options as of such date, were
excluded from the computation of diluted earnings per share as their effect
would have been anti-dilutive.
5 -- STOCK-BASED COMPENSATION
The Company issues both stock options and restricted stock awards to its
employees. Restricted stock awards are expensed over the life of the vesting
period in accordance with SFAS No. 123, "Accounting for Stock Based
Compensation." In January 2005, the Company issued approximately 311,000
shares of restricted stock options to its employees. These shares will vest
over a four year period and are being expensed based on the closing market
price of the Company's stock on the date of issuance.
As permitted by SFAS No. 123, the Company accounts for stock-based
compensation arrangements with employees in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees." Compensation expense for stock options issued to
employees is based on the difference on the date of grant between the fair
value of the Company's stock and the exercise price of the option. No employee
compensation cost related to stock option grants is reflected in net income,
as all granted options had an exercise price equal to the market value of the
underlying common stock at the date of grant. The Company accounts for equity
instruments issued to non-employees in accordance with the provisions of SFAS
No. 123 and EITF Issue No. 96-18, "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction With Selling,
Goods or Services." All transactions in which goods or services are the
consideration received for the issuance of equity instruments are accounted
for based on the fair value of the consideration received or the fair value of
the equity instrument issued, whichever is more reliably measurable. Stock
options granted to consultants, other than directors, are expensed upon
issuance.
7
SAVIENT PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5 -- STOCK-BASED COMPENSATION -- (CONTINUED)
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based compensation:
THREE MONTHS
ENDED MARCH 31,
----------------
2005 2004
------- ------
(UNAUDITED)
(IN THOUSANDS
EXCEPT PER SHARE
DATA)
Net (loss) income
As reported ............................................... $(3,865) $1,178
Deduct:
Total stock-based employee compensation expense determined
under fair value based method for all awards, net of
related tax effects...................................... 1,285 1,800
------- ------
Pro forma net (loss) ....................................... $(5,150) $ (622)
======= ======
Basic (loss) earnings per common share:
As reported ............................................... $ (0.06) $ 0.02
======= ======
Pro forma ................................................. $ (0.09) $(0.01)
======= ======
Diluted (loss) earnings per common share:
As reported ............................................... $ (0.06) $ 0.02
======= ======
Pro forma ................................................. $ (0.09) $(0.01)
======= ======
6 -- INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and their basis for income tax purposes and the tax effects of
capital loss, net operating loss and tax credit carry forwards. Valuation
allowances reduce deferred tax assets to the amounts that are more likely than
not to be realized.
Based upon the Company's current business outlook and the change in its
strategic direction, the likelihood of the Company being able to fully realize
its deferred income tax benefits against future income is uncertain.
Accordingly, at March 31, 2005, the Company maintains a $24,388,000 valuation
allowance against its deferred income tax assets.
7 -- COMMITMENTS AND CONTINGENCIES
On December 20, 2002, a purported stockholder class action was filed against
the Company and three of its officers. The action is pending under the caption
A.F.I.K. Holding SPRL v. Fass, No. 02-6048 (HAA) in the U.S. District Court
for the District of New Jersey and alleges violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934. The plaintiff purports to
represent a class of stockholders who purchased shares of the Company between
April 19, 1999 and August 2, 2002. The complaint asserts that certain of the
Company's financial statements were materially false and misleading because
the Company restated its earnings and financial statements for the years ended
1999, 2000 and 2001, as described in the Company's Current Report on Form 8-K
dated, and its press release issued on August 2, 2002. Five nearly identical
actions were filed in January and February 2003. In September 2003, the
actions were consolidated and co-lead plaintiffs and co-lead counsel were
appointed in accordance with the Private Securities Litigation Reform Act. The
parties have entered into a stipulation which provides for the lead plaintiff
to file an amended consolidated complaint. The Company has filed a motion to
dismiss the action. Briefing in support of and in opposition to this motion
has been completed but the court has not scheduled a hearing date. The Company
cannot predict when a hearing on this motion will be scheduled, or, once such
hearing has been held, when the court will render its decision.
8
SAVIENT PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
On October 27, 2003, the Company received a letter addressed to the board of
directors from attorneys for a purported stockholder of the Company demanding
that Savient commence legal proceedings to recover its damages against
directors who served on the Company's board immediately prior to the 2003
annual meeting of stockholders, Fulbright & Jaworski L.L.P., Arthur Andersen
LLP, the partners of Arthur Andersen responsible for the audit of the
Company's financial statements for 1999, 2000 and 2001, as well as all other
officers and directors responsible for the alleged wrongdoing. The letter
asserted that some or all of these persons were responsible for the material
overstatement of the Company's assets, earnings and net worth, and that these
persons caused the Company to disseminate false and misleading press releases
and filings with the Securities and Exchange Commission. An advisory committee
to the board of directors, consisting of directors who were not directors
prior to the 2003 annual meeting of stockholders, investigated this demand and
has determined that litigation should not proceed.
The Company intends to vigorously defend against all allegations of
wrongdoing. The Company has referred these claims to its directors' and
officers' insurance carrier, which has reserved its rights as to coverage with
respect to these actions.
The Company is obligated under certain circumstances to indemnify certain
customers for certain or all expenses incurred and damages suffered by them as
a result of any infringement of third party patents. In addition the Company
is obligated to indemnify its officers and directors against all reasonable
costs and expenses related to stockholder and other claims pertaining to
actions taken in their capacity as officers and directors which are not
covered by the Company's directors and officers' insurance policy. These
indemnification obligations are in the regular course of business and in most
cases do not include a limit on maximum potential future payments, nor are
there any recourse provisions or collateral that may offset the cost. As of
March 31, 2005, the Company has not recorded a liability for any obligations
arising as a result of these indemnification obligations.
On March 11, 2005, the Company halted a Phase II clinical trial for
Prosaptide in patients with HIV-associated peripheral neuropathy after a data
and safety monitoring board advised the Company that there was little chance
the trial would reach its primary endpoint. Under the terms of the Myelos
acquisition agreement, through which the company acquired Prosaptide, the
Company is required to make a payment of $30 million to the former
stockholders of Myelos if the Company is in a position to file a New Drug
Application for FDA approval of Prosaptide for the treatment of peripheral
neuropathic pain or neuropathy. The agreement also requires the Company to pay
15% of worldwide net sales of Prosaptide in the third year of
commercialization to the former stockholders of Myelos, at least 50% of which
must be paid in shares of common stock. At the time of the acquisition of
Myelos, the Company recorded negative goodwill of $18,989,000 on its balance
sheet primarily because the amount written off as in-process research and
development acquired exceeded the purchase price. Prior to January 1, 2002,
the amount of negative goodwill was being amortized over five years. The
amortization of the negative goodwill ceased effective January 1, 2002, in
accordance with SFAS No. 142. The unamortized balance in negative goodwill as
of March 31, 2005 was $16,028,000. This balance will be maintained as a
deferred credit until it is either netted against the contingent payments or
reflected in net income as an extraordinary item should the contingent
payments not become due because the technology did not meet the milestones
that trigger payment. Should the Company terminate further research into
Prosaptide, the negative goodwill will be immediately recognized.
On March 23, 2005, the Company announced the signing of a definitive
agreement with Ferring Pharmaceuticals, Inc. ("Ferring USA") to co-promote
Nuflexxa in the United States. Under the terms of the agreement, which is
contingent upon completion of the sale of the Company's global biologics
manufacturing business, the Company will promote Nuflexxa to rheumatologists
in the United States. Ferring USA will focus its promotional efforts for
Nuflexxa on the orthopedic surgeon community in the United States and will
market globally to both rheumatologists and orthopedic surgeons.
9
SAVIENT PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
The Company plans to establish a sales force targeting the rheumatology
community for this co-promotion effort. In addition, the Company will
contribute financial support to the medical education, training and related
advertising and marketing programs to support Nuflexxa through December 31,
2008. In consideration of this investment, the Company will receive 50% of the
global revenue for Nuflexxa above agreed upon revenue thresholds. Under the
agreement, the Company is required to invest $20 million in its sales force
and other marketing contributions over the first two calendar years, subject
to adjustment if the closing of the sale of the Company's global biologics
manufacturing business does not occur on or before July 31, 2005. Beyond the
first two calendar years, the Company's continued contribution to and
participation in the co-promotion arrangement is contingent upon the
achievement of agreed upon revenue thresholds.
During the first quarter of 2005, the Company settled the outstanding patent
litigation with Genentech which had been pending in Israel with respect to
certain methods relating to genetically engineered products and human growth
hormone. The claim was settled for a payment of $2.25 million which was fully
reserved at the end of the year. In January 2005, the Company concluded a
partial settlement of its patent infringement and patent interference
litigation against Novo Nordisk, receiving $3 million for the resolution of
the Company's claims for lost profits and attorney's fees. An additional
payment from Novo is due upon the conclusion of the appeal filed by Novo
regarding an issue in the patent infringement opinion, regardless of the
outcome of the appeal.
Additionally, in January 2005, the Company and Berna Biotech Ltd. agreed to
terminate their existing Technology Transfer and License Agreement whereupon
Berna returned its license to the Company's Hepatitis B vaccine program in
exchange for a payment of $750,000.
8 -- ASSETS AND LIABILITIES HELD FOR SALE
On March 23, 2005, the Company announced the signing of a definitive
agreement to sell its global biologics manufacturing business for $80 million
cash to Ferring. The Company will receive the proceeds in three installments:
$55 million at closing, $15 million at the first anniversary of closing and
$10 million at the second anniversary of closing. The Company estimates the
proceeds from this transaction over the next two years to be about $70 million
after transaction-related expenses, taxes and the extinguishment of bank debt,
assuming the transaction closes in the next five months. The closing of the
transaction is subject to a number of conditions, including governmental and
regulatory approvals. The global biologics manufacturing business is comprised
of the Company's wholly owned subsidiary, BTG-Israel and certain assets and
intellectual property of the parent company, Savient. Effective with the first
quarter of 2005, the Company's assets and liabilities of the global biologics
manufacturing business have been segregated on the balance sheet as held for
sale. See Note 7 "Commitments and Contingencies".
On March 23, 2005, the Company announced the signing of a definitive
agreement with Ferring USA to co-promote Nuflexxa in the United States. Under
the terms of the agreement, which is contingent upon completion of the sale of
the Company's global biologics manufacturing business, the Company will
promote Nuflexxa to rheumatologists in the United States. Ferring USA will
focus its promotional efforts for Nuflexxa on the orthopedic surgeon community
in the United States and will market globally to both rheumatologists and
orthopedic surgeons.
The Company plans to establish a sales force targeting the rheumatology
community for this co-promotion effort. In addition, the Company will
contribute financial support to the medical education, training and related
advertising and marketing programs to support Nuflexxa through December 31,
2008. In consideration of this investment, the Company will receive 50% of the
global revenue for Nuflexxa above agreed upon revenue thresholds. Under the
agreement, the Company is required to invest $20 million in its sales force
and other marketing contributions over the first two calendar years, subject
to adjustment if the closing of the sale of the Company's global biologics
manufacturing business does not occur on or before
10
SAVIENT PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8 -- ASSETS AND LIABILITIES HELD FOR SALE -- (CONTINUED)
July 31, 2005. Beyond the first two calendar years, the Company's continued
contribution to and participation in the co-promotion arrangement is
contingent upon the achievement of agreed upon revenue thresholds.
As of March 31, 2005, long-term debt outstanding was $3,889,000. This amount
was repaid on April 30, 2005 in anticipation of the closing of the sale of the
global biologics manufacturing business. In addition, upon the closing of the
transaction, the Company will fund the currently unfunded portion of the
employee severance obligation of BTG-Israel. As of March 31, 2005, the amount
of unfunded severance obligations was $3,704,000. Also upon the closing of the
transaction, the Company will realize as income any amounts of previously
deferred revenues with respect to certain long-term contracts of the business.
As of March 31, 2005, the amount of such deferred revenue was $10,985,000.
A summary statement of net assets of the global biologics manufacturing
business at March 31, 2005 and December 31, 2004, as they were included in the
consolidated financial statements of the Company, follows:
MARCH 31, 2005 DECEMBER 31, 2004
-------------- -----------------
(UNAUDITED)
(IN THOUSANDS)
Accounts receivable, net ................. $ 3,827 $ 9,540
Inventories, net ......................... 7,921 5,781
Other current assets ..................... 2,097 805
------- -------
Total current assets................... 13,845 16,126
Property and equipment, net .............. 58,941 60,033
Severance pay funded ..................... 2,587 2,945
Other assets ............................. 243 164
------- -------
Total assets........................... 75,616 79,268
------- -------
Accounts payable ......................... 1,276 1,366
Other current liabilities ................ 4,387 4,752
------- -------
Total current liabilities.............. 5,663 6,118
Severance Pay ............................ 6,291 6,624
------- -------
Total liabilities...................... 11,954 12,742
------- -------
Net assets............................. $63,662 $66,526
======= =======
9 -- SEGMENT INFORMATION
The pending sale of the global biologics manufacturing business resulted in
the identification of three reportable segments: Oral Liquid Pharmaceuticals,
Other Specialty Pharmaceuticals and Biologics Manufacturing. In prior years,
the operations were not managed along segment lines. The Oral Liquid
Pharmaceuticals segment develops, manufactures and markets oral liquid
formulations of off-patent drugs to treat patients who take medication in oral
liquid form. This segment sells two categories of products: licensed products
and specials. Licensed products are products for which the Company has
received U.K. regulatory approval to promote the oral formulation, and
specials are products for which the Company has limited U.K. regulatory
approval to accept custom orders but which the Company is not permitted to
promote. Other Specialty Pharmaceuticals includes the remaining products which
are branded prescription pharmaceuticals. These products currently include an
injectable testosterone product and a synthetic analogue of a testosterone
derivative. The Biologics Manufacturing segment products include an injection
to treat osteoarthritis pain, a human growth hormone, insulin and vaccines.
11
SAVIENT PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9 -- SEGMENT INFORMATION -- (CONTINUED)
The accounting policies are consistent between segments. The Company
allocates management fees to the segments based on various factors which
include management time. These fees eliminate in the consolidation.
Although the Company segments are managed on a worldwide basis, they operate
in two principal geographic locations, the United States and the United
Kingdom. The Company's three segments have been organized around these
geographic areas.
Information about the Company's segments is presented below:
THREE MONTHS ENDED MARCH 31, 2005
--------------------------------------------------------------
(UNAUDITED)
(IN THOUSANDS)
BIOLOGICS
ORAL LIQUID OTHER SPECIALTY MANUFACTURING
PHARMACEUTICALS PHARMACEUTICALS BUSINESS TOTAL
--------------- --------------- ------------- --------
Revenues ......................................................... $ 9,064 $ 9,773 $ 4,144 $ 22,981
Operating income (loss) before corporate and non-cash charges .... 3,412 (8,014) 1,707 (2,895)
Less:
Depreciation and amortization ................................... 1,317 300 1,078 2,695
Corporate charges ............................................... 1,065 (1,065) -- --
-------- ------- ------- --------
Operating income as reported ..................................... 1,030 (7,249) 629 (5,590)
Other (expense) income, net ...................................... (931) 3,117 (129) 2,057
Income tax expense ............................................... (35) (62) (235) (332)
-------- ------- ------- --------
Net income (loss) ................................................ 64 (4,194) 265 (3,865)
======== ======= ======= ========
Segment assets ................................................... $128,948 $33,279 $75,616 $237,843
======== ======= ======= ========
Expenditures for segment assets .................................. $ 490 $ 88 $ 117 $ 695
======== ======= ======= ========
THREE MONTHS ENDED MARCH 31, 2004
-------------------------------------------------------------
(UNAUDITED)
(IN THOUSANDS)
BIOLOGICS
ORAL LIQUID OTHER SPECIALTY MANUFACTURING
PHARMACEUTICALS PHARMACEUTICALS BUSINESS TOTAL
--------------- --------------- ------------- --------
Revenues ......................................................... $ 7,204 $22,051 $ 4,148 $ 33,403
Operating income before corporate and non-cash charges ........... 2,936 3,327 (2,106) 4,157
Less:
Depreciation and amortization ................................... 1,191 421 911 2,523
Corporate charges ............................................... 626 (626) -- --
-------- ------- ------- --------
Operating income as reported ..................................... 1,119 3,532 (3,017) 1,634
Other income (expense), net ...................................... (827) 1,016 (116) 73
Income tax expense ............................................... (558) (748) 777 (529)
-------- ------- ------- --------
Net income (loss) ................................................ $ (266) $ 3,800 $(2,356) $ 1,178
======== ======= ======= ========
Segment Assets ................................................... $138,638 $66,468 $84,088 $289,194
======== ======= ======= ========
Expenditures for segment assets .................................. $ 919 $ 156 $ 80 $ 1,155
======== ======= ======= ========
12
SAVIENT PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9 -- SEGMENT INFORMATION -- (CONTINUED)
Information about the Company's product sales by geographic region is as
follows:
THREE MONTHS ENDED MARCH 31,
-----------------------------------
(UNAUDITED)
DOLLAR AMOUNTS IN THOUSANDS
2005 2004
---------------- ---------------
United States ............................................................................... $ 9,324 41.2% $21,128 65.6%
United Kingdom .............................................................................. 8,781 38.9 7,101 22.1
Other international ......................................................................... 4,510 19.9 3,972 12.3
------- ----- ------- -----
Total ....................................................................................... 22,615 100.0 32,201 100.0
======= ===== ======= =====
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations together with our consolidated financial
statements and the related notes appearing in Item 1 of this Quarterly Report
on Form 10-Q. The following discussion and analysis and other portions of this
Quarterly Report on Form 10-Q contain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934. All statements,
other than statements of historical facts, included in this report regarding
our strategy, expected future financial position, results of operations, cash
flows, financing plans, discovery and development of products, potential
acquisitions, strategic alliances, intellectual property, competitive
position, plans and objectives of management are forward-looking statements.
Words such as "anticipate," "believe," "estimate," "expect," "intend," "plan,"
"will" and other similar expressions help identify forward-looking statements,
although not all forward-looking statements contain these identifying words.
In particular, the statements regarding our new strategic direction and its
potential effects on our business and the statements regarding the divestiture
of our global biologics manufacturing business are forward-looking statements.
These forward-looking statements involve substantial risks and uncertainties
and are based on our current expectations, assumptions, estimates and
projections about our business and the biopharmaceutical and specialty
pharmaceutical industries in which we operate. We may not actually achieve the
plans, intentions or expectations disclosed in our forward-looking statements,
and you should not place undue reliance on our forward- looking statements.
Actual results or events could differ materially from the plans, intentions
and expectations disclosed in the forward-looking statements that we make. We
have included important factors in the cautionary statements included in this
report, particularly in the section entitled "Risk Factors That May Affect
Results," that we believe could cause actual results or events to differ
materially from the forward-looking statements that we make. Our forward-
looking statements do not reflect the potential impact of any future
acquisitions, mergers, dispositions, joint ventures or investments we may
make. We do not assume any obligation to update any forward-looking
statements.
OVERVIEW
We are an emerging specialty pharmaceutical company engaged in developing,
manufacturing and marketing pharmaceutical products that address unmet medical
needs in both niche and larger market segments. We distribute our products on
a worldwide basis. In the United States, we distribute our products through
wholesalers and we market our products to physicians through a sales force
that includes both our own employees and representatives of a contract sales
organization. In the United Kingdom, we distribute our oral liquid
pharmaceutical products directly to hospitals and through wholesalers to
retail customers, and we market our products primarily to physicians through
our own sales force. In Israel, we distribute our products directly to
hospitals, HMOs and retailers, and we market our products to physicians
through our own sales force. Elsewhere in the world, we distribute our
products primarily through third party license and distribution relationships.
Through a combination of internal research and development, acquisitions,
collaborative relationships and licensing arrangements, we have assembled a
portfolio of therapeutic products and product candidates, many of which are
currently being marketed and several of which are in registration or clinical
development. In July 2004, we announced a change in our strategic business
plan to reposition our company to focus on the full development of our
pipeline products. This plan includes an enhanced focus on the clinical
development of Puricase, our product candidate for which we recently completed
Phase 2 clinical trials. In March 2005, we halted a Phase II clinical trial
for our second product candidate, Prosaptide. We are also engaged in an active
in-licensing program to access and develop novel compounds in late-stage
clinical trials as well as marketed products complementary to this strategy.
We were founded in 1980 as Bio-Technology General Corp. to develop,
manufacture and market novel therapeutic products. In September 2002, we
acquired Rosemont Pharmaceuticals Limited, a specialty pharmaceutical company
located in the United Kingdom. Rosemont develops, manufactures and markets
pharmaceutical products in oral liquid form. We coordinate our overall
administration, finance, business development, human clinical trials, U.S.
sales and marketing activities, quality assurance and regulatory affairs
primarily from our headquarters in East Brunswick, New Jersey. We carry out
the development,
14
manufacture, distribution and sale of our oral liquid pharmaceutical products
through Rosemont in the United Kingdom. Development and manufacturing
activities for our global biologics manufacturing business are primarily
carried out in Israel through our Bio-Technology General (Israel) Ltd.
subsidiary. On March 23, 2005, we announced that we had signed a definitive
agreement to divest our global biologics manufacturing business to Ferring. As
a result of the execution of this definitive agreement, we segregated our
assets and liabilities held for sale on our balance sheet.
On March 23, 2005, we also announced the signing of a definitive agreement
with Ferring Pharmaceuticals, Inc. ("Ferring USA") to copromote Nuflexxa in
the United States. Under the terms of the agreement, which is contingent upon
completion of the sale of our global biologics manufacturing business to two
subsidiaries of Ferring, we will promote Nuflexxa to rheumatologists in the
United States. Ferring USA will focus its promotional efforts for Nuflexxa on
the orthopedic surgeon community in the United States and will market globally
to both rheumatologists and orthopedic surgeons.
We plan to establish a sales force targeting the rheumatology community for
this co-promotion effort. In addition, we will contribute financial support to
the medical education, training and related advertising and marketing programs
to support Nuflexxa through December 31, 2008. In consideration of this
investment, we will receive 50% of the global revenue for Nuflexxa above
agreed upon revenue thresholds. Under the agreement, we are required to invest
$20 million in our sales force and other marketing contributions over the
first two calendar years, subject to adjustment if the closing of the sale of
our global biologics manufacturing business does not occur on or before July
31, 2005. Beyond the first two calendar years, our continued contribution to
and participation in the co-promotion arrangement is contingent upon the
achievement of agreed upon revenue thresholds.
Our financial results have been heavily dependent on Oxandrin sales since we
introduced it in December 1995. Sales of Oxandrin accounted for 45% of our net
product sales in the first three months of 2005 and 65% of our net product
sales in the first three months of 2004. However, oxandrolone, the active
ingredient in Oxandrin, is off-patent, and our patents directed to the use of
the active pharmaceutical ingredient in Oxandrin for weight gain have also
expired. Oxandrin net sales in the first three months of 2005 were adversely
impacted by returns during the period and a provision for future returns.
Several companies have filed drug master files with the FDA relating to a
generic drug with the same active pharmaceutical ingredient as Oxandrin.
Although we cannot predict when generic competition for Oxandrin will begin,
the FDA may approve one or more generic versions of Oxandrin at any time. The
introduction of these generic products would likely cause a significant
decrease in our Oxandrin revenues, which would adversely affect us financially
and could require us to scale back some of our business activities. As a
result, we anticipate that Oxandrin will be a less significant product for our
future operating results.
In February 2004, we filed a Citizens Petition with the FDA requesting that,
in the interest of public health, the FDA establish specific bio-equivalence
requirements for oral products containing oxandrolone. This petition cited a
serious safety concern in patients using Oxandrin together with anticoagulant
drugs containing warfarin. In addition, this petition cited concerns related
to the physical-chemical properties of the oxandrolone drug substance which
are important for manufacturing quality assurance and which we believe should
result in the FDA categorizing Oxandralone as a "problem drug" in terms of
manufacturing. We requested in our petition that any company wishing to
introduce an oxandrolone product into the United States should, prior to the
issuance of marketing approval, be required to also conduct a clinical trial
to investigate the interaction between that product candidate and warfarin and
demonstrate that it is identical to the interaction between Oxandrin and
warfarin. We have since filed with the FDA affidavits supporting our petition.
In August and September 2004, two opposition comment letters to our petition
were filed with the FDA. In August 2004, the FDA issued a letter to us stating
that extensive review of the questions raised in our petition will be required
before the FDA will respond. In February 2005, we submitted another
supplemental position paper to the FDA advocating the adoption of rigorous
impurity standards for oxandrolone consistent with the draft recently
published by the United States Pharmacopeia, which will become the standard in
2006. Since August 2004, we have received no further communication from the FDA
regarding our petition.
15
Sales of Delatestryl have decreased significantly as a result of the
FDA's allowance of the reintroduction of a generic version of Delatestryl into
the market in March 2004, and could continue to decrease further in the future.
Oral liquid pharmaceutical product sales represented a significant portion
of our overall product sales in the first three months of 2005. These sales
accounted for 40% of our net product sales for the first three months of 2005
and 22% of our net product sales for the first three months of 2004. Given the
historical growth of oral liquids pharmaceutical product sales in combination
with the potential introduction of generic oxandrolone and the divestiture of
our global biologics manufacturing business, we expect oral liquid
pharmaceutical products to account for an even higher percentage of our
overall product sales in the coming years.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which we have
prepared in accordance with accounting principles generally accepted in the
United States. Applying these principles requires our judgment in determining
the appropriateness of acceptable accounting principles and methods of
application in diverse and complex economic activities. The preparation of
these financial statements requires us to make estimates and judgments that
affect the reported amounts of revenues, expenses, assets and liabilities, and
related disclosure of contingent assets and liabilities. We base our estimates
on historical experience and other assumptions that we believe are reasonable
under the circumstances. Actual results may differ materially from these
estimates under different assumptions or conditions.
We discuss our critical accounting policies in our Annual Report on Form 10-
K for the year ended December 31, 2004 in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Critical Accounting Policies and the Use of Estimates." In addition to the
critical accounting policies discussed in our Annual Report on Form 10-K we
have identified the following additional critical accounting policies:
In our Annual Report on Form 10-K for the fiscal year ended December 31,
2004, we reported that, as a result of the execution of a definitive agreement
to sell our global biologics manufacturing business, we would reclassify that
business as discontinued operations in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 144. Upon further analysis, we have
concluded that the global biologics manufacturing business should be
reclassified only as "assets held for sale" in accordance with Emerging Issues
Task Force ("EITF") Issue No. 03-13 "Applying the Conditions in Paragraph 42
of SFAS No. 144 in Determining Whether to Report Discontinuing Operations".
This reclassification is reflected in this Quarterly Report on Form 10-Q.
Revenue recognition. Product sales are recognized when title to the product
has transferred to our customers in accordance with the terms of the sale, and
when collectability is probable, net of discounts, sales incentives, sales
allowances and sales returns. Under the terms of sale that we offer to our
customers, title may transfer upon delivery to the customer, upon delivery to
the customer's shipper or carrier or upon shipment. Contract fees consist
mainly of license of marketing and distribution rights and research and
development projects. In accordance with Staff Accounting Bulletin 101,
"Revenue Recognition in Financial Statements," as amended by SAB 104, issued
by the SEC in December 1999, contract fee revenues are recognized over the
estimated term of the related agreements, which range from 5 to 16 years.
Revenue related to performance milestones is recognized based upon the
achievement of the milestone, as defined in the respective agreements, and
when collectibility is probable. Advance payments received in excess of
amounts earned are included in deferred revenue. Royalties are recognized as
earned once agreement exists, the sale is made only upon receipt of
confirmation from the contracting parties.
Allowances for returns. We recognize product sales when product is shipped
and collectibility is probable, net of discounts, sales incentives, sales
allowances and sales returns.
Beginning in the first quarter of 2004 and continuing through the second
quarter, we became aware that retail customers of our wholesalers were
preparing to return expired product, primarily 2.5-mg Oxandrin and
16
10-mg Oxandrin. Historically, we had experienced virtually no returns of the
2.5-mg Oxandrin tablet because of the product's five-year shelf life. The 10-mg
Oxandrin tablet, which was introduced in the second half of 2002, currently has
a two-year shelf life. At December 31, 2004, we had recorded a reserve for
returns totalling $9,419,000.
In the first quarter of 2005, we issued credits to our wholesalers for
product returns in the amount of $511,000. We also revised our estimates
upwards to 12 months from 7 months to reflect the number of months remaining
before our wholesale distributors will ship product to retail pharmacies in
accordance with current industry standards. On the basis of this information,
we increased our estimates for future product returns and recorded an
additional reserve totalling $2,899,000 in the first quarter of 2005. At
March 31, 2005, the aggregate reserve for returns was $11,807,000.
We will continue to monitor our product returns. We regularly review the
factors that influence our estimates including:
o actual returns experience;
o the demand for our products;
o estimated inventory levels of our wholesaler customers;
o the shipping and returns practices of our wholesalers as products
approach their expiration dates; and
o other relevant factors.
If necessary, we make adjustments when we believe that actual product returns
may differ from established reserves. Changes in facts and circumstances and
the demand for our products could result in material changes in the amount of
returned product, and actual results may differ materially from our estimates.
Inventory obsolescence. We state inventories at the lower of cost or
market. We determine cost using the weighted-average method. If inventory
costs exceed expected market value due to obsolescence or quantities in excess
of expected demand, we record reserves for the difference between the cost and
the market value. We determine these reserves based on estimates. The reserves
at March 31, 2005 were $3,765,000. In addition, we maintain loss contract
reserves of $885,000 for outstanding purchase orders and the resolution of
other commitments that will be in excess of expected demand.
We believe Oxandrin inventories could potentially be in excess of expected
product demand if the FDA approves a generic form of the product in the near
term. The amount of such potential excess will vary depending upon the timing
of the approval of a generic product, the number of generic products that are
approved and the rate by which generic sales reduce demand for branded
Oxandrin. If generic approval occurs during the second quarter of 2005, we
estimate that such potential excess may be up to $6.7 million.
For the three months ended March 31, 2005, the Company provided for
additional obsolescence of $1,714,000. This increased the reserve to
$3,765,000 as of March 31, 2005.
17
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated percentage of
revenues represented by certain items reflected on our statements of
operations.
THREE MONTHS
ENDED
MARCH 31,
-------------
2005 2004
----- -----
Revenues:
Products sales, net .......................................... 98.4% 96.4%
Contract fees ................................................ 1.3 0.7
Royalties .................................................... -- 2.8
Other revenues ............................................... 0.3 0.1
----- -----
Total revenues.............................................. 100.0 100.0
----- -----
Expenses:
Cost of product sales ........................................ 37.9 25.9
Research and development ..................................... 27.3 25.9
Marketing and sales .......................................... 22.4 20.0
General and administrative ................................... 26.9 16.1
Amortization of intangibles associated with acquisitions ..... 4.4 3.0
Commissions and royalties .................................... 5.3 4.2
----- -----
Total expenses.............................................. 124.2 95.1
----- -----
Operating (loss) income ....................................... (24.2) 4.9
Other income, net ............................................. 9.0 0.2
----- -----
(Loss) income before income taxes ............................. (15.2) 5.1
Income taxes .................................................. 1.4 1.6
----- -----
Net (loss) income ............................................. (16.6)% 3.5%
===== =====
We have historically derived our revenues from product sales as well as from
collaborative arrangements with third parties. The sources of revenue under
our third party arrangements include up-front contract fees, reimbursement for
producing certain experimental materials, milestone payments and royalties on
sales of product.
Our revenues and expenses have in the past displayed, and may in the future
continue to display, significant variations. These variations may result from
a variety of factors, including:
o the timing and amount of product sales;
o changing demand for our products;
o our inability to provide adequate supply for our products;
o changes in wholesaler buying patterns;
o returns of expired product;
o changes in government or private payor reimbursement policies for our
products;
o increased competition from new or existing products, including generic
products;
o the timing of the introduction of new products;
o the timing and realization of milestone and other payments from
licensees;
o the timing and amount of expenses relating to research and development,
product development and manufacturing activities;
o the extent and timing of costs of obtaining, enforcing and defending
intellectual property rights; and
o any charges related to acquisitions.
18
The decrease in the value of the U.S. dollar relative to the British pound
sterling had the effect of increasing our revenues as measured in U.S. dollars
by $263,000 for the three months ended March 31, 2005. This decrease also had
the effect of reducing our net loss for the three months ended March 31, 2005
by $66,000.
The following table summarizes net sales of our commercialized products as a
percentage of net product sales for the periods indicated:
THREE MONTHS ENDED MARCH 31,
-----------------------------------
2005 2004
---------------- ---------------
(DOLLARS IN THOUSANDS)
Oxandrin .................................. $ 8,347 36.9% $18,423 57.2%
Human growth hormone ...................... 1,972 8.7 1,928 6.0
BioLon .................................... 1,603 7.1 1,503 4.7
Delatestryl ............................... 1,144 5.1 2,704 8.4
Oral liquid pharmaceutical products ....... 9,064 40.1 7,204 22.3
Other ..................................... 485 2.1 439 1.4
------- ----- ------- -----
Total .................................. $22,615 100.0% $32,201 100.0%
======= ===== ======= =====
We believe that our product mix will vary from period to period based on the
purchasing patterns of our customers and our focus on:
o increasing market penetration of our existing products;
o expanding into new markets; and
o commercializing additional products.
In particular, quarterly fluctuations in sales of Oxandrin have had a
significant impact on our quarterly results of operations, and we expect this
to continue in future periods.
Comparison of Three Months Ended March 31, 2005 and March 31, 2004.
Revenues. Total revenues decreased by $10,422,000, or 31%, in the three
months ended March 31, 2005 to $22,981,000 from $33,403,000 in the three
months ended March 31, 2004. The decrease in total revenues resulted primarily
from the decrease in product sales, net, and other revenues. Royalties
decreased by $932,000, reflecting a change in our revenue recognition policy
to recognizing royalty revenue only upon receipt of confirmation from the
contracting party.
Product sales, net decreased by $9,586,000, or 30%, in the three months
ended March 31, 2005 to $22,615,000 from $32,201,000 in the three months ended
March 31, 2004. The decrease resulted primarily from decreases in net sales of
Oxandrin and Delatestryl, partially offset by an increase in sales of oral
liquid pharmaceutical products.
Sales of Oxandrin in the three months ended March 31, 2005 were $8,347,000,
a decrease of $10,076,000, or 55%, from $18,423,000 in the three months ended
March 31, 2004. This decrease is attributable to a significant purchasing
reduction by Cardinal Health and other wholesalers, the negative impact of
returns of expiring product and a provision for future returns. In addition,
total dispensed prescriptions for Oxandrin in the three months ended March 31,
2005 declined by 7% as compared to the three months ended March 31, 2004, and
by 6% as compared to the three months ended December 31, 2004. These decreases
were partially offset by price increases. As a result of the product returns
of expiring Oxandrin that began in 2004, we issued credits to our wholesalers
totalling $499,000 in the first three months of 2005. As of March 31, 2005,
the reserve for future returns, which may occur over several years, was
increased by $2,303,000.
Sales of oral liquid pharmaceutical products in the three months ended March
31, 2005 were $9,064,000, an increase of $1,860,000, or 26%, from $7,204,000
in the first three months of 2004. A portion of the increase in sales of oral
liquid pharmaceutical products was attributable to the decrease in the value
of the
19
U.S. dollar relative to the British pound sterling. Measured in pounds
sterling, sales of oral liquid pharmaceutical products in the three months
ended March 31, 2005 increased by 22% over sales in the first three months of
2004.
Sales of Delatestryl in the three months ended March 31, 2005 were
$1,144,000, a decrease of $1,560,000, or 58%, from $2,704,000 in the first
three months of 2004. The decrease in sales was attributable to the
reintroduction of a competing generic product into the market in 2004. We
expect our Delatestryl sales during the last three quarters of 2005 to be
significantly lower than our sales of $3,780,000 during the last three
quarters of 2004 as a result of the reintroduction of this competing generic
product.
Contract fees were $291,000 in the three months ended March 31, 2005 and
$230,000 in the three months ended March 31, 2004. These amounts mainly
represent fees received in prior periods but earned and recognized in the
three months ended March 31, 2005 and 2004 in accordance with SAB 101.
Royalties in the three months ended March 31, 2005 were zero as compared to
$932,000,000 in the first three months of 2004. These royalties are received
on third party sales of our Mircette, Silkis and insulin products. The
decrease in royalties in the first three months of 2005 was attributable to a
change in our revenue recognition policy whereby revenue is only recognized as
earned upon receipt of confirmation from the contracting parties.
Cost of product sales increased by $70,000, or less than 1%, in the three
months ended March 31, 2005 to $8,721,000 from $8,651,000 in the three months
ended March 31, 2004. Cost of product sales as a percentage of product sales
increased from 27% in the three months ended March 31, 2004 to 39% in the
three months ended March 31, 2005. This increase was principally attributable
to:
o changes in our product mix, with an increase in sales of oral liquid
pharmaceutical products;
o an increase in the reserve for inventory obsolescence and
o an increase in loss contract reserves.
Cost of product sales as a percentage of product sales also varies from year
to year and quarter to quarter depending on the quantity and mix of products
sold. Oxandrin has relatively low manufacturing costs relative to its sales
prices; whereas Delatestryl and the oral liquid pharmaceutical products have
higher manufacturing costs relative to their sales prices.
Research and development expense decreased by $2,382,000, or 27%, in the
three months ended March 31, 2005 to $6,282,000 from $8,664,000 in the three
months ended March 31, 2004. Research and development expense decreased during
the three months ended March 31, 2005 as a result of a decrease in development
studies in our Biologics Manufacturing segment, offset in part by increases in
the costs of conducting toxicology studies of Prosaptide and of producing
clinical supplies of both Puricase and Prosaptide. We expect research and
development expense in 2005 to exceed the 2004 level if we proceed with the
further development of Puricase and Prosaptide.
Marketing and sales expense decreased by $1,512,000, or 23%, in the three
months ended March 31, 2005 to $5,154,000 from $6,666,000 in the three months
ended March 31, 2004. The decrease was primarily attributable to pre-marketing
expenses incurred for Nuflexxa in the United States.
General and administrative expense increased by $805,000, or 15%, in the
three months ended March 31, 2005 to $6,177,000 from $5,372,000 in the three
months ended March 31, 2004. The increase in general and administrative
expense resulted from significant increases in final audit fees for the close
out of 2004 and consulting expenses related to our compliance with the
requirements of the Sarbanes-Oxley Act, partially offset by lower legal
expenses.
Amortization of intangibles associated with acquisitions. In connection
with our acquisition of our oral liquid pharmaceutical business, we recorded
intangibles of $80,800,000, consisting of developed products, trademarks and
patents. We are amortizing these intangibles using the straight-line method
over the estimated useful life of approximately 20 years. We recorded
$1,013,000 of amortization of these intangibles in the first three months of
2005 and 2004.
20
Commissions and royalties expense was $1,224,000 in the three months ended
March 31, 2005, compared to $1,403,000 in the three months ended March 31,
2004. The decrease of $179,000, or 13%, was primarily attributable to reduced
commissions paid to the Ross Products Division of Abbott Laboratories, or
Ross, on sales of Oxandrin for the long-term care market and a decrease in
royalties that we were required to pay for our Delatestryl and Mircette
products due to a decrease in the sales of those products.
Other income, net was $2,057,000 for the three months ended March 31, 2005,
compared to $73,000 for the three months ended March 31, 2004. The change is
primarily attributable to the successful settlement of intellectual property
litigation suits, most notably our settlement with Novo Nordisk.
Income taxes. Provision for income taxes for the three months ended March
31, 2005 was $332,000, compared to $529,000 for the three months ended March
31, 2004. The decrease in provision for income taxes was primarily
attributable to increased losses in our Other Specialty Pharmaceutical segment
at March 31, 2005 compared to income at March 31, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital at March 31, 2005 was $79,184,000, compared to an
adjusted working capital figure of $80,785,000 at December 31, 2004.
Our cash flows have fluctuated significantly as a result of changes in our
revenues, operating expenses, capital spending, working capital requirements,
the issuance of common stock and other financing activities. We expect that
cash flows in the near future will be primarily determined by the levels of
our net income, working capital requirements, milestone payment obligations
and financings, if any, that we may undertake in addition to the receipt of
anticipated proceeds from our divestiture of our global biologics
manufacturing business. Net cash increased by $2,346,000 in the three months
ended March 31, 2005.
Net cash provided by operating activities was $2,919,000 in the three months
ended March 31, 2005, compared to $5,329,000 in the three months ended March
31, 2004. Net loss was $3,865,000 in the three months ended March 31, 2005,
compared to net income of $1,178,000 in the three months ended March 31, 2004.
Net cash used in operating activities other than our Biologics Manufacturing
segment was $920,000 in the three months ended March 31, 2005.
In the three months ended March 31, 2005, net cash provided by operating
activities was less than our net loss because of an increase in our reserves
for inventory obsolescence of $1,714,000, amortization of intangible assets
associated with acquisition of $1,013,000, an increase in our provision for
sales returns of $2,388,000, a decrease in accounts receivable of $2,545,000
and an increase in assets available for sale of $3,652,000. Partially
offsetting this was a $788,000 decrease in liabilities held for sale and a
$6,206,000 decrease in other current liabilities, of which $3,000,000 was
related to the retirement of a reserve for pending litigation. A portion of
this retired reserve balance is in accounts payable at March 31, 2005.
Net cash provided by investing activities was $1,003,000 in the three months
ended March 31, 2005 compared to net cash used in investing activities of
$1,643,000 in the three months ended March 31, 2004. Capital expenditures of
$578,000 in the three months ended March 31, 2005 were offset by the proceeds
from the sale of our investment in Omrix Corporation of $1,625,000.
Net cash used in financing activities was $1,466,000 in the three months
ended March 31, 2005, compared to $1,244,000 in the three months ended March
31, 2004. These amounts primarily reflected repayment of $1,759,000 of debt in
the first three months of 2005 and $1,668,000 in the first three months of
2004, in each case partially offset by net proceeds from our issuance of
common stock primarily pursuant to our employee stock purchase plan.
We believe that our cash resources as of March 31, 2005, together with
anticipated product sales and anticipated proceeds from the divestiture of our
global biologics manufacturing business, will be sufficient to fund our
ongoing operations and debt service obligations for at least the next twelve
months. However, we may fail to achieve our anticipated liquidity levels as a
result of unexpected events or failure to achieve our goals. Our future
capital requirements will depend on many factors, including the following:
o our ability to successfully close the divestiture of our global biologics
manufacturing business;
21
o the timing and amount of product sales, particularly our continued
ability to sell Oxandrin prior to the introduction of generic versions of
the product;
o continued progress in our research and development programs, particularly
with respect to Prosaptide and Puricase;
o the timing of, and the costs involved in, obtaining regulatory approvals,
including regulatory approvals for Prosaptide, Puricase, and any other
product candidates that we may seek to develop in the future and
regulatory approval to manufacture oral liquid pharmaceutical products
for supply into the U.S. market;
o the timing and magnitude of any future milestone payment obligations;
o fluctuations in foreign exchange rates for sales denominated in
currencies other than the U.S. dollar;
o the quality and timeliness of the performance of our third party
suppliers and distributors;
o the cost of commercialization activities, including product marketing,
sales and distribution;
o the costs involved in preparing, filing, prosecuting, maintaining, and
enforcing patent claims and other patent related costs, including
litigation costs and the results of such litigation;
o the outcome of pending purported class action and other related, or
potentially related, actions and the litigation costs with respect to
such actions; and
o our ability to establish and maintain collaborative arrangements.
If we are required to seek additional funding for our operations, we might
not be able to obtain such additional funds or, if such funds are available,
such funding might be on unacceptable terms. We continue to seek additional
collaborative research and development and licensing arrangements in order to
provide revenue from sales of certain products and funding for a portion of
the research and development expenses relating to the products covered.
However, we may not be able to enter into any such agreements.
22
RISK FACTORS THAT MAY AFFECT RESULTS
You should carefully consider the risks and uncertainties described below.
If any of the following risks or uncertainties actually occurs, our business,
prospects, financial condition and operating results would likely suffer,
possibly materially.
RISKS RELATING TO OUR NEW STRATEGIC DIRECTION
THE CLOSING OF THE SALE OF OUR GLOBAL BIOLOGICS MANUFACTURING BUSINESS TO
FERRING WILL BE COMPLEX, TIME-CONSUMING AND EXPENSIVE, AND MAY DISRUPT OR
DISTRACT OUR MANAGEMENT AND OTHER EMPLOYEES. IN ADDITION, THE CLOSING OF THE
TRANSACTION IS SUBJECT TO A NUMBER OF CONDITIONS, INCLUDING GOVERNMENTAL AND
REGULATORY APPROVALS. IF WE ARE UNABLE TO COMPLETE THIS DIVESTITURE, WE MAY
NOT ACHIEVE THE EXPECTED BENEFITS OF OUR NEW STRATEGIC DIRECTION.
On March 23, 2005, we announced that we had signed a definitive agreement to
sell our global biologics manufacturing business to Ferring. We believe that
this divestiture will provide the incremental resources required to fund the
advancement of our lead drug candidate, Puricase for the treatment of severe
refractory gout which has recently completed Phase 2 clinical trials in the
United States, and pursue business development opportunities to in-license
novel compounds in late-stage clinical trials as well as marketed products
complementary to this strategy. However, divestiture of our global biologics
manufacturing business will be complex, time-consuming and expensive, and may
disrupt or distract our management and other employees. In addition, the
closing of the transaction is subject to a number of conditions, including
governmental and regulatory approvals. While we expect that the transaction
will close in the first half of 2005, we may not be able to complete this
divestiture within that time period or at all. This divestiture involves
substantial transaction costs and we may not ultimately achieve expected
benefits and cost reductions. If we do not successfully complete the
divestiture of our global biologics manufacturing business, we may not achieve
the expected benefits of our new strategic direction.
WE ARE REPOSITIONING OUR COMPANY TO FOCUS ON PRODUCT DEVELOPMENT, INCLUDING
AN ENHANCED FOCUS ON THE CLINICAL DEVELOPMENT OF PURICASE, OUR PRODUCT
CANDIDATE THAT HAS RECENTLY COMPLETED PHASE 2 CLINICAL TRIALS, AND PROSAPTIDE.
IF WE ARE UNABLE TO COMMERCIALIZE EITHER OR BOTH OF THESE PRODUCT CANDIDATES,
OR EXPERIENCE SIGNIFICANT DELAYS OR UNANTICIPATED COSTS IN DOING SO, OUR
BUSINESS WILL BE MATERIALLY HARMED.
As part of our strategic business plan, we are repositioning our company to
focus on the full development of our pipeline products. This will include an
enhanced focus on the clinical development of Puricase, our product candidate
that has recently completed Phase 2 clinical trials, and Prosaptide, our
product candidate for which we may explore indications for the treatment of
peripheral neuropathic pain or the potential to treat peripheral neuropathic
pain in the HIV or other disease populations. We are engaged in an active in-
licensing program to access and develop novel compounds in late-stage clinical
trials as well as marketed products complementary to this strategy. On March
11, 2005, we announced that we will terminate our Phase 2 clinical trial of
Prosaptide after a scheduled interim analysis, scheduled pursuant to the trial
protocol, indicated that even if the trial were to continue as designed to its
planned end there would be little chance that the trial would demonstrate
efficacy in the treatment of peripheral neuropathic pain. We intend to analyze
all the available data from this study and from recently completed pre-
clinical pharmacology studies. When the whole of the Prosaptide data set has
been thoroughly reviewed by our staff and a panel of independent experts, we
will determine whether we will pursue alternative indications for the
treatment or peripheral neuropathic pain, or further explore the potential of
Prosaptide to treat the underlying peripheral neuropathy in HIV/AIDS and other
diseases, or terminate our Prosaptide development program.
Our ability to commercialize Puricase, Prosaptide and any other product
candidate that we may develop in the future will depend on several factors,
including:
o successfully completing clinical trials;
o receiving marking approvals from the FDA and similar foreign regulatory
authorities;
o establishing commercial manufacturing arrangements with third-party
manufacturers, to the extent we do not manufacture the product candidates
ourselves;
23
o launching commercial sales of the product, whether alone or in
collaboration with others; and
o acceptance of the product in the medical community and with third-party
payors.
If we are unable to successfully commercialize Puricase or Prosaptide, or
both, or if we experience significant delays or unanticipated costs in doing
so, our business will be materially harmed. We will face similar drug
development risks for any other product candidates that we may develop in the
future.
PURICASE AND PROSAPTIDE, AND ANY OTHER PRODUCT CANDIDATE THAT WE MAY DEVELOP
IN THE FUTURE, MUST SATISFY RIGOROUS STANDARDS OF SAFETY AND EFFICACY BEFORE
THEY CAN BE APPROVED FOR SALE. TO SATISFY THESE STANDARDS, WE MUST ENGAGE IN
EXPENSIVE AND LENGTHY CLINICAL TRIALS AND OBTAIN REGULATORY APPROVAL.
We must successfully complete clinical trials for Puricase and Prosaptide
before we can apply for marketing approval of these product candidates. In
July 2003, we commenced a Phase 2 clinical trial of Prosaptide in patients
with HIV-associated peripheral neuropathy to supplement the findings of a
previous Phase 2 clinical trial in patients with diabetes mellitus. On March
11, 2005, we announced that we will terminate our Phase 2 clinical trial of
Prosaptide after a scheduled interim analysis, scheduled pursuant to the trial
protocol. We intend to analyze all the available data from this study and from
recently completed preclinical pharmacology studies. When the whole of the
Prosaptide data set has been thoroughly reviewed by our staff and a panel of
independent experts, we will determine whether we will pursue alternative
indications for the treatment of peripheral neuropathic pain, or further
explore the potential of Prosaptide to treat the underlying peripheral
neuropathy in HIV/AIDS and other diseases, or terminate our Prosaptide
development program.
In December 2004 we administered the last patient dose in a Phase 2 clinical
trial of Puricase. We anticipate that the results of this study will be
available in May 2005. Our Puricase clinical trial may be unsuccessful, which
would materially harm our business. Even if this trial is successful, we will
be required to conduct additional clinical trials before an NDA can be filed
with the FDA for marketing approval of Puricase.
Clinical testing is expensive, difficult to design and implement, can take
many years to complete and is uncertain as to outcome. Success in early phases
of clinical trials does not ensure that later clinical trials will be
successful, and interim results of a clinical trial do not necessarily predict
final results. A failure of one or more of our clinical trials can occur at
any stage of testing. We may experience numerous unforeseen events during, or
as a result of, the clinical trial process that could delay or prevent our
ability to receive regulatory approval or commercialize Prosaptide or
Puricase, including:
o regulators or institutional review boards may not authorize us to
commence a clinical trial or conduct a clinical trial at a prospective
trial site;
o our clinical trials may produce negative or inconclusive results, and we
may decide, or regulators may require us, to conduct additional
preclinical testing or clinical trials or we may abandon projects that we
expect to be promising;
o enrollment in our clinical trials may be slower than we currently
anticipate, or participants may drop out of our clinical trials;
o we might have to suspend or terminate our clinical trials if the
participating patients are being exposed to unacceptable health risks;
o regulators or institutional review boards may require that we hold,
suspend or terminate clinical research for various reasons, including
noncompliance with regulatory requirements;
o the cost of our clinical trials may be greater than we currently
anticipate;
o any regulatory approval we ultimately obtain may be limited or subject to
restrictions or post-approval commitments that render the product not
commercially viable; and
o the effects of our product candidates may not be the desired effects or
may include undesirable side effects or the product candidates may have
other unexpected characteristics.
24
If we are required to conduct additional clinical trials or other testing of
our product candidates beyond those that we currently contemplate, if we are
unable to successfully complete our clinical trials or other testing or if the
results of these trials or tests are not positive or are only modestly
positive, we may:
o be delayed in obtaining marketing approval for our product candidates;
o not be able to obtain marketing approval;
o obtain approval for indications that are not as broad as intended; or
o not obtain marketing approval before other companies are able to bring
competitive products to market.
Our product development costs will also increase if we experience delays in
testing or approvals. We do not know whether our ongoing clinical trials will
be completed on schedule. Similarly, we do not know whether our planned
clinical trials will begin as planned, will need to be restructured or will be
completed on schedule, if at all. Significant delays in clinical trials could
also allow our competitors to bring products to market before we do and impair
our ability to commercialize our products or product candidates.
OUR NEW STRATEGIC FOCUS INCLUDES AN IN-LICENSING PROGRAM TO ACCESS AND
DEVELOP NOVEL COMPOUNDS IN LATE-STAGE CLINICAL TRIALS. WE MAY NOT BE
SUCCESSFUL IN OUR EFFORTS TO EXPAND OUR PORTFOLIO OF PRODUCTS IN THIS MANNER.
As part of the change in our strategic business plan, we announced that we
intend to concentrate on an active in-licensing program to access and develop
novel compounds in late-stage clinical trials. To date, we have had limited
success in in-licensing compounds, and we may continue to have difficulty in
this area for a number of reasons. In particular, the licensing and
acquisition of pharmaceutical products is a competitive area. Numerous
companies are also pursuing strategies to license or acquire products similar
to those that we may pursue. These companies may have a competitive advantage
over us due to their size, cash resources and greater clinical development and
commercialization capabilities. Other factors that may prevent us from
licensing or otherwise acquiring suitable product candidates include the
following:
o we may be unable to identify suitable products or product candidates
within our areas of expertise;
o we may be unable to license or acquire the relevant technology on terms
that would allow us to make an appropriate return on our investment in
the product; or
o companies that perceive us to be their competitors may be unwilling to
assign or license their product rights to us.
If we are unable to develop suitable potential product candidates by
obtaining rights to novel compounds from third parties, our business will
suffer.
RISKS RELATED TO OUR BUSINESS
WE INCURRED A SUBSTANTIAL NET LOSS IN 2004 AND ANTICIPATE THAT WE MAY INCUR
SUBSTANTIAL NET LOSSES FOR THE FORESEEABLE FUTURE. IF WE ARE UNABLE TO
COMMERCIALIZE PURICASE, PROSAPTIDE OR ANY OTHER PRODUCT CANDIDATES, WE MAY
NEVER RETURN TO PROFITABILITY.
Our operations in 2004 reflected net income for the first quarter of 2004 of
$1,178,000 compared to net loss of $3,865,000 in the first quarter of 2005.
Our losses in 2005 resulted, in part, from returns of Oxandrin product and a
provision for future Oxandrin returns that we recorded during 2005 and the
FDA's allowance of the reintroduction of a generic version of Delatestryl in
March 2004. We expect to continue to incur substantial losses for the
foreseeable future. Our financial results have been substantially dependent on
Oxandrin sales. Sales of Oxandrin accounted for 37% of our net product sales
in the first 3 months of 2005 and 57% in the first three months of 2004.
However, while we cannot predict when generic competition for Oxandrin will
begin, the FDA may approve one or more generic versions of Oxandrin at any
time. If the FDA approves a generic version of Oxandrin, our revenues will
decline significantly, and our results of operations will be materially
adversely affected.
25
Our return to profitability is dependent on the successful commercialization
of Puricase, Prosaptide and any other product candidates that we may develop.
If we are unable to successfully commercialize Puricase, Prosaptide or any
other product candidates, or if we experience significant delays or
unanticipated costs in doing so, or if sales revenue from any product
candidate that receives marketing approval is insufficient, we may never
return to profitability. Even if we do become profitable again, we may not be
able to sustain or increase our profitability on a quarterly or annual basis.
WE WILL NEED SUBSTANTIAL CAPITAL TO DEVELOP AND COMMERCIALIZE PRODUCTS, AND
WE MAY BE UNABLE TO OBTAIN ADDITIONAL CAPITAL. IF WE ARE UNABLE TO OBTAIN
ADDITIONAL FINANCING, OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL
CONDITION MAY BE ADVERSELY AFFECTED.
The development and commercialization of pharmaceutical products requires
substantial funds. In addition, we may require cash to acquire new product
candidates. In recent periods, we have satisfied our cash requirements
primarily through product sales. Historically, we have also obtained capital
through collaborations with third parties, contract fees, government funding
and equity and debt financings. These financing alternatives might not be
available in the future to satisfy our cash requirements.
We expect that the repositioning of our company will require significant
additional capital resources. Although we believe that the divestiture of our
global biologics manufacturing business will provide the incremental resources
required to fund the advancement of our drug development programs, the closing
of the divestiture is subject to a number of conditions, including
governmental and regulatory approvals, and these goals may not be achieved due
to unexpected events or our failure to achieve our strategic goals.
We might not be able to obtain additional funds or, if such funds are
available, such funding might be on unacceptable terms. If we raise additional
funds by issuing equity securities, dilution to our then existing stockholders
will result. If we raise additional funds through the issuance of debt
securities or borrowings, we may incur substantial interest expense and could
become subject to financial and other covenants that could restrict our
ability to take specified actions, such as incurring additional debt or making
capital expenditures. If adequate funds are not available, we may be required
to significantly curtail one or more of our commercialization efforts or
development programs or obtain funds through sales of assets or arrangements
with collaborative partners or others on less favorable terms than might
otherwise be available.
A SIGNIFICANT PORTION OF OUR REVENUES IS REPRESENTED BY SALES OF OXANDRIN.
SALES OF OXANDRIN DECLINED SUBSTANTIALLY DURING THE FIRST THREE MONTHS OF 2005
AS COMPARED TO THE FIRST THREE MONTHS OF 2004. OXANDRIN MAY BEGIN FACING
GENERIC COMPETITION AT ANY TIME, WHICH WOULD LIKELY CAUSE A SIGNIFICANT
FURTHER DECREASE IN OXANDRIN SALES AND RENDER OUR EXISTING OXANDRIN INVENTORY
OBSOLETE.
Net sales of Oxandrin for the first three months of 2005 amounted to $8.3
million, representing approximately 37% of our net product sales for that
period. Net sales of Oxandrin amounted to $18.4 million in the first three
months of 2004, representing 57% of net product sales. Several companies have
filed drug master files with the FDA relating to a generic drug with the same
active pharmaceutical ingredient as Oxandrin. While we cannot predict when
generic competition for Oxandrin will begin, the FDA may approve one or more
generic versions of Oxandrin at any time. The introduction of these generic
products would likely cause a significant decrease in our Oxandrin revenues,
which would adversely affect us financially and could require us to scale back
some of our business activities. As a result, we anticipate that Oxandrin will
be a less significant product for our future operating results.
Our inventories include Oxandrin inventories that we believe would
potentially be in excess of expected product demand if the FDA approves a
generic form of the product in the near term. The amount of such potential
excess will vary depending upon the timing of the approval of a generic
product, the number of generic products that are approved and the rate by
which generic sales reduce demand for branded Oxandrin. If generic approval
occurs during the second quarter of 2005, we estimate that such potential
excess may be up to $6.7 million.
26
OXANDRIN SALES IN PARTICULAR REPORTING PERIODS MAY BE AFFECTED BY
WHOLESALERS' BUYING PATTERNS AND PRODUCT RETURNS.
We make a significant portion of our sales of Oxandrin in the United States
to major drug wholesalers. These sales are affected by fluctuations in the
buying patterns of these wholesalers and the corresponding changes in
inventory levels that they maintain. These changes may not reflect underlying
prescriber demand and can be influenced by price concessions or announcements
of price increases in future periods. We believe that Oxandrin sales in the
second quarter of 2004 were negatively affected by reduced purchases by
wholesalers as they reduced their inventory levels. Our Oxandrin sales in
future periods may be further reduced if wholesalers continue to reduce
inventories. This may be more likely if and when a generic version of Oxandrin
is introduced.
The Ross Products Division of Abbott Laboratories, or Ross, markets Oxandrin
under a co-promotion agreement with us for the treatment of weight loss by
residents of long-term care facilities. According to IMS Health data, the
long-term care market represented approximately 17% of Oxandrin wholesaler to
end-user sales in 2004, 16% in 2003 and 14% in 2002. Prescriptions in the
long-term care market decreased by 9.3% in 2004 compared to 2003. To date, the
average prescription written for the long-term care market involves a lower
dose of Oxandrin than the average prescription written for the AIDS market. As
a result, the rate of growth in Oxandrin sales may be less than the rate of
growth in prescriptions. Ross has the right to terminate our Oxandrin co-
promotion agreement at any time upon six months notice. If Ross elects to do
so, our Oxandrin sales could be adversely affected until we are able to
replace the Ross sales force. However, we may not be able to do so
successfully.
OUR RESULTS OF OPERATIONS HAVE BEEN ADVERSELY AFFECTED BY RECENT RETURNS OF
OXANDRIN. FUTURE RETURNS OF OXANDRIN OR OTHER PRODUCTS COULD ALSO AFFECT OUR
RESULTS OF OPERATIONS.
Revenues from Oxandrin sales were reduced by approximately $2.9 million as a
result of product returns and sales return allowances that we recorded in the
first three months of 2005. As of March 31, 2005, $11.8 million of that amount
remains as an allowance for future product returns. Future product returns in
excess of our reserves would reduce our revenues and adversely affect our
results of operations.
WE OPERATE IN A HIGHLY COMPETITIVE MARKET. OUR COMPETITORS MAY DEVELOP
ALTERNATIVE TECHNOLOGIES OR SAFER OR MORE EFFECTIVE PRODUCTS BEFORE WE ARE
ABLE TO DO SO.
The pharmaceutical and biotechnology industries are intensely competitive.
The technological areas in which we work continue to evolve at a rapid pace.
Our future success will depend upon our ability to compete in the research,
development and commercialization of products and technologies in our areas of
focus. Competition from pharmaceutical, chemical and biotechnology companies,
universities and research institutions is intense and we expect it to
increase. Many of these competitors are substantially larger than we are and
have substantially greater capital resources, research and development
capabilities and experience and manufacturing, marketing, financial and
managerial resources than we do. Acquisitions of competing companies by large
pharmaceutical companies or other companies could enhance the financial,
marketing and other resources available to these competitors.
Rapid technological development may result in our product candidates in
development becoming obsolete before we can begin marketing these product
candidates or before we are able to recover a significant portion of the
research, development and commercialization expenses incurred in the
development of those products. For example, since our launch of Oxandrin in
December 1995 through December 2000, a significant portion of Oxandrin sales
has been for treatment of patients suffering from AIDS-related weight loss.
These patients' need for Oxandrin may decrease as a result of the development
of safer or more effective treatments, such as protease inhibitors. In fact,
since January 2001, growth in the AIDS-related weight loss market has slowed
substantially. As a result, we are working to expand the use of Oxandrin to
treat involuntary weight loss associated with other conditions, such as
cancer, burns, non-healing wounds and chronic obstructive pulmonary disease.
However, we may not be successful in our efforts.
Our products must compete with others to gain market acceptance and market
share. An important factor will be the timing of market introduction of
competitive products. Accordingly, the relative speed with which
27
we and competing companies can develop products, complete the clinical testing
and approval processes, and supply commercial quantities of the products to
the market will be an important element of market success.
Our competitors may develop safer, more effective or more affordable
products or achieve earlier product development completion, patent protection,
regulatory approval or product commercialization than we do. Our competitors'
achievement of any of these goals could have a material adverse effect on our
business. These companies also compete with us to attract qualified personnel
and to attract third parties for acquisitions, joint ventures or other
collaborations.
MANUFACTURING OUR PRODUCTS REQUIRES US TO MEET STRINGENT QUALITY CONTROL
STANDARDS. IN ADDITION, WE DEPEND ON THIRD PARTIES TO MANUFACTURE MANY OF OUR
PRODUCTS, AND PLAN TO RELY ON THIRD PARTIES TO MANUFACTURE ANY FUTURE
PRODUCTS. IF WE OR THESE THIRD PARTIES FAIL TO MEET APPLICABLE QUALITY
REQUIREMENTS, OUR REVENUES AND PRODUCT DEVELOPMENT EFFORTS MAY BE MATERIALLY
ADVERSELY AFFECTED.
The manufacture of our products involves a number of technical steps and
requires us or our third-party suppliers to meet stringent quality control
specifications imposed by us or by governmental regulatory bodies. In the
event of a natural disaster, equipment failure, strike, war or other
difficulty, we or our suppliers may be unable to manufacture our products in a
manner necessary to fulfill demand. Our inability to fulfill demand may permit
our licensees and distributors to terminate their agreements, seek alternate
suppliers or manufacture the products themselves.
Further, we depend on third parties for the supply of many of our products.
Failure of any third party to meet applicable regulatory requirements may
adversely affect our profit margins or result in unforeseen delays or other
problems beyond our control. For example, in July 2001, Bristol-Myers Squibb
Company ceased manufacturing Delatestryl for us when it closed the
manufacturing facility at which it produced Delatestryl. Risks involved with
engaging third-party suppliers include:
o reliance on the third party for regulatory compliance and quality
assurance;
o the possible breach of the manufacturing agreement by the third party or
the inability of the third party to meet our production schedules because
of factors beyond our control, such as shortages in qualified personnel;
and
o the possibility of termination or nonrenewal of the agreement by the
third party, based on its own business priorities, at a time that is
costly or inconvenient for us.
Delays or difficulties with our third party suppliers could significantly
delay the manufacture of one or more of our products. If that occurs, we may
have to seek alternative sources of supply, which we may not be able to obtain
at commercially acceptable rates, if at all. If we cannot enter into
alternative supply arrangements, we may have to abandon or sell product lines
on unsatisfactory terms. Any of the foregoing may adversely affect our
financial results, possibly materially.
THE MANUFACTURE AND PACKAGING OF PHARMACEUTICAL PRODUCTS ARE SUBJECT TO THE
REQUIREMENTS OF THE FDA AND SIMILAR FOREIGN REGULATORY BODIES. IF WE OR OUR
THIRD-PARTY SUPPLIERS FAIL TO SATISFY THESE REQUIREMENTS, OUR BUSINESS
OPERATIONS MAY BE MATERIALLY HARMED.
The manufacturing process for pharmaceutical products is highly regulated.
Manufacturing activities must be conducted in accordance with the FDA's
current GMP, and comparable requirements of foreign regulatory bodies. For
example, Rosemont is currently upgrading its manufacturing facility to obtain
FDA approval to sell oral liquid formulations in the United States. Similarly,
despite prior approvals of certain products manufactured at our Be'er Tuvia
manufacturing facility, the FDA must reinspect that facility on a product-by-
product basis before we can sell those additional products manufactured in
that facility in the United States. Failure by us or our third-party suppliers
to comply with applicable regulations, requirements, or guidelines could
result in sanctions being imposed on us, including fines, injunctions, civil
penalties, failure of regulatory authorities to grant marketing approval of
our products, delays, suspension or withdrawal of approvals, license
revocation, seizures or recalls of product, operating restrictions and
criminal prosecutions, any of which could significantly and adversely affect
our business. Other than by contract, we do not have control over the
compliance by our third-party suppliers with these regulations and standards.
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Changes in manufacturing processes or procedures, including changes in the
location where a product is manufactured or changes in a third-party supplier
may require prior FDA or other governmental review or approval or revalidation
of the manufacturing process. This review or revalidation may be costly and
time-consuming.
Because there are a limited number of manufacturers that operate under
applicable regulatory requirements, it may be difficult for us to change a
third-party supplier if we were otherwise required to do so. Similarly,
because of the applicable requirements, we may not be able to quickly and
efficiently replace our manufacturing capacity if we are unable to manufacture
our products at our facilities.
WE HAVE LIMITED MARKETING CAPABILITY AND EXPERIENCE AND RELY ON THIRD
PARTIES TO MARKET MANY OF OUR PRODUCTS. IF THESE THIRD PARTIES DO NOT MEET OUR
PERFORMANCE EXPECTATIONS, OUR SALES MAY BE ADVERSELY AFFECTED.
We depend on third party licensees to distribute and market many of our
products, including Bio-Tropin, Biolon, Mircette, Silkis, Bio-Hep-B, Nuflexxa,
Euflexxa and insulin products. The success of these arrangements depends on
each licensee's own financial, competitive, marketing and strategic
considerations, which include the relative advantages, including patent and
proprietary positions, of alternate products being marketed or developed by
others. Furthermore, the amounts of any payments to be received by us under
our license agreements from sales of product by licensees depends on the
extent to which our licensees devote resources to the development and
commercialization of the products. Although we believe that our licensees have
an economic motivation to commercialize their products, we have no effective
control over the licensees' commercialization efforts.
Turnover in our sales and marketing employees adversely affects our product
sales, as it can take several months to find and train new sales and marketing
employees. Competition for experienced sales and marketing employees is
intense, and we compete with companies with greater resources and larger
product lines. During 2003 we experienced significant difficulty in
maintaining our sales and marketing force in the United States as a result of
a number of factors, including the limited number of products we market in the
United States, the expected introduction of generic versions of Oxandrin, our
inability to in-license additional products for our sales and marketing team
to sell and the uncertainty created by the proposed (and now abandoned)
acquisition of us by Teva Pharmaceutical Industries Ltd. As a result, in
November 2003, we engaged a contract sales organization to fill territories
for which we had lost and could not replace sales and marketing employees. The
successful marketing of our products will be dependent on the efforts of this
contract sales organization, over which we will have little or no control.
WE MAY NOT BE SUCCESSFUL IN ESTABLISHING ADDITIONAL STRATEGIC ALLIANCES,
WHICH COULD ADVERSELY AFFECT OUR ABILITY TO DEVELOP AND COMMERCIALIZE PRODUCTS
AND SERVICES.
Part of our new strategic plan to focus on product development involves
entering into new strategic alliances for the development and
commercialization of products and services when we believe that doing so will
maximize product value. For example, if the results of our ongoing Phase 2
clinical trial for Puricase are favorable, we may seek partners to
commercialize Puricase, rather than continue to develop it on our own. We may
also seek a collaborator for Prosaptide.
If we are unsuccessful in reaching an agreement with a suitable collaborator
for our current or future product candidates, we may fail to meet our business
objectives for the applicable product or program. We face significant
competition in seeking appropriate collaborators. Moreover, these alliance
arrangements are complex to negotiate and time-consuming to document. We may
not be successful in our efforts to establish additional strategic alliances
or other alternative arrangements. The terms of any additional strategic
alliances or other arrangements that we establish may not be favorable to us.
Moreover, such strategic alliances or other arrangements may not be
successful.
The risks that we are likely to face in connection with any future strategic
alliances include the following:
o strategic alliance agreements are typically for fixed terms and are
subject to termination under various circumstances, including, in many
cases without cause;
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o our collaborators may change the focus of their development and
commercialization efforts;
o we may rely on our collaborators to manufacture the products covered by
our alliances;
o the areas of research, development and commercialization that we may
pursue, either alone or in collaboration with third parties, may be
limited as a result of non-competition provisions of our strategic
alliance agreements; and
o our collaborators may develop and commercialize, either alone or with
others, products and services that are similar to or competitive with the
products and services that are the subject of the alliance with us.
OUR SALES DEPEND ON PAYMENT AND REIMBURSEMENT FROM THIRD-PARTY PAYORS, AND A
REDUCTION IN THE PAYMENT OR REIMBURSEMENT RATE COULD RESULT IN DECREASED USE
OR SALES OF OUR PRODUCTS.
Most patients will rely on Medicare and Medicaid, private health insurers
and other third party payors to pay for their medical needs, including any
drugs we or our collaborators may market. If third party payors do not provide
adequate coverage or reimbursement for any products that we may develop, our
revenues and prospects for profitability will suffer. The U.S. Congress
recently enacted a limited prescription drug benefit for Medicare recipients
in the Medicare Prescription Drug and Modernization Act of 2003. While the
program established by this statute may increase demand for our products, if
we participate in this program our prices will be negotiated with drug
procurement organizations for Medicare beneficiaries and are likely to be
lower than we might otherwise obtain. Non-Medicare third party drug
procurement organizations may also base the price they are willing to pay on
the rate paid by drug procurement organizations for Medicare beneficiaries.
A primary trend in the U.S. healthcare industry is toward cost containment.
In addition, in some foreign countries, particularly the countries of the
European Union, the pricing of prescription pharmaceuticals is subject to
governmental control. In these countries, pricing negotiations with
governmental authorities can take six to 12 months or longer after the receipt
of regulatory marketing approval for a product. To obtain reimbursement or
pricing approval in some countries, we may be required to conduct a clinical
trial that compares the cost effectiveness of our product candidates or
products to other available therapies. The conduct of such a clinical trial
could be expensive and result in delays in commercialization of our products.
Third-party payors are challenging the prices charged for medical products
and services, and many third-party payors limit reimbursement for newly
approved healthcare products. In particular, third-party payors may limit the
indications for which they will reimburse patients who use any products we may
develop. Cost control initiatives could decrease the price we might establish
for products that we may develop, which would result in lower product revenues
to us.
Beginning in the second quarter of 2003, three states with budget crises -
New York, California, and Florida - have eliminated or limited reimbursement
of prescription drugs for HIV and AIDS, including Oxandrin, under their AIDS
Drug Assistance Programs, which has adversely affected and is expected to
continue to adversely affect sales of Oxandrin in those states. Efforts and
discussions are ongoing with these state agencies to reverse these recent
changes, but to date we have not been successful and we cannot predict whether
we will be successful in the future. If we are not successful, our Oxandrin
sales in this HIV/AIDS related involuntary weight loss market will continue to
be adversely impacted.
WE HAVE RECENTLY MADE SIGNIFICANT CHANGES IN OUR SENIOR MANAGEMENT TEAM. IF
WE FAIL TO ATTRACT AND KEEP SENIOR MANAGEMENT AND KEY SCIENTIFIC PERSONNEL, WE
MAY BE UNABLE TO SUCCESSFULLY DEVELOP OR COMMERCIALIZE OUR PRODUCT CANDIDATES.
We have recently made significant changes in our senior management team. On
July 13, 2004, Christopher Clement, who had been our president and chief
operating officer, became our president and chief executive officer. On May
28, 2004, Philip K. Yachmetz joined us as senior vice president and general
counsel and on August 23, 2004, Lawrence A. Gyenes joined us as senior vice
president, chief financial officer and treasurer. On March 30, 2005, David
Fink joined us as senior vice president, commercial operations. Our success
will depend in part on our ability to attract, retain and motivate highly
qualified personnel and to maintain continuity and stability within our
management team.
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There is a great deal of competition from other companies and research and
academic institutions for the limited number of scientists with expertise in
the areas of our activities. If we cannot continue to attract and retain, on
acceptable terms, the qualified personnel necessary for the continued
development of our business, we may not be able to sustain our operations and
execute on our business plan. We generally do not enter into employment
agreements with any of our scientific personnel. In addition, we do not
maintain, and have no current intention of obtaining, "key man" life insurance
on any of our employees.
ECONOMIC, POLITICAL AND OTHER RISKS ASSOCIATED WITH FOREIGN OPERATIONS COULD
ADVERSELY AFFECT OUR INTERNATIONAL SALES.
We significantly expanded our international operations with the acquisition
of Rosemont on September 30, 2002. Our net product sales outside the United
States accounted for approximately 59% of our total product sales for the
first three months of 2005 and 34% of our net product sales in 2004. Because
we sell our products worldwide, our businesses are subject to risks associated
with doing business internationally, including:
o difficulties in staffing and managing foreign operations;
o changes in a country's or region's political or economic conditions;
o longer payment cycles of foreign customers and difficulty of collecting
receivables in foreign jurisdictions;
o trade protection measures and import or export licensing requirements;
o less familiarity with business customs and practices;
o the imposition of tariffs and import and export controls;
o the impact of possible recessionary environments in economies outside the
United States;
o unexpected changes in regulatory requirements;
o currency exchange rate fluctuations;
o differing labor laws and changes in those laws;
o differing protection of intellectual property and changes in that
protection;
o differing tax laws and changes in those laws; and
o differing regulatory requirements and changes in those requirements.
We do not currently engage in currency hedging transactions. However,
depending on our sales from international operations and our perception as to
currency volatility, we may choose to limit our exposure by the purchase of
forward foreign exchange contracts or similar hedging strategies. The currency
exchange strategy that we adopt may not be successful in avoiding exchange-
related losses. In addition, the above-listed factors may cause a decline in
our future international revenue and, consequently, may harm our business. We
may not be able to sustain or increase revenue that we derive from
international sources.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY DEVELOPMENTS IN ISRAEL.
We currently conduct significant research, development and biologics
production activities in Israel. These activities are affected by economic,
military and political conditions in Israel and in the Middle East in general.
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors. These
hostilities have caused security and economic problems in Israel. In addition,
since October 2000, there has been a significant increase in violence,
primarily in the West Bank and Gaza Strip. During the course of military
operations, Israel's military reserves, which include a number of our
employees and executives, may be called up, which could adversely affect our
ability to conduct our business.
Any major hostilities involving Israel could adversely affect our research,
development and production operations. Ongoing or revived hostilities related
to Israel could adversely affect us. For example, from the
31
fourth quarter of 2001 until September 2002, we were required to stop U.S.
shipments of BioLon sterilized by our Israeli contractor because the FDA was
unable to inspect the new manufacturing facility of this contractor as a
result of the violence in Israel at the time. Additionally, in recent years
the FDA has from time to time suspended inspections of manufacturing
facilities in Israel as a result of violence in Israel. For example, the FDA
cancelled its scheduled April 2003 visit to Israel in light of the then
existing situation with Iraq. Any such action could delay FDA inspection of
the Be'er Tuvia facility and, therefore, use of such facility to manufacture
products for the U.S. market.
On March 23, 2005, we announced that we had signed a definitive agreement to
divest our global biologics manufacturing business to Ferring.
WE MAY INCUR SUBSTANTIAL PRODUCT LIABILITY.
The testing and marketing of our products entail an inherent risk of product
liability and associated adverse publicity. Pharmaceutical product liability
exposure could be extremely large and pose a material risk. Although we have
so far been able to obtain indemnification from pharmaceutical companies
commercializing our products, other companies with which we collaborate may
not agree to do so. Furthermore, the companies that agree to these
indemnification obligations may not have adequate financial resources to
satisfy their obligation.
To the extent we elect to test or market products independently, we will
bear the risk of product liability directly. We currently have $20 million of
product liability insurance coverage in place. We might not be able to
maintain existing insurance or obtain additional insurance on acceptable
terms, or at all. It is possible that a single product liability claim could
exceed our insurance coverage limits, and multiple claims are possible. Any
successful product liability claim made against us could substantially reduce
or eliminate any stockholders' equity we may have and could materially harm
our financial results. Product liability claims, regardless of their merits,
could be costly and divert management's attention, and adversely affect our
reputation and the demand for our products.
THE ULTIMATE OUTCOME OF PENDING SECURITIES LITIGATION IS UNCERTAIN.
After the restatement of our financial statements for the years ended
December 31, 1999, 2000 and 2001 and the first two quarters of 2002, we and
some of our current and former officers were named in a series of similar
purported securities class action lawsuits. The complaints in theses actions
allege violations of U.S. securities law through alleged material
misrepresentations and omissions and seek an unspecified award of damages.
In addition, members of our board of directors prior to June 2003 and Arthur
Andersen LLP, our prior auditor, were named in derivative actions that
claimed, among other things, that our directors breached their fiduciary
duties by failing to implement and maintain an adequate internal accounting
control system. While these derivative suits were dismissed by the court, we
have received a letter on behalf of a purported stockholder demanding that we
commence an action against most of our directors, certain former directors,
Arthur Andersen and others who were responsible for the actions that resulted
in the restatement of our financial statements. A special committee of our
board of directors, consisting of directors who were not directors prior to
our June 2003 annual meeting of stockholders, has investigated this demand and
has determined that litigation relating to this matter should not proceed.
We intend to contest the pending securities actions against us vigorously.
However, an adverse decision in these cases could adversely affect us
financially. We have referred these claims to our directors and officers
insurance carrier, which has reserved its rights as to coverage with respect
to these actions.
RISKS RELATING TO INTELLECTUAL PROPERTY
IF WE ARE UNABLE TO OBTAIN AND MAINTAIN PROTECTION FOR THE INTELLECTUAL
PROPERTY RELATING TO OUR TECHNOLOGY AND PRODUCTS, THE VALUE OF OUR TECHNOLOGY
AND PRODUCTS WILL BE ADVERSELY AFFECTED.
Our success will depend in large part on our ability to obtain and maintain
protection in the United States and other countries for the intellectual
property covering or incorporated into our technology and products. The patent
situation in the field of biotechnology and pharmaceuticals is highly
uncertain and
32
involves complex legal and scientific questions. We may not be able to obtain
additional issued patents relating to our technology or products. Even if
issued, patents may be challenged, narrowed, invalidated or circumvented,
which could limit our ability to stop competitors from marketing similar
products or limit the length of term of patent protection we may have for our
products. Changes in either patent laws or in interpretations of patent laws
in the United States and other countries may diminish the value of our
intellectual property or narrow the scope of our patent protection.
Our patents also may not afford us protection against competitors with
similar technology. Because patent applications in the United States and many
foreign jurisdictions are typically not published until 18 months after
filing, or in some cases not at all, and because publications of discoveries
in the scientific literature often lag behind actual discoveries, neither we
nor our licensors can be certain that we or they were the first to make the
inventions claimed in issued patents or pending patent applications, or that
we or they were the first to file for protection of the inventions set forth
in these patent applications.
IF WE ARE UNABLE TO PROTECT THE CONFIDENTIALITY OF OUR PROPRIETARY
INFORMATION AND KNOW-HOW, THE VALUE OF OUR TECHNOLOGY AND PRODUCTS COULD BE
ADVERSELY AFFECTED.
In addition to patented technology, we rely upon unpatented proprietary
technology, processes and know-how. We seek to protect this information in
part by confidentiality agreements with our employees, consultants and third
parties. These agreements may be breached, and we may not have adequate
remedies for any such breach. In addition, our trade secrets may otherwise
become known or be independently developed by competitors. If our confidential
information or trade secrets become publicly known, they may lose their value
to us.
IF WE INFRINGE OR ARE ALLEGED TO INFRINGE INTELLECTUAL PROPERTY RIGHTS OF
THIRD PARTIES, IT WILL ADVERSELY AFFECT OUR BUSINESS.
Our research, development and commercialization activities, as well as any
product candidates or products resulting from these activities, may infringe
or be claimed to infringe patents or patent applications under which we do not
hold licenses or other rights. Third parties may own or control these patents
and patent applications in the United States and abroad. These third parties
could bring claims against us or our collaborators that would cause us to
incur substantial expenses and, if successful against us, could cause us to
pay substantial damages. Further, if a patent infringement suit were brought
against us or our collaborators, we or they could be forced to stop or delay
research, development, manufacturing or sales of the product or product
candidate that is the subject of the suit.
As a result of patent infringement claims, or in order to avoid potential
claims, we or our collaborators may choose or be required to seek a license
from the third party and be required to pay license fees or royalties or both.
These licenses may not be available on acceptable terms, or at all. Even if we
or our collaborators were able to obtain a license, the rights may be
nonexclusive, which could result in our competitors gaining access to the same
intellectual property. Ultimately, we could be prevented from commercializing
a product, or be forced to cease some aspect of our business operations, if,
as a result of actual or threatened patent infringement claims, we or our
collaborators are unable to enter into licenses on acceptable terms. This
could harm our business significantly.
There has been substantial litigation and other proceedings regarding patent
and other intellectual property rights in the pharmaceutical and biotechnology
industries. In addition to infringement claims against us, we may become a
party to other patent litigation and other proceedings, including interference
proceedings declared by the U.S. Patent and Trademark Office and opposition
proceedings in the European Patent Office or in another patent office,
regarding intellectual property rights with respect to our products and
technology. The cost to us of any patent litigation or other proceeding, even
if resolved in our favor, could be substantial. Some of our competitors may be
able to sustain the costs of such litigation or proceedings more effectively
than we can because of their substantially greater financial resources.
Uncertainties resulting from the initiation and continuation of patent
litigation or other proceedings could adversely affect our ability to compete
in the marketplace. Patent litigation and other proceedings may also absorb
significant management time.
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WE CURRENTLY ARE, AND IN THE FUTURE MAY BE, INVOLVED IN COSTLY LEGAL
PROCEEDINGS TO ENFORCE OR PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR TO
DEFEND AGAINST CLAIMS THAT WE INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF
OTHERS.
Litigation is inherently uncertain, and an adverse outcome could subject us
to significant liability for damages or invalidate our proprietary rights.
Legal proceedings that we initiate to protect our intellectual property rights
could also result in counterclaims or countersuits against us. Any litigation,
regardless of its outcome, could be time-consuming and expensive to resolve
and could divert our management's time and attention. Any intellectual
property litigation also could force us to take specific actions, including:
o cease selling products or undertaking processes that are claimed to be
infringing a third party's intellectual property;
o obtain licenses to make, use, sell, offer for sale or import the relevant
technologies from the intellectual property's owner, which licenses may
not be available on reasonable terms, or at all;
o redesign those products or processes that are claimed to be infringing a
third party's intellectual property; or
o pursue legal remedies with third parties to enforce our indemnification
rights, which may not adequately protect our interests.
We are currently a party to a lawsuit regarding intellectual property with
Barr Laboratories, relating to Mircette in the United States.
This lawsuit, which is described in greater detail in our Annual Report on
Form 10-K, as amended, for the year ended December 31, 2004 in the section
titled "Item 3. Legal Proceedings", has diverted, and expected to continue to
divert, the efforts and attention of our key management and technical
personnel. We have incurred, and expect to continue to incur, substantial
legal fees and expenses in connection with this lawsuit. As a result, this
lawsuit, regardless of the eventual outcomes, has been, and will continue to
be, costly and time-consuming. Furthermore, we could be involved in similar
disputes or litigation with other third parties in the future. An adverse
decision in any intellectual property litigation could have a material adverse
effect on our business, results of operations and financial condition
REGULATORY RISKS
WE ARE SUBJECT TO STRINGENT GOVERNMENTAL REGULATION, AND OUR FAILURE TO
COMPLY WITH APPLICABLE REGULATIONS COULD ADVERSELY AFFECT OUR ABILITY TO
CONDUCT OUR BUSINESS.
Virtually all aspects of our business are subject to extensive regulation by
numerous federal and state governmental authorities in the United States, such
as the FDA, as well as by foreign countries where we manufacture or distribute
our products. Of particular significance are the requirements covering
research and development, testing, manufacturing, quality control, labeling
and promotion of pharmaceutical products for human use. All of our products,
manufacturing processes and facilities require governmental licensing or
approval prior to commercial use. A pharmaceutical product cannot be marketed
in the United States until it has been approved by the FDA, and then can only
be marketed for the indications and claims approved by the FDA. As a result of
these requirements, the length of time, the level of expenditures and the
laboratory and clinical information required for approval of an NDA or a BLA
are substantial. The approval process applicable to products of the type being
developed by us usually takes five to seven years from the commencement of
human clinical trials and typically requires substantial expenditures. We and
our collaborators may encounter significant delays or excessive costs in our
or their respective efforts to secure necessary approvals or licenses. Before
obtaining regulatory approval for the commercial sale of our products, we are
required to conduct pre-clinical and clinical trials to demonstrate that the
product is safe and efficacious for the treatment of the target indication.
The timing of completion of clinical trials depends on a number of factors,
many of which are outside our control. In addition, we and our collaborators
may encounter delays or rejections based upon changes in the policies of
regulatory authorities. The FDA and foreign regulatory authorities have
substantial discretion to terminate clinical trials, require additional
testing, delay or withhold registration and marketing approval, and mandate
product withdrawals.
34
Failure to obtain requisite governmental approvals, or failure to obtain
approvals of the scope requested, could delay or preclude us or our
collaborators from marketing our products, could limit the commercial use of
the products and could also allow competitors time to introduce competing
products ahead of product introductions by us. Even after regulatory approval
is obtained, use of the products could reveal side effects that, if serious,
could result in suspension of existing approvals and delays in obtaining
approvals in other jurisdictions.
Regulation by governmental authorities in the United States and other
countries is a significant factor affecting the timing of the
commercialization of our products and our ongoing research and development
activities. The timing of regulatory approvals is not within our control. To
date, the length of time required to obtain regulatory approval of genetically
engineered products has been significantly longer than expected, both for us
and the biotechnology industry in general. We believe that these delays have
in the past negatively impacted our ability to attract funding and that, as a
result, the terms of such financings have been less favorable to us than they
might otherwise have been had our product revenues provided sufficient funds
to finance the large costs of taking a product from discovery through
commercialization. As a result, we have had to license the commercialization
of many of our products to third parties in exchange for research funding and
royalties on product sales, resulting in lower revenues than if we had
commercialized the products on our own.
Failure to comply with applicable regulatory requirements can, among other
things, result in significant fines or other sanctions, termination of
clinical trials, suspension of regulatory approvals, product recalls, seizure
of products, imposition of operating restrictions and criminal prosecutions.
While we have developed and instituted a corporate compliance program based on
current best practices, we cannot assure you that we or our employees have
been or will be in compliance with all potentially applicable federal and
state regulations.
Further, FDA policy or similar policies of regulatory agencies in other
countries may change and additional governmental requirements may be
established that could prevent or delay regulatory approval of our products.
We cannot predict what effect changes in regulations, enforcement positions,
statutes or legal interpretation, when and if promulgated, adopted or enacted,
may have on our business in the future. Changes could, among other things,
require changes to manufacturing methods or facilities, expanded or different
labeling, new approvals, the recall, replacement or discontinuance of certain
products, additional record keeping and expanded scientific substantiation.
These changes, or new legislation, could adversely affect our business.
RISKS RELATING TO AN INVESTMENT IN OUR COMMON STOCK
OUR STOCK PRICE IS VOLATILE, WHICH COULD ADVERSELY AFFECT YOUR INVESTMENT.
Our stock price is volatile. Since January 1, 2001, our common stock traded
as high as $13.57 per share and as low as $1.77 per share. The market price of
our common stock may be influenced by many factors, including:
o our ability to successfully implement our new strategic direction;
o announcements of technological innovations or new commercial products by
us or our competitors;
o announcements by us or our competitors of results in pre-clinical testing
and clinical trials;
o regulatory developments;
o patent or proprietary rights developments;
o public concern as to the safety or other implications of biotechnology
products;
o changes in our earnings estimates and recommendations by securities
analysts;
o period-to-period fluctuations in our financial results; and
o general economic, industry and market conditions.
35
The volatility of our common stock imposes a greater risk of capital losses
on our stockholders than would a less volatile stock. In addition, volatility
makes it difficult to ascribe a stable valuation to a stockholder's holdings
of our common stock. The stock market in general and the market for
biotechnology companies in particular have also experienced significant price
and volume fluctuations that are often unrelated to the operating performance
of particular companies. In the past, following periods of volatility in the
market price of the securities of biopharmaceutical companies, securities
class action litigation has often been instituted against these companies.
Such litigation would result in substantial costs and a diversion of
management's attention and resources, which could adversely affect our
business.
WE EXPECT OUR QUARTERLY RESULTS TO FLUCTUATE, WHICH MAY CAUSE VOLATILITY IN
OUR STOCK PRICE.
Our revenues and expenses have in the past and may in the future continue to
display significant variations. These variations may result from a variety of
factors, including:
o the amount and timing of product sales;
o changing demand for our products;
o our inability to provide adequate supply for our products;
o changes in wholesaler buying patterns;
o returns of expired product;
o changes in government or private payor reimbursement policies for our
products;
o increased competition from new or existing products, including generic
products;
o the timing of the introduction of new products;
o the timing and realization of milestone and other payments from
licensees;
o the timing and amount of expenses relating to research and development,
product development and manufacturing activities;
o the extent and timing of costs of obtaining, enforcing and defending
intellectual property rights; and
o any charges related to acquisitions.
Because many of our expenses are fixed, particularly in the short-term, any
decrease in revenues will adversely affect our earnings until revenues can be
increased or expenses reduced. We also expect our revenues and earnings to be
adversely affected once a generic version of Oxandrin is introduced. Because
of fluctuations in revenues and expenses, it is possible that our operating
results for a particular quarter or quarters will not meet the expectations of
public market analysts and investors, which could cause the market price of
our common stock to decline. We believe that period-to-period comparisons of
our operating results are not a good indication of our future performance and
stockholders should not rely on those comparisons to predict our future
operating or share price performance.
EFFECTING A CHANGE OF CONTROL OF OUR COMPANY COULD BE DIFFICULT, WHICH MAY
DISCOURAGE OFFERS FOR SHARES OF OUR COMMON STOCK.
Our certificate of incorporation and the Delaware General Corporation Law
contain provisions that may delay or prevent an attempt by a third party to
acquire control of us. These provisions include the requirements of Section
203 of the Delaware General Corporation Law. In general, Section 203 prohibits
designated types of business combinations, including mergers, for a period of
three years between us and any third party that owns 15% or more of our common
stock. This provision does not apply if:
o our board of directors approves of the transaction before the third party
acquires 15% of our stock;
o the third party acquires at least 85% of our stock at the time its
ownership goes past the 15% level; or
o our board of directors and two-thirds of the shares of our common stock
not held by the third party vote in favor of the transaction.
36
We have also adopted a stockholder rights plan intended to deter hostile or
coercive attempts to acquire us. Under the plan, if any person or group
acquires more than 20% of our common stock without approval of our board of
directors under specified circumstances, our other stockholders have the right
to purchase shares of our common stock, or shares of the acquiring company, at
a substantial discount to the public market price. As a result, the plan makes
an acquisition much more costly to a potential acquirer.
Our certificate of incorporation also authorizes us to issue up to 4 million
shares of preferred stock in one or more different series with terms fixed by
our board of directors. Stockholder approval is not necessary to issue
preferred stock in this manner. Issuance of these shares of preferred stock
could have the effect of making it more difficult for a person or group to
acquire control of us. No shares of our preferred stock are currently
outstanding. While our board of directors has no current intention or plan to
issue any preferred stock, issuance of these shares could also be used as an
anti-takeover device.
WE HAVE IDENTIFIED MATERIAL WEAKNESSES IN OUR INTERNAL CONTROLS OVER
FINANCIAL REPORTING. THESE IDENTIFIED MATERIAL WEAKNESSES AND ANY OTHER
MATERIAL WEAKNESSES IN OUR INTERNAL CONTROL OVER FINANCIAL REPORTING OR OUR
FAILURE TO REMEDIATE SUCH MATERIAL WEAKNESSES COULD RESULT IN A MATERIAL
MISSTATEMENT IN OUR FINANCIAL STATEMENTS NOT BEING PREVENTED OR DETECTED AND
COULD AFFECT INVESTOR CONFIDENCE IN THE ACCURACY AND COMPLETENESS OF OUR
FINANCIAL STATEMENTS AS WELL AS OUR STOCK PRICE.
In conjunction with our review of our internal control over financial
reporting under Section 404 of the Sarbanes-Oxley Act of 2002, we have
identified material weaknesses in our internal control over financial
reporting relating to the Company's financial reporting process, internal
communications and insufficient expertise with respect to accounting for
income taxes and the application of complex revenue recognition standards.
Material weaknesses in our internal control over financial reporting could
result in material misstatements in our financial statements not being
prevented or detected. We may experience difficulties or delays in completing
remediation or may not be able to successfully remediate material weaknesses
at all.
Any material weakness or unsuccessful remediation could affect investor
confidence in the accuracy and completeness of our financial statements, which
in turn could harm our business and have an adverse effect on our stock price
and our ability to raise additional funds.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. To
date our exposure to market risk has been limited. We do not currently hedge
any market risk, although we may do so in the future. We do not hold or issue
any derivative financial instruments for trading or other speculative
purposes.
Our obligations under our credit facility bear interest at floating rates.
Therefore, changes in prevailing interest rates affect our interest expense.
As of March 31, 2005, the outstanding principal amount of our credit facility
was $3,889,000. A 100 basis point increase in market interest rates would
result in an increase to our annual interest expense of $39,000 before giving
effect to required monthly principal payments.
Our material interest-bearing assets consist of cash and cash equivalents
and short-term investments, including investments in commercial paper, time
deposits and other debt instruments. Our interest income is sensitive to
changes in the general level of interest rates, primarily U.S. interest rates,
and other market conditions.
As a result of our operations in Israel and the United Kingdom, we are
subject to currency exchange rate fluctuations that can affect our results of
operations. Our results of operations for the first three months of 2004 and
the first three months of 2005 benefited from the decrease in value of the
U.S. dollar relative to the British pound sterling and to the euro. We manage
our Israeli operations with the objective of protecting against any material
net financial loss from the effects of Israeli inflation and currency
devaluations on our non-U.S. dollar assets and liabilities, as measured in
U.S. dollars. The cost of our operations in Israel, as expressed in U.S.
dollars, is influenced by the extent to which any increase in the rate of
inflation in Israel is not offset, or is offset on a lagging basis, by a
devaluation of the Israeli Shekel relative to the U.S. dollar. To date, BTG-
Israel's revenues, as measured in Shekels, have consisted primarily of
research funding from the Office of the Chief Scientist of the State of
Israel, as well as product sales in Israel. To the extent that BTG-Israel's
expenses as measured in Shekels exceed its revenues in Shekels, devaluations
of the Shekel have been and will continue to be a benefit to our financial
condition. However, should BTG-Israel's revenues in Shekels exceed its
expenses in Shekels in any material respect, the devaluation of the Shekel
will adversely affect our financial condition. Furthermore, to the extent the
devaluation of the Shekel relative to the U.S. dollar does not substantially
offset the increase in the costs of local goods and services in Israel, our
financial results will be adversely affected as local expenses measured in
U.S. dollars will increase.
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of our chief executive officer and
chief financial officer, evaluated the effectiveness of our disclosure
controls and procedures as of March 31, 2005. The term "disclosure controls
and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act, means controls and other procedures of a company that are
designed to ensure that information required to be disclosed by a company in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company's
management, including its principal executive and principal financial officer,
as appropriate to allow timely decisions regarding required disclosure. Our
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving
their objectives and management necessarily applies its judgment in evaluating
the cost-benefit relationship of possible controls and procedures. Based on
the evaluation of our disclosure controls and procedures as of March 31, 2005,
our chief executive officer and chief financial officer concluded that, as of
such date, our disclosure controls and procedures were effective at the
reasonable assurance level.
As previously described in our Annual Report of Form 10-K for the fiscal
year ended December 31, 2004, as amended, in connection with the preparation
of our Annual Report on Form 10-K, deficiencies were identified that
constituted material weaknesses in our internal controls. To remediate these
and other
38
deficiencies in our internal controls, during the quarter ended March 31,
2005, we instituted the following additional procedures and controls:
o hired a Director of Taxation to upgrade our tax expertise and improve the
accuracy of future tax calculations;
o hired a Chief Accounting Officer to upgrade our U.S. generally accepted
accounting principles and SEC skill sets;
o improved communications and initiated periodic reviews of material
contracts by the accounting staff for completeness, accuracy and proper
accounting treatment;
o performed additional reviews of customer billing terms and determined
actual delivery dates for shipments by our accounting staff; and
o made changes in assigned roles and responsibilities within the accounting
department to complement the hiring of additional accounting personnel
and enhance our segregation of duties within Savient.
No other change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the
fiscal quarter ended March 31, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 20, 2002, a purported stockholder class action was filed against
us and three of our officers. The action is pending under the caption A.F.I.K.
Holding SPRL v. Fass, No. 02-6048 (HAA) in the U.S. District Court for the
District of New Jersey and alleges violations of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934. The plaintiff purports to represent a
class of stockholders who purchased our shares between April 19, 1999 and
August 2, 2002. The complaint asserts that certain of our financial statements
were materially false and misleading because we restated our earnings and
financial statements for the years ended 1999, 2000 and 2001, as described in
our Current Report on Form 8-K dated, and our press release issued on August 2,
2002. Five nearly identical actions were filed in January and February 2003.
In September 2003, the actions were consolidated and co-lead plaintiffs and
co-lead counsel were appointed in accordance with the Private Securities
Litigation Reform Act. The parties have entered into a stipulation which
provides for the lead plaintiff to file an amended consolidated complaint. We
have filed a motion to dismiss the action. Briefing in support of and in
opposition to this motion has been completed but the court has not scheduled a
hearing date. We cannot predict when a hearing on this motion will be
scheduled, or, once such hearing has been held, when the court will render its
decision.
On October 27, 2003, we received a letter addressed to our board of
directors from attorneys for a purported stockholder of the Company demanding
that we commence legal proceedings to recover our damages against directors
who served on our board immediately prior to our 2003 annual meeting of
stockholders, Fulbright & Jaworski L.L.P., Arthur Andersen LLP, the partners
of Arthur Andersen responsible for the audit of our financial statements for
1999, 2000 and 2001, as well as all other officers and directors responsible
for the alleged wrongdoing. The letter asserted that some or all of these
persons were responsible for the material overstatement of our assets,
earnings and net worth, and that these persons caused us to disseminate false
and misleading press releases and filings with the Securities and Exchange
Commission. An advisory committee to our board of directors, consisting of
directors who were not directors prior to our 2003 annual meeting of
stockholders, investigated this demand and has determined that litigation
should not proceed.
We intend to vigorously defend against all allegations of wrongdoing. We
have referred these claims to our directors' and officers' insurance carrier,
which has reserved its rights as to coverage with respect to these actions.
We are obligated under certain circumstances to indemnify certain customers
for certain or all expenses incurred and damages suffered by them as a result
of any infringement of third party patents. In addition, we are obligated to
indemnify our officers and directors against all reasonable costs and expenses
related to stockholder and other claims pertaining to actions taken in their
capacity as officers and directors which are not covered by our directors and
officers' insurance policy. These indemnification obligations are in the
regular course of business and in most cases do not include a limit on maximum
potential future payments, nor are there any recourse provisions or collateral
that may offset the cost. As of March 31, 2005, we have not recorded a
liability for any obligations arising as a result of these indemnification
obligations.
During the first quarter of 2005, we settled the outstanding patent
litigation with Genentech which had been pending in Israel with respect to
certain methods relating to genetically engineered products and human growth
hormone. The claim was settled for a payment of $2.25 million which was fully
reserved at the end of the year. In January 2005, we concluded a partial
settlement of our patent infringement and patent interference litigation
against Novo Nordisk, receiving $3 million for the resolution of our claims
for lost profits and attorney's fees. An additional payment from Novo is due
upon the conclusion of the appeal filed by Novo regarding an issue in the
patent infringement opinion, regardless of the outcome of the appeal.
ITEM 6. EXHIBITS
(a) Exhibits
The exhibits listed in the Exhibit Index are included in this report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SAVIENT PHARMACEUTICALS, INC.
(Registrant)
By: /s/ Christopher Clement
-----------------------------------------
Christopher Clement
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Lawrence A. Gyenes
-----------------------------------------
Lawrence A. Gyenes
Senior Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting
Officer)
Dated: May 10, 2005
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Certificate of Incorporation, as amended (1)
3.2 By-laws, as amended (2)
10.1 Employment agreement dated August 23, 2004, between Lawrence A.
Gyenes and the Registrant (3)
31.1 Certification of principal executive officer pursuant to Rule 13a-14(a)/15d-14(a) under the
Securities Exchange Act of 1934, as amended
31.2 Certification of the principal financial officer pursuant to Rule 13a-14(a)/15d-14(a) under the
Securities Exchange Act of 1934, as amended
32.1 Statement pursuant to 18 U.S.C. ss.1350
32.2 Statement pursuant to 18 U.S.C. ss.1350
- ---------------
(1) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994.
(2) Incorporated by reference from the Registrant's Current Report on Form 8-K,
dated October 7, 1998.
(3) Incorporated by reference from the Registrant's Current Report on Form 8-K,
dated August 27, 2004.
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