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EX-32 - EX-32 - SANTARUS INC | a56893exv32.htm |
EX-31.1 - EX-31.1 - SANTARUS INC | a56893exv31w1.htm |
EX-10.1 - EX-10.1 - SANTARUS INC | a56893exv10w1.htm |
EX-10.2 - EX-10.2 - SANTARUS INC | a56893exv10w2.htm |
EX-31.2 - EX-31.2 - SANTARUS INC | a56893exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-50651
SANTARUS, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
33-0734433 (I.R.S. Employer Identification No.) |
3721 Valley Centre Drive, Suite 400, San Diego, CA (Address of principal executive offices) |
92130 (Zip Code) |
(858) 314-5700
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
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. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). o Yes þ No
The number of outstanding shares of the registrants common stock, par value $0.0001 per
share, as of July 30, 2010 was 58,564,686.
SANTARUS, INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010
TABLE OF CONTENTS
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Santarus, Inc.
Condensed Balance Sheets
(in thousands, except share and per share amounts)
(unaudited)
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 86,840 | $ | 86,129 | ||||
Short-term investments |
12,242 | 7,815 | ||||||
Accounts receivable, net |
15,363 | 16,253 | ||||||
Inventories, net |
1,794 | 5,336 | ||||||
Prepaid expenses and other current assets |
6,001 | 3,797 | ||||||
Total current assets |
122,240 | 119,330 | ||||||
Long-term restricted cash |
1,400 | 1,400 | ||||||
Property and equipment, net |
867 | 875 | ||||||
Intangible assets, net |
9,000 | 9,750 | ||||||
Other assets |
6 | 6 | ||||||
Total assets |
$ | 133,513 | $ | 131,361 | ||||
Liabilities and stockholders equity |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued liabilities |
$ | 47,736 | $ | 58,676 | ||||
Allowance for product returns |
13,886 | 12,846 | ||||||
Current portion of deferred revenue |
| 245 | ||||||
Total current liabilities |
61,622 | 71,767 | ||||||
Deferred revenue, less current portion |
2,650 | 2,678 | ||||||
Long-term debt |
10,000 | 10,000 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $0.0001 par value; 10,000,000 shares authorized at
June 30, 2010 and December 31, 2009; no shares issued and
outstanding at June 30, 2010 and December 31, 2009 |
| | ||||||
Common stock, $0.0001 par value; 100,000,000 shares authorized at
June 30, 2010 and December 31, 2009; 58,558,790 and 58,344,932
shares issued and outstanding at June 30, 2010 and December 31,
2009, respectively |
6 | 6 | ||||||
Additional paid-in capital |
340,299 | 337,312 | ||||||
Accumulated other comprehensive income (loss) |
1 | (1 | ) | |||||
Accumulated deficit |
(281,065 | ) | (290,401 | ) | ||||
Total stockholders equity |
59,241 | 46,916 | ||||||
Total liabilities and stockholders equity |
$ | 133,513 | $ | 131,361 | ||||
See accompanying notes.
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Santarus, Inc.
Condensed Statements of Operations
(in thousands, except share and per share amounts)
(unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Product sales, net |
$ | 32,866 | $ | 27,989 | $ | 61,876 | $ | 55,544 | ||||||||
Promotion revenue |
8,100 | 5,641 | 16,924 | 10,180 | ||||||||||||
Royalty revenue |
708 | | 2,378 | | ||||||||||||
Other license revenue |
| 2,217 | 245 | 4,933 | ||||||||||||
Total revenues |
41,674 | 35,847 | 81,423 | 70,657 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Cost of product sales |
3,793 | 2,104 | 5,366 | 3,984 | ||||||||||||
License fees and royalties |
2,298 | 1,851 | 5,258 | 3,678 | ||||||||||||
Research and development |
4,540 | 3,262 | 9,557 | 6,373 | ||||||||||||
Selling, general and administrative |
24,928 | 27,334 | 51,467 | 54,052 | ||||||||||||
Total costs and expenses |
35,559 | 34,551 | 71,648 | 68,087 | ||||||||||||
Income from operations |
6,115 | 1,296 | 9,775 | 2,570 | ||||||||||||
Other income (expense): |
||||||||||||||||
Interest income |
24 | 62 | 46 | 154 | ||||||||||||
Interest expense |
(113 | ) | (115 | ) | (229 | ) | (228 | ) | ||||||||
Total other income (expense) |
(89 | ) | (53 | ) | (183 | ) | (74 | ) | ||||||||
Income before income taxes |
6,026 | 1,243 | 9,592 | 2,496 | ||||||||||||
Income tax expense |
1 | 122 | 256 | 222 | ||||||||||||
Net income |
$ | 6,025 | $ | 1,121 | $ | 9,336 | $ | 2,274 | ||||||||
Net income per share: |
||||||||||||||||
Basic |
$ | 0.10 | $ | 0.02 | $ | 0.16 | $ | 0.04 | ||||||||
Diluted |
$ | 0.10 | $ | 0.02 | $ | 0.15 | $ | 0.04 | ||||||||
Weighted
average shares outstanding used to calculate net income per share: |
||||||||||||||||
Basic |
58,459,569 | 57,919,535 | 58,408,054 | 57,870,998 | ||||||||||||
Diluted |
61,164,993 | 58,714,674 | 61,811,085 | 58,355,834 |
See accompanying notes.
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Table of Contents
Santarus, Inc.
Condensed Statements of Cash Flows
(in thousands)
(unaudited)
Six Months Ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
Operating activities |
||||||||
Net income |
$ | 9,336 | $ | 2,274 | ||||
Adjustments
to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
938 | 1,078 | ||||||
Unrealized gain on trading securities, net |
(2 | ) | (39 | ) | ||||
Stock-based compensation |
2,488 | 2,388 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable, net |
890 | (1,019 | ) | |||||
Inventories, net |
3,542 | (67 | ) | |||||
Prepaid expenses and other current assets |
(2,204 | ) | (218 | ) | ||||
Accounts payable and accrued liabilities |
(10,940 | ) | 215 | |||||
Allowance for product returns |
1,040 | 1,186 | ||||||
Deferred revenue |
(273 | ) | (4,816 | ) | ||||
Net cash provided by operating activities |
4,815 | 982 | ||||||
Investing activities |
||||||||
Purchases of short-term investments |
(11,894 | ) | (6,340 | ) | ||||
Maturities of short-term investments |
5,387 | 3,538 | ||||||
Redemption of investments |
2,100 | 50 | ||||||
Purchases of property and equipment |
(196 | ) | (141 | ) | ||||
Net cash used in investing activities |
(4,603 | ) | (2,893 | ) | ||||
Financing activities |
||||||||
Exercise of stock options |
174 | 44 | ||||||
Issuance of common stock, net |
325 | 331 | ||||||
Net cash provided by financing activities |
499 | 375 | ||||||
Increase (decrease) in cash and cash equivalents |
711 | (1,536 | ) | |||||
Cash and cash equivalents at beginning of the period |
86,129 | 49,886 | ||||||
Cash and cash equivalents at end of the period |
$ | 86,840 | $ | 48,350 | ||||
See accompanying notes.
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Table of Contents
Santarus, Inc.
Notes to Condensed Financial Statements
(unaudited)
(unaudited)
1. Organization and Business
Santarus, Inc. (Santarus or the Company) is a specialty biopharmaceutical company focused
on acquiring, developing and commercializing proprietary products that address the needs of
patients treated by gastroenterologists, endocrinologists and other physicians. Santarus was
incorporated on December 6, 1996 as a California corporation and did not commence significant
business activities until late 1998. On July 9, 2002, the Company reincorporated in the State of
Delaware.
2. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance
with U.S. generally accepted accounting principles (GAAP) related to the preparation of interim
financial statements and the rules and regulations of the U.S. Securities and Exchange Commission
related to a quarterly report on Form 10-Q. Accordingly, they do not include all of the
information and disclosures required by GAAP for complete financial statements. The balance sheet
at December 31, 2009 has been derived from the audited financial statements at that date but does
not include all information and disclosures required by GAAP for complete financial statements.
The interim financial statements reflect all adjustments which, in the opinion of management, are
necessary for a fair presentation of the financial condition and results of operations for the
periods presented. Except as otherwise disclosed, all such adjustments are of a normal recurring
nature.
Operating results for the three and six months ended June 30, 2010 are not necessarily
indicative of the results that may be expected for any future periods. For further information,
please see the financial statements and related disclosures included in the Companys annual report
on Form 10-K for the year ended December 31, 2009.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities as well as
disclosures of contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. Revenue Recognition
The Company recognizes revenue when there is persuasive evidence that an arrangement exists,
title has passed, the price is fixed or determinable, and collectability is reasonably assured.
Product Sales, Net. The Company sells Zegerid® (omeprazole/sodium bicarbonate)
Capsules and Zegerid Powder for Oral Suspension primarily to pharmaceutical wholesale distributors.
The Company is obligated to accept from customers products that are returned within six months of
their expiration date or up to 12 months beyond their expiration date. The Company authorizes
returns for expired or damaged products in accordance with its return goods policy and procedures.
The Company issues credit to the customer for expired or damaged returned product. The Company
rarely exchanges product from inventory for returned product. At the time of sale, the Company
records its estimates for product returns as a reduction to revenue at full sales value with a
corresponding increase in the allowance for product returns liability. Actual returns are recorded
as a reduction to the allowance for product returns liability at sales value with a corresponding
decrease in accounts receivable for credit issued to the customer.
The Company recognizes product sales net of estimated allowances for product returns,
estimated rebates in connection with contracts relating to managed care, Medicare, and patient
coupons, and estimated chargebacks from distributors, wholesaler fees and prompt payment and other
discounts. The Company establishes allowances for estimated product returns, rebates and
chargebacks based primarily on the following qualitative and quantitative factors:
| the number of and specific contractual terms of agreements with customers; | ||
| estimated levels of inventory in the distribution channel; |
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| estimated remaining shelf life of products; | ||
| analysis of prescription data gathered by a third-party prescription data provider; | ||
| direct communication with customers; | ||
| historical product returns, rebates and chargebacks; | ||
| anticipated introduction of competitive products or generics; | ||
| anticipated pricing strategy changes by the Company and/or its competitors; and | ||
| the impact of state and federal regulations. |
In its analyses, the Company utilizes prescription data purchased from a third-party data
provider to develop estimates of historical inventory channel pull-through. The Company utilizes a
separate analysis which compares historical product shipments less returns to estimated historical
prescriptions written. Based on that analysis, the Company develops an estimate of the quantity of
product in the distribution channel which may be subject to various product return, rebate and
chargeback exposures.
The Companys estimates of product returns, rebates and chargebacks require managements most
subjective and complex judgment due to the need to make estimates about matters that are inherently
uncertain. If actual future payments for returns, rebates, chargebacks and other discounts exceed
the estimates the Company made at the time of sale, its financial position, results of operations
and cash flows would be negatively impacted.
The Companys allowance for product returns was $13.9 million as of June 30, 2010 and $12.8
million as of December 31, 2009. In order to provide a basis for estimating future product returns
on sales to its customers at the time title transfers, the Company has been tracking its Zegerid
products return history by individual production batches from the time of its first commercial
product launch of Zegerid Powder for Oral Suspension 20 mg in late 2004, taking into consideration
product expiration dating and estimated inventory levels in the distribution channel. The Company
recognizes product sales at the time title passes to its customers, and the Company provides for an
estimate of future product returns at that time based upon these historical product returns trends,
analysis of product expiration dating and inventory levels in the distribution channel, and the
other factors discussed above. There may be a significant time lag between the date the Company
determines the estimated allowance and when it receives the product return and issues credit to a
customer. Due to this time lag, the Company records adjustments to its estimated allowance over
several periods, which can result in a net increase or a net decrease in its operating results in
those periods.
The Companys allowance for rebates, chargebacks and other discounts was $31.5 million as of
June 30, 2010 and $34.7 million as of December 31, 2009. These allowances reflect an estimate of
the Companys liability for rebates due to managed care organizations under specific contracts,
rebates due to various organizations under Medicare contracts and regulations, chargebacks due to
various organizations purchasing the Companys products through federal contracts and/or group
purchasing agreements, and other rebates and customer discounts due in connection with wholesaler
fees and prompt payment and other discounts. The Company estimates its liability for rebates and
chargebacks at each reporting period based on a combination of the qualitative and quantitative
assumptions listed above. In each reporting period, the Company evaluates its outstanding
contracts and applies the contractual discounts to the invoiced price of wholesaler shipments
recognized. Although the total invoiced price of shipments to wholesalers for the reporting period
and the contractual terms are known during the reporting period, the Company projects the ultimate
disposition of the sale (e.g. future utilization rates of cash payors, managed care, Medicare or
other contracted organizations). This estimate is based on historical trends adjusted for
anticipated changes based on specific contractual terms of new agreements with customers,
anticipated pricing strategy changes by the Company and/or its competitors and the other
qualitative and quantitative factors described above. There may be a significant time lag between
the date the Company determines the estimated allowance and when the Company makes the contractual
payment or issues credit to a customer. Due to this time lag, the Company records adjustments to
its estimated allowance over several periods, which can result in a net increase or a net decrease
in its operating results in those periods.
In late June 2010, the Company began selling an authorized generic version of its prescription
Zegerid Capsules under a Distribution and Supply Agreement (the Distribution Agreement) with
Prasco, LLC (Prasco). Prasco has agreed to purchase all of its authorized generic product
requirements from the Company and pays a specified invoice supply price for such products. The
Company recognizes revenue from shipments to Prasco at the invoice supply price and records the
related cost of product sales when title transfers, which is generally at the time of shipment.
The Company is also entitled to receive a percentage of the gross margin on sales of the authorized
generic products by Prasco, which the Company will recognize as an addition to product sales, net
when Prasco reports to the Company the gross margin from the ultimate sale
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of the products. Any adjustments to the gross margin related to Prascos estimated sales
discounts and other deductions will be recognized in the period Prasco reports the amounts to the
Company.
Promotion, Royalty and Other License Revenue. The Company analyzes each element of its
promotion and licensing agreements to determine the appropriate revenue recognition. The Company
recognizes revenue on upfront payments over the period of significant involvement under the related
agreements unless the fee is in exchange for products delivered or services rendered that represent
the culmination of a separate earnings process and no further performance obligation exists under
the contract. The Company recognizes milestone payments upon the achievement of specified
milestones if (1) the milestone is substantive in nature, and the achievement of the milestone was
not reasonably assured at the inception of the agreement and (2) the fees are nonrefundable. Any
milestone payments received prior to satisfying these revenue recognition criteria are recognized
as deferred revenue. Sales milestones, royalties and promotion fees are based on sales and/or
gross margin information, which may include estimates of sales discounts and other deductions,
received from the relevant alliance agreement partner. Sales milestones, royalties and promotion
fees are recognized as revenue when earned under the agreements, and any adjustments related to
estimated sales discounts and other deductions are recognized in the period the alliance agreement
partner reports the amounts to the Company.
4. Stock-Based Compensation
For the three months ended June 30, 2010 and 2009 and the six months ended June 30, 2010 and
2009, the Company recognized approximately $1.4 million, $1.4 million, $2.5 million and $2.4
million of total stock-based compensation, respectively. For the three and six months ended June
30, 2009, stock-based compensation included approximately $355,000 related to stock options
containing performance-based vesting. As of June 30, 2010, total unrecognized compensation cost
related to stock options and employee stock purchase plan rights was approximately $11.3 million,
and the weighted average period over which it was expected to be recognized was 3.0 years. In
March 2010, the Company granted options to purchase an aggregate of 2,810,228 shares of its common
stock in connection with annual option grants to all eligible employees. These stock options vest
over a four-year period from the date of grant.
5. Comprehensive Income
Comprehensive income consists of net income and other comprehensive income (loss). Other
comprehensive income (loss) includes certain changes in stockholders equity that are excluded from
net income, specifically unrealized gains and losses on securities available-for-sale.
Comprehensive income consists of the following (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income |
$ | 6,025 | $ | 1,121 | $ | 9,336 | $ | 2,274 | ||||||||
Unrealized gain on investments |
1 | | 1 | | ||||||||||||
Comprehensive income |
$ | 6,026 | $ | 1,121 | $ | 9,337 | $ | 2,274 | ||||||||
6. Net Income Per Share
Basic income per share is calculated by dividing the net income by the weighted average number
of common shares outstanding for the period, without consideration for common stock equivalents.
Diluted income per share is computed by dividing the net income by the weighted average number of
common share equivalents outstanding for the period determined using the treasury-stock method.
For purposes of this calculation, common stock subject to repurchase by the Company, preferred
stock, options and warrants are considered to be common stock equivalents and are only included in
the calculation of diluted income per share when their effect is dilutive. Potentially dilutive
securities totaling 9.7 million shares and 11.2 million shares for the three months ended June 30,
2010 and 2009 and 8.4 million shares and 11.5 million shares for the six months ended June 30, 2010
and 2009, respectively, were excluded from the calculation of diluted income per share because of
their anti-dilutive effect.
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Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Numerator: |
||||||||||||||||
Net income (in thousands) |
$ | 6,025 | $ | 1,121 | $ | 9,336 | $ | 2,274 | ||||||||
Denominator: |
||||||||||||||||
Weighted average common
shares outstanding for
basic net income per
share |
58,459,569 | 57,919,535 | 58,408,054 | 57,870,998 | ||||||||||||
Net effect of dilutive
common stock equivalents |
2,705,424 | 795,139 | 3,403,031 | 484,836 | ||||||||||||
Denominator for diluted
net income per share |
61,164,993 | 58,714,674 | 61,811,085 | 58,355,834 | ||||||||||||
Net income per share |
||||||||||||||||
Basic |
$ | 0.10 | $ | 0.02 | $ | 0.16 | $ | 0.04 | ||||||||
Diluted |
$ | 0.10 | $ | 0.02 | $ | 0.15 | $ | 0.04 | ||||||||
7. Segment Reporting
Management has determined that the Company operates in one business segment which is the
acquisition, development and commercialization of pharmaceutical products.
8. Available-for-Sale Securities
The Company has classified its debt securities, other than its auction rate securities (ARS)
and Auction Rate Securities Rights (ARS Rights), as available-for-sale and, accordingly, carries
these investments at fair value, and unrealized holding gains or losses on these securities are
carried as a separate component of stockholders equity. The cost of debt securities is adjusted
for amortization of premiums or accretion of discounts to maturity, and such amortization is
included in interest income. Realized gains and losses and declines in value judged to be
other-than-temporary (of which there have been none to date) on available-for-sale securities are
included in interest income. The cost of securities sold is based on the specific identification
method.
The following is a summary of the Companys available-for-sale investment securities as of
June 30, 2010 and December 31, 2009 (in thousands). All available-for-sale securities held as of
June 30, 2010 and December 31, 2009 have contractual maturities within one year. There were no
gross realized gains or losses on sales of available-for-sale securities for the three and six
months ended June 30, 2010 and the year ended December 31, 2009.
Amortized | Market | Unrealized | ||||||||||
Cost | Value | Gain (Loss) | ||||||||||
June 30, 2010: |
||||||||||||
U.S. government-sponsored enterprise securities |
$ | 11,549 | $ | 11,550 | $ | 1 | ||||||
U.S. Treasury securities |
342 | 342 | | |||||||||
$ | 11,891 | $ | 11,892 | $ | 1 | |||||||
December 31, 2009: |
||||||||||||
U.S. government-sponsored enterprise securities |
$ | 3,852 | $ | 3,852 | $ | | ||||||
U.S. Treasury securities |
1,516 | 1,515 | (1 | ) | ||||||||
$ | 5,368 | $ | 5,367 | $ | (1 | ) | ||||||
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The classification of available-for-sale securities in the Companys balance sheets is as
follows (in thousands):
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Short-term investments |
$ | 10,492 | $ | 3,967 | ||||
Restricted cash |
1,400 | 1,400 | ||||||
$ | 11,892 | $ | 5,367 | |||||
As of June 30, 2010 and December 31, 2009, the Company held ARS and ARS Rights which were
classified as trading securities. The Company classified the balance of its ARS and ARS Rights
totaling $1.8 million and $3.8 million in aggregate as short-term investments in the balance sheets
as of June 30, 2010 and December 31, 2009, respectively.
9. Fair Value Measurements
The authoritative guidance for fair value measurements establishes a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level
1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs
other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3, defined as unobservable inputs in which little or no market data exists, therefore
requiring an entity to develop its own assumptions.
The Companys financial assets measured at fair value on a recurring basis at June 30, 2010
are as follows (in thousands):
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant Other | Significant | ||||||||||||||
Identical Assets | Observable Inputs | Unobservable Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
Money market funds |
$ | 24,316 | $ | | $ | | $ | 24,316 | ||||||||
U.S. Treasury securities |
342 | | | 342 | ||||||||||||
U.S. government sponsored
enterprise securities |
| 74,074 | | 74,074 | ||||||||||||
Municipal debt obligations
auction rate securities |
| | 1,565 | 1,565 | ||||||||||||
Auction rate securities rights |
| | 185 | 185 | ||||||||||||
$ | 24,658 | $ | 74,074 | $ | 1,750 | $ | 100,482 | |||||||||
Level 3 assets held as of June 30, 2010 include municipal debt obligations with an auction
rate reset mechanism issued by state municipalities. These ARS are AAA-rated debt instruments with
a long-term maturity date of 2034 and interest rates that are reset at short-term intervals (every
28 days) through auctions. Due to conditions in the global credit markets, these securities,
representing a par value of approximately $1.8 million at June 30, 2010, had insufficient demand
resulting in multiple failed auctions since early 2008. As a result, these affected securities
were not liquid.
In October 2008, the Company received an offer of ARS Rights from UBS Financial Services,
Inc., a subsidiary of UBS AG (UBS), and in November 2008, the Company accepted the ARS Rights
offer. The ARS Rights permitted the Company to require UBS to purchase the Companys ARS at par
value at any time during the period of June 30, 2010 through July 2, 2012. As a condition to
accepting the offer of ARS Rights, the Company released UBS from all claims except claims for
consequential damages relating to its marketing and sales of ARS. The Company also agreed not to
serve as a class representative or receive benefits under any class action settlement or investor
fund. In July 2010, the Company exercised its ARS Rights, and UBS purchased all of the Companys
outstanding ARS at par value totaling $1.8 million.
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As the Companys ARS did not have a readily determinable market value, the Company used a
discounted cash flow model to determine the estimated fair value of its investment in ARS and its
ARS Rights as of June 30, 2010. The assumptions used in preparing the discounted cash flow model
include estimates for interest rates, timing and amount of cash flows and expected holding period
of the ARS and ARS Rights.
In 2008, the Company elected to measure the ARS Rights under the authoritative guidance for
the fair value option for financial assets and financial liabilities. Reflecting managements
intent to exercise its ARS Rights during the period of June 30, 2010 through July 2, 2012, the
Company transferred its ARS from investments available-for-sale to trading securities in 2008.
Changes in the fair values of the Companys ARS and ARS Rights were recognized as an increase or
decrease in interest income.
The following table provides a summary of changes in fair value of the Companys Level 3
financial assets for the three and six months ended June 30, 2010 and 2009 (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Auction Rate Securities and Rights: |
||||||||||||||||
Beginning balance |
$ | 2,500 | $ | 4,261 | $ | 3,848 | $ | 4,250 | ||||||||
Redemptions and sales, at par |
(750 | ) | (50 | ) | (2,100 | ) | (50 | ) | ||||||||
Net unrealized gain included in net income |
| 28 | 2 | 39 | ||||||||||||
Ending balance |
$ | 1,750 | $ | 4,239 | $ | 1,750 | $ | 4,239 | ||||||||
10. Balance Sheet Details
Inventories, net consist of the following (in thousands):
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Raw materials |
$ | 912 | $ | 1,071 | ||||
Finished goods |
3,109 | 4,269 | ||||||
4,021 | 5,340 | |||||||
Allowance for excess and obsolete inventory |
(2,227 | ) | (4 | ) | ||||
$ | 1,794 | $ | 5,336 | |||||
Inventories are stated at the lower of cost (FIFO) or market and consist of finished goods and
raw materials used in the manufacture of the Companys Zegerid Capsules and the related authorized
generic products and Zegerid Powder for Oral Suspension products. Also included in inventories are
product samples of Glumetza® (metformin hydrochloride extended release tablets) which
the Company purchases from Depomed, Inc. (Depomed) under its promotion agreement. The Company
provides reserves for potentially excess, dated or obsolete inventories based on an analysis of
inventory on hand and on firm purchase commitments, compared to forecasts of future sales. As of
June 30, 2010, the Company reserved approximately $225,000 against on-hand inventories of product
samples of Glumetza in connection with Depomeds voluntary recall from wholesalers of certain lots
of Glumetza 500 mg tablets. In addition, as of June 30, 2010, the Company reserved approximately
$2.0 million against on-hand inventories of it Zegerid products in connection with the launch of
generic and authorized generic versions of prescription Zegerid Capsules and the Companys related
decision to cease promotion of Zegerid.
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Accounts payable and accrued liabilities consist of the following (in thousands):
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Accounts payable |
$ | 2,714 | $ | 8,782 | ||||
Accrued compensation and benefits |
4,830 | 7,525 | ||||||
Accrued rebates |
28,971 | 31,268 | ||||||
Accrued license fees and royalties |
2,205 | 1,831 | ||||||
Accrued contract sales organization expenses |
1,901 | 1,573 | ||||||
Accrued research and development expenses |
3,902 | 3,421 | ||||||
Income taxes payable |
194 | 1,267 | ||||||
Other accrued liabilities |
3,019 | 3,009 | ||||||
$ | 47,736 | $ | 58,676 | |||||
11. Long-Term Debt
On July 11, 2008, the Company entered into an Amended and Restated Loan and Security Agreement
(the Amended Loan Agreement) with Comerica Bank (Comerica). The Amended Loan Agreement amends
and restates the terms of the original Loan and Security Agreement entered into between the Company
and Comerica in July 2006. In December 2008, the Company drew down $10.0 million under the Amended
Loan Agreement. The credit facility under the Amended Loan Agreement consists of a revolving line
of credit, pursuant to which the Company may request advances in an aggregate outstanding amount
not to exceed $25.0 million. Under the Amended Loan Agreement, the revolving loan bears interest,
as selected by the Company, at either the variable rate of interest, per annum, most recently
announced by Comerica as its prime rate plus 0.50% or the LIBOR rate (as computed in the Amended
and Restated LIBOR Addendum to the Amended Loan Agreement) plus 3.00%. The Company has selected
the prime rate plus 0.50% interest rate option, which as of June 30, 2010 was 3.75%. Interest
payments on advances made under the Amended Loan Agreement are due and payable in arrears on the
first calendar day of each month during the term of the Amended Loan Agreement. Amounts borrowed
under the Amended Loan Agreement may be repaid and re-borrowed at any time prior to July 11, 2011.
There is a non-refundable unused commitment fee equal to 0.50% per annum on the difference between
the amount of the revolving line and the average daily balance outstanding thereunder during the
term of the Amended Loan Agreement, payable quarterly in arrears. The Amended Loan Agreement will
remain in full force and effect for so long as any obligations remain outstanding or Comerica has
any obligation to make credit extensions under the Amended Loan Agreement.
Amounts borrowed under the Amended Loan Agreement are secured by substantially all of the
Companys personal property, excluding intellectual property. Under the Amended Loan Agreement,
the Company is subject to certain affirmative and negative covenants, including limitations on the
Companys ability to: undergo certain change of control events; convey, sell, lease, license,
transfer or otherwise dispose of assets; create, incur, assume, guarantee or be liable with respect
to certain indebtedness; grant liens; pay dividends and make certain other restricted payments; and
make investments. In addition, under the Amended Loan Agreement the Company is required to
maintain a cash balance with Comerica in an amount of not less than $4.0 million and to maintain
any other cash balances with either Comerica or another financial institution covered by a control
agreement for the benefit of Comerica. The Company is also subject to specified financial
covenants with respect to a minimum liquidity ratio and, in specified limited circumstances,
minimum EBITDA requirements as defined in the Amended Loan Agreement. The Company believes it has
currently met all of its obligations under the Amended Loan Agreement.
12. Distribution and Supply Agreement
In April 2010, the Company entered into a Distribution Agreement with Prasco, which grants
Prasco the right to distribute and sell an authorized generic version of the Companys Zegerid
prescription products in the United States. Prasco has agreed to purchase all of its authorized
generic product requirements from the Company and will pay a specified invoice supply price for
such products. Prasco is also obligated to pay the Company a percentage of the gross margin on
sales of the authorized generic products. In late June 2010, as a result of Par Pharmaceutical,
Inc.s (Pars) decision to launch its generic version of Zegerid Capsules, Prasco commenced
shipment of an authorized generic of Zegerid Capsules in 20 mg and 40 mg dosage strengths in the
U.S. under the Prasco label.
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The term of the Distribution Agreement will continue for a period of five years after the date
of launch of the first authorized generic product, unless terminated earlier in accordance with its
terms.
The Company may terminate the Distribution Agreement with respect to any of the covered
products upon 30 days prior written notice in the event that a competitive product that was
previously launched is no longer available. The Company may also terminate the Distribution
Agreement for any reason upon nine months prior written notice.
Prasco may terminate the Distribution Agreement with respect to a particular product if the
Company fails to deliver a commencement notice with respect to such product within 60 days after
the launch of a competitive product, or if the Company fails to deliver launch quantities of the
applicable product to Prasco and such failure prevents Prasco from making the first commercial sale
of such product within such 60-day period. Prasco may also terminate the Distribution Agreement if
Prascos net selling price of a licensed product decreases to less than a specified percentage
above the invoice supply price for such product and the Company does not correspondingly reduce the
invoice supply price.
In addition, either party may terminate the Distribution Agreement in the event of the other
partys uncured material breach or bankruptcy or insolvency, or if the licensed products are
withdrawn from the U.S. market. In the event of termination, the rights granted by the Company to
Prasco associated with the authorized generic products will cease.
13. Contingencies
Par Pharmaceutical, Inc. Zegerid Patent Litigation
In April 2010, the U.S. District Court for the District of Delaware ruled that five patents
covering Zegerid Capsules and Zegerid Powder for Oral Suspension (U.S. Patent Nos. 6,489,346;
6,645,988; 6,699,885; 6,780,882; and 7,399,772) are invalid due to obviousness. These patents were
the subject of lawsuits the Company filed in 2007 against Par for infringement. The lawsuits were
filed in response to abbreviated new drug applications (ANDAs) filed by Par with the U.S. Food
and Drug Administration (FDA). In May 2010, the Company filed an appeal of the District Courts
ruling to the U.S. Court of Appeals for the Federal Circuit. Although the Company intends to
vigorously defend and enforce its patent rights, the Company is not able to predict the timing or
outcome of the appeal.
In early July 2010, Par commenced its commercial sale of its generic version of the Companys
Zegerid Capsules prescription product. The Company anticipates that Par will launch its generic
version of the Companys Zegerid Powder for Oral Suspension product once it receives FDA approval
to market that product. Pursuant to FDA rules and regulations, the Company believes that Par, as
the first ANDA filer with respect to the Companys Zegerid prescription products, will have a
six-month period of exclusivity from the date it launches its generic products during which all
other ANDA filers will not be allowed to market or sell their generic products. After the
expiration of the six-month exclusivity period, additional FDA-approved generic versions, if any,
of these Zegerid products may become available.
As a result of Pars decision to launch its generic version of the Companys Zegerid Capsules
prescription product, in late June 2010, under the Companys Distribution Agreement with Prasco,
Prasco commenced shipments of the Companys authorized generic of prescription Zegerid Capsules in
20 mg and 40 mg dosage strengths in the U.S., and the Company ceased its commercial promotion of
Zegerid prescription products.
The launch of generic Zegerid Capsules prescription products will adversely impact sales of
the Companys Zegerid brand prescription products and have a negative impact on the Companys
financial condition and results of operations, including causing a significant decrease in the
Companys revenues and cash flows. Even if physicians prescribe Zegerid products, third-party
payors and pharmacists can substitute generic versions of Zegerid. In many cases, insurers and
other healthcare payment organizations encourage the use of generic brands through their
prescription benefits coverage and payment or reimbursement policies. Insurers and other
healthcare payment organizations may make generic alternatives of Zegerid more attractive to
patients by providing different amounts of coverage or out-of-pocket expenses so that the net cost
of the generic product to the patient is less than the net cost of the Companys branded product.
The District Courts ruling also negatively impacts the patent protection for the products
being commercialized in the U.S. and its territories pursuant to the Companys over-the-counter
license with Schering-Plough and its distribution agreement with Glaxo Group Limited, an affiliate
of GlaxoSmithKline, plc (GSK) for Puerto Rico and the U.S. Virgin Islands, which in turn may
impact the amount of, or the Companys ability to receive, milestone payments and royalties
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under its agreements with these strategic partners. The ruling may also negatively impact the
patent protection for the products being commercialized pursuant to the Companys ex-US licenses
with GSK and Norgine B.V. Although the U.S. ruling is not binding in countries outside the U.S.,
similar challenges to those raised in the U.S. litigation may be raised in territories outside the
U.S.
Regardless of how the litigation is ultimately resolved, the litigation has been and will
continue to be costly, time-consuming and distracting to management, which could have a material
adverse effect on the Company.
University of Missouri Application for Patent Reissue
In December 2007, the University of Missouri filed an Application for Reissue of U.S. Patent
No. 5,840,737 (the 737 patent) with the U.S. Patent and Trademark Office (PTO). The 737
patent is one of six issued patents listed in the Approved Drug Products with Therapeutic
Equivalence Evaluations (the Orange Book) for Zegerid Powder for Oral Suspension. The 737
patent is not one of the four patents listed in the Orange Book for Zegerid Capsules. It is not
feasible to predict the impact that the reissue proceeding may have on the scope and validity of
the 737 patent claims. If the claims of the 737 patent ultimately are narrowed substantially or
invalidated by the PTO, the extent of the patent coverage afforded to the Companys Zegerid family
of products could be further impaired. In addition, the Company expects the University of Missouri
will disclose to the PTO the District Courts ruling described above, and the Company cannot
predict the impact such disclosure will have on the reissue proceedings.
C.B. Fleet Co., Inc. Phospho-soda® Product Liability Litigation
In October 2009, the Company became aware of two lawsuits filed by individual plaintiffs in
Ohio state court relating to C.B. Fleet Co., Inc. (Fleet) and claiming injuries purportedly
caused by Fleets Phospho-soda®, sodium phosphate oral solution product. The complaints
name Fleet, Santarus, the Cleveland Clinic Foundation, the Research Foundation of the American
Society of Colon and Rectal Surgeons, the Society of American Gastrointestinal and Endoscopic
Surgeons and several other individuals as defendants. The complaints allege, among other things,
that the defendants fraudulently concealed, misrepresented and suppressed material medical and
scientific information about Fleets Phospho-soda product. The plaintiffs are seeking compensatory
damages, exemplary damages, damages for loss of consortium, damages under the Ohio Consumer
Protection Act, and attorneys fees and expenses. The Company co-promoted Fleets
Phospho-soda® EZ-Prep Bowel Cleansing System, a different sodium phosphate oral
solution product manufactured by Fleet, under a co-promotion agreement, which the Company and Fleet
entered into in August 2007 and which expired in October 2008. In November 2009, the Company filed
notices to remove the lawsuits to the United States District Court for the Northern District of
Ohio, and plaintiffs filed motions to remand the actions back to Ohio state court. In April 2010,
the Company filed motions requesting that it be dismissed from these lawsuits, as well as responses
to plaintiffs motions to remand.
Under the terms of the co-promotion agreement, the Company has requested that Fleet indemnify
the Company in connection with these matters. In addition, the Company has tendered notice of
these matters to its insurance carriers pursuant to the terms of its insurance policies. Due to
the uncertainty of the ultimate outcome of these matters and the Companys ability to maintain
indemnification and/or insurance coverage, the Company cannot predict the effect, if any, this
matter will have on its business. Regardless of how this litigation is ultimately resolved, this
matter may be costly, time-consuming and distracting to management, which could have a material
adverse effect on the Company.
Depomed, Inc. Glumetza Patent Litigation
In November 2009, Depomed filed a lawsuit in the United States District Court for the Northern
District of California against Lupin Limited and its wholly-owned subsidiary, Lupin Pharmaceutical,
Inc., (collectively Lupin) for infringement of the patents listed in the Orange Book for
Glumetza. The lawsuit was filed in response to an ANDA and Paragraph IV certification filed with
the FDA by Lupin regarding Lupins intent to market generic versions of 500 mg and 1000 mg tablets
for Glumetza prior to the expiration of the Orange Book patents. Depomed commenced the lawsuit
within the requisite 45 day time period, placing an automatic stay on the FDA from approving
Lupins proposed products for 30 months or until a decision is rendered by the District Court,
which is adverse to the Orange Book patents, whichever may occur earlier. Absent a court decision,
the 30-month stay is expected to expire in May 2012. Lupin has prepared and filed an answer in the
case, principally asserting non-infringement and invalidity of the Orange Book patents, and has
also filed counterclaims. Discovery is currently underway and a hearing for claim construction,
or Markman hearing, is scheduled for January 2011.
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Under the terms of the Companys promotion agreement with Depomed, Depomed has assumed
responsibility for managing and paying for this action, subject to certain consent rights held by
the Company regarding any potential settlements or other similar types of dispositions. Although
Depomed has indicated that it intends to vigorously defend and enforce its patent rights, the
Company is not able to predict the timing or outcome of this action.
14. Accounting Pronouncements
Pending Adoption of Recent Accounting Pronouncements
In October 2009, the Emerging Issues Task Force (EITF) issued authoritative guidance on
revenue recognition with regard to multiple element arrangements. The consensus in this recently
issued guidance supersedes certain prior guidance and requires an entity to allocate arrangement
consideration at the inception of an arrangement to all of its deliverables based on their relative
selling prices (i.e., the relative selling-price method). The consensus eliminates the use of the
residual method of allocation (i.e., in which the undelivered element is measured at its estimated
selling price and the delivered element is measured as the residual of the arrangement
consideration) and requires the relative selling-price method in all circumstances in which an
entity recognizes revenue for an arrangement with multiple deliverables subject to the issued
guidance. This guidance requires both ongoing disclosures regarding an entitys multiple-element
revenue arrangements as well as certain transitional disclosures during periods after adoption.
This guidance is effective for the first fiscal year beginning on or after June 15, 2010. The
Company does not expect the adoption of this guidance will have a material impact on its financial
statements.
15. Subsequent Events
Restructuring
As a result of Pars decision to launch its generic version of Zegerid Capsules and the
Companys related decision to cease promotion of Zegerid prescription products, on June 30, 2010,
the Companys Board of Directors determined to implement a corporate restructuring, including a
workforce reduction of approximately 37%, or approximately 120 employees, in its commercial
organization and certain other operations. The Company also determined to significantly reduce the
number of contract sales representatives that it utilizes. The Company is providing 60-day Worker
Adjustment and Retraining Notification Act notices to the affected employees to inform them that
their employment is expected to end at the conclusion of the 60-day period. The Company began
notifying affected employees in July 2010 and expects to substantially complete its restructuring
plan in the third quarter of 2010.
The Company is offering outplacement services and severance benefits to the affected
employees, including cash severance payments and payment of COBRA health care coverage for
specified periods. In addition, the Company has offered to accelerate the vesting of stock options
by six months and extend the period for exercising vested stock options by twelve months from each
affected employees termination date. Each affected employees eligibility for the severance
benefits is contingent upon such employees execution of a separation agreement, which includes a
general release of claims against the Company.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion contains forward-looking statements, which involve risks and
uncertainties. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set forth below under
the caption Risk Factors. The interim condensed financial statements and this Managements
Discussion and Analysis of Financial Condition and Results of Operations should be read in
conjunction with the financial statements and notes thereto for the year ended December 31, 2009
and the related Managements Discussion and Analysis of Financial Condition and Results of
Operations, both of which are contained in our Annual Report on Form 10-K for the year ended
December 31, 2009.
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Overview
We are a specialty biopharmaceutical company focused on acquiring, developing and
commercializing proprietary products that address the needs of patients treated by
gastroenterologists, endocrinologists and other physicians.
Our commercial organization currently promotes Glumetza® (metformin hydrochloride
extended release 500 mg and 1000 mg tablets) prescription products in the U.S., under the terms of
an exclusive promotion agreement that we entered into with Depomed, Inc., or Depomed, in July 2008.
Glumetza is a once-daily, extended-release formulation of metformin that incorporates patented
drug delivery technology and is indicated as an adjunct to diet and exercise to improve glycemic
control in adult patients with type 2 diabetes. The extended-release delivery system is designed
to offer patients with diabetes an ability to reach their optimal dose of metformin with fewer
gastrointestinal, or GI, side effects. We began our promotion of the Glumetza products in October
2008. Depomed is currently conducting a voluntary recall from wholesalers of 52 lots of Glumetza
500 mg tablets. In connection with the recall, Depomed has suspended product shipments of Glumetza
500 mg tablets to its customers pending further investigation and discussions with the U.S. Food
and Drug Administration, or FDA. Depomed has indicated that it currently expects to resume
shipments of Glumetza 500 mg tablets to its customers by mid August 2010, however, this timing may
be extended to the extent that Depomeds current testing and resupply activities are not
successful. The recall does not impact the 1000 mg formulation of Glumetza, and we have focused
our promotional efforts on Glumetza 1000 mg until the supply of Glumetza 500 mg is resumed.
We are developing two product candidates targeting GI conditions under the terms of a
strategic collaboration that we entered into with Cosmo Technologies Limited, or Cosmo. The
product candidates utilize Cosmos patented MMX® technology, which is a proprietary
multi-matrix system that is designed to deliver a drug substance to the colon. The goal of the MMX
technology is to enhance clinical efficacy while limiting side effects typically associated with
systemic absorption. Budesonide MMX is an oral corticosteroid and is currently being investigated
in a phase III clinical program for the induction of remission of mild or moderate active
ulcerative colitis. Rifamycin SV MMX is a broad spectrum, semi-synthetic antibiotic and has been
investigated in a phase II clinical program in patients with infectious diarrhea. We initiated a
phase III clinical program evaluating rifamycin SV MMX in patients with travelers diarrhea in the
second quarter of 2010. Under the strategic collaboration, we were granted exclusive rights to
develop and commercialize these product candidates for the U.S.
Prior to June 30, 2010, our commercial organization promoted Zegerid®
(omeprazole/sodium bicarbonate) Capsules and Powder for Oral Suspension, which are formulations
that combine omeprazole, which is a proton pump inhibitor, or PPI, and an antacid. We developed
these products as the first immediate-release oral PPIs for the U.S. prescription market, and they
have been approved by the FDA to treat or reduce the risk of a variety of upper GI diseases and
disorders, including gastroesophageal reflux disease, or GERD. Our Zegerid products utilize
antacids, which raise the gastric pH and thus protect the PPI, omeprazole, from acid degradation in
the stomach, allowing the omeprazole to be quickly absorbed into the bloodstream and to provide
continued acid control.
In May 2010, we filed an appeal of the U.S. District Court for the District of Delawares
ruling that five patents covering Zegerid Capsules and Zegerid Powder for
Oral Suspension (U.S. Patent Nos. 6,489,346; 6,645,988; 6,699,885; 6,780,882; and 7,399,772) are
invalid due to obviousness to the U.S. Court of Appeals for the Federal Circuit. These patents
were the subject of lawsuits we filed in 2007 against Par Pharmaceutical, Inc., or Par, for
infringement. The University of Missouri, licensor of the patents, was joined in the litigation as
a co-plaintiff. The lawsuits were filed in response to abbreviated new drug applications, or
ANDAs, filed by Par with the FDA.
As a result of Pars decision to launch a generic version of our Zegerid Capsules prescription
product, we determined in late June 2010 to cease promotion of our Zegerid prescription products
and implement a corporate restructuring, including a workforce reduction of approximately 37%, or
approximately 120 employees, in our commercial organization and other selected operations. At the
same time, we also determined to significantly reduce the number of contract sales representatives
that we utilize.
In April 2010, we entered into a distribution and supply agreement with Prasco LLC, or Prasco,
which grants Prasco the right to distribute and sell an authorized generic version of our Zegerid
prescription products in the United States. Prasco has agreed to purchase all of its authorized
generic product requirements from us and will pay a specified invoice supply price for such
products. Prasco is also obligated to pay us a percentage of the gross margin on sales of the
authorized generic products. In late June 2010, Prasco commenced shipment of an authorized generic
of Zegerid Capsules
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in 20 mg and 40 mg dosage strengths in the U.S. under the Prasco label. The term of the
distribution and supply agreement will continue for a period of five years after the date of launch
of the first authorized generic product, unless terminated earlier in accordance with its terms.
The launch of generic Zegerid Capsules prescription products will adversely impact sales of
our Zegerid brand prescription products and have a negative impact on our financial condition and
results of operations, including causing a significant decrease in our revenues and cash flows.
Even if physicians prescribe Zegerid products, third-party payors and pharmacists can substitute
generic versions of Zegerid. In many cases, insurers and other healthcare payment organizations
encourage the use of generic brands through their prescription benefits coverage and payment or
reimbursement policies. Insurers and other healthcare payment organizations may make generic
alternatives of Zegerid more attractive to patients by providing different amounts of coverage or
out-of-pocket expenses so that the net cost of the generic product to the patient is less than the
net cost of our branded product.
To further leverage our proprietary PPI technology and diversify our sources of revenue, we
have licensed exclusive rights to Schering-Plough HealthCare Products, Inc., or Schering-Plough, a
subsidiary of Merck & Co., Inc., to develop, manufacture and sell Zegerid OTC® products
in the lower dosage strength of 20 mg of omeprazole in the U.S. and Canada. We have also entered
into license and distribution agreements granting exclusive rights to Glaxo Group Limited, an
affiliate of GlaxoSmithKline, plc, or GSK, to develop, manufacture and commercialize prescription
and over-the-counter, or OTC, products in up to 114 specified countries (including markets within
Africa, Asia, the Middle-East, and Central and South America), and to distribute and sell Zegerid
brand prescription products in Puerto Rico and the U.S. Virgin Islands. In addition, we have
entered into a license agreement granting certain exclusive rights to Norgine B.V., or Norgine, to
develop, manufacture and commercialize prescription immediate-release omeprazole products in
specified markets in Western, Central and Eastern Europe and in Israel.
The District Courts ruling also negatively impacts the patent protection for the products
being commercialized in the U.S. and its territories pursuant to our over-the-counter license with
Schering-Plough and our distribution agreement with GSK for Puerto Rico and the U.S. Virgin
Islands, which in turn may impact the amount of, or our ability to receive, milestone payments and
royalties under our agreements with these strategic partners. With regard to our distribution
agreement with GSK, due to the launch of third party and authorized generic versions of our Zegerid
prescription products, we are coordinating with GSK to terminate and wind-down activities under the
distribution agreement for Puerto Rico and the U.S. Virgin Islands in the near future. The ruling
may also negatively impact the patent protection for the products being commercialized pursuant to
our ex-US licenses with GSK and Norgine. Although the U.S. ruling is not binding in countries
outside the U.S., similar challenges to those raised in the U.S. litigation may be raised in
territories outside the U.S.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on
our financial statements, which have been prepared in accordance with U.S. generally accepted
accounting principles, or GAAP. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and liabilities. We review our estimates on
an on-going basis. We base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities. Actual results may differ
from these estimates under different assumptions or conditions. We believe the following
accounting policies to be critical to the judgments and estimates used in the preparation of our
financial statements.
Revenue Recognition
We recognize revenue when there is persuasive evidence that an arrangement exists, title has
passed, the price is fixed or determinable, and collectability is reasonably assured.
Product Sales, Net. We sell our Zegerid products primarily to pharmaceutical wholesale
distributors. We are obligated to accept from customers products that are returned within six
months of their expiration date or up to 12 months beyond their expiration date. We authorize
returns for expired or damaged products in accordance with our return goods policy and procedures.
We issue credit to the customer for expired or damaged returned product. We rarely exchange product
from
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inventory for returned product. At the time of sale, we record our estimates for product
returns as a reduction to revenue at full sales value with a corresponding increase in the
allowance for product returns liability. Actual returns are recorded as a reduction to the
allowance for product returns liability at sales value with a corresponding decrease in accounts
receivable for credit issued to the customer.
We recognize product sales net of estimated allowances for product returns, estimated rebates
in connection with contracts relating to managed care, Medicare, and patient coupons, and estimated
chargebacks from distributors, wholesaler fees and prompt payment and other discounts. We
establish allowances for estimated product returns, rebates and chargebacks based primarily on the
following qualitative and quantitative factors:
| the number of and specific contractual terms of agreements with customers; | ||
| estimated levels of inventory in the distribution channel; | ||
| estimated remaining shelf life of products; | ||
| analysis of prescription data gathered by a third-party prescription data provider; | ||
| direct communication with customers; | ||
| historical product returns, rebates and chargebacks; | ||
| anticipated introduction of competitive products or generics; | ||
| anticipated pricing strategy changes by us and/or our competitors; and | ||
| the impact of state and federal regulations. |
In our analyses, we utilize prescription data purchased from a third-party data provider to
develop estimates of historical inventory channel pull-through. We utilize a separate analysis
which compares historical product shipments less returns to estimated historical prescriptions
written. Based on that analysis, we develop an estimate of the quantity of product in the
distribution channel which may be subject to various product return, rebate and chargeback
exposures.
Our estimates of product returns, rebates and chargebacks require our most subjective and
complex judgment due to the need to make estimates about matters that are inherently uncertain. If
actual future payments for returns, rebates, chargebacks and other discounts exceed the estimates
we made at the time of sale, our financial position, results of operations and cash flows would be
negatively impacted.
Our allowance for product returns was $13.9 million as of June 30, 2010 and $12.8 million as
of December 31, 2009. In order to provide a basis for estimating future product returns on sales to
our customers at the time title transfers, we have been tracking our Zegerid products return
history by individual production batches from the time of our first commercial product launch of
Zegerid Powder for Oral Suspension 20 mg in late 2004, taking into consideration product expiration
dating and estimated inventory levels in the distribution channel. We recognize product sales at
the time title passes to our customers, and we provide for an estimate of future product returns at
that time based upon these historical product returns trends, our analysis of product expiration
dating and estimated inventory levels in the distribution channel, and the other factors discussed
above. There may be a significant time lag between the date we determine the estimated allowance
and when we receive the product return and issue credit to a customer. Due to this time lag, we
record adjustments to our estimated allowance over several periods, which can result in a net
increase or a net decrease in our operating results in those periods.
Our allowance for rebates, chargebacks and other discounts was $31.5 million as of June 30,
2010 and $34.7 million as of December 31, 2009. These allowances reflect an estimate of our
liability for rebates due to managed care organizations under specific contracts, rebates due to
various organizations under Medicare contracts and regulations, chargebacks due to various
organizations purchasing our products through federal contracts and/or group purchasing agreements,
and other rebates and customer discounts due in connection with wholesaler fees and prompt payment
and other discounts. We estimate our liability for rebates and chargebacks at each reporting
period based on a combination of the qualitative and quantitative assumptions listed above. In
each reporting period, we evaluate our outstanding contracts and apply the contractual discounts to
the invoiced price of wholesaler shipments recognized. Although the total invoiced price of
shipments to wholesalers for the reporting period and the contractual terms are known during the
reporting period, we project the ultimate disposition of the sale (e.g. future utilization rates of
cash payors, managed care, Medicare or other contracted organizations). This estimate is based on
historical trends adjusted for anticipated changes based on specific contractual terms of new
agreements with customers, anticipated pricing strategy changes by us and/or our competitors and
the other qualitative and quantitative factors described above. There may be a significant time
lag between the date we determine the estimated allowance and when we make the contractual payment
or issue credit to a customer. Due to this
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time lag, we record adjustments to our estimated allowance over several periods, which can
result in a net increase or a net decrease in our operating results in those periods.
In late June 2010, we began selling an authorized generic version of our prescription Zegerid
Capsules under a distribution and supply agreement with Prasco, LLC, or Prasco. Prasco has agreed
to purchase all of its authorized generic product requirements from us and pays a specified invoice
supply price for such products. We recognize revenue from shipments to Prasco at the invoice
supply price and the related cost of product sales when title transfers, which is generally at the
time of shipment. We are also entitled to receive a percentage of the gross margin on sales of the
authorized generic products by Prasco, which we will recognize as an addition to product sales, net
when Prasco reports to us the gross margin from the ultimate sale of the products. Any adjustments
to the gross margin related to Prascos estimated sales discounts and other deductions will be
recognized in the period Prasco reports the amounts to us.
Promotion, Royalty and Other License Revenue. We analyze each element of our promotion and
licensing agreements to determine the appropriate revenue recognition. We recognize revenue on
upfront payments over the period of significant involvement under the related agreements unless the
fee is in exchange for products delivered or services rendered that represent the culmination of a
separate earnings process and no further performance obligation exists under the contract. We
recognize milestone payments upon the achievement of specified milestones if (1) the milestone is
substantive in nature, and the achievement of the milestone was not reasonably assured at the
inception of the agreement and (2) the fees are nonrefundable. Any milestone payments received
prior to satisfying these revenue recognition criteria are recognized as deferred revenue. Sales
milestones, royalties and promotion fees are based on sales and/or gross margin information, which
may include estimates of sales discounts and other deductions, received from the relevant alliance
agreement partner. Sales milestones, royalties and promotion fees are recognized as revenue when
earned under the agreements, and any adjustments related to estimated sales discounts and other
deductions are recognized in the period the alliance agreement partner reports the amounts to us.
Inventories and Related Reserves
Inventories are stated at the lower of cost (FIFO) or market and consist of finished goods and
raw materials used in the manufacture of our Zegerid Capsules and the related authorized generic
products and Zegerid Powder for Oral Suspension products. Also included in inventories are product
samples of the Glumetza products which we purchase from Depomed under our promotion agreement. We
provide reserves for potentially excess, dated or obsolete inventories based on an analysis of
inventory on hand and on firm purchase commitments compared to forecasts of future sales.
Stock-Based Compensation
We estimate the fair value of stock options and employee stock purchase plan rights granted
using the Black-Scholes valuation model. This estimate is affected by our stock price, as well as
assumptions regarding a number of complex and subjective variables. These variables include the
expected volatility of our stock price, the expected term of the stock option, the risk-free
interest rate and expected dividends. In determining our volatility factor, we consider the
expected volatility of similar entities as well as our historical volatility since our initial
public offering in April 2004. In evaluating similar entities, we consider factors such as
industry, stage of development, size and financial leverage. In determining the expected life of
the options, we use the simplified method. Under this method, the expected life is presumed to
be the mid-point between the vesting date and the end of the contractual term. We will continue to
use the simplified method until we have sufficient historical exercise data to estimate the
expected life of the options.
The fair value of options granted is amortized on a straight-line basis over the requisite
service period of the awards, which is generally the vesting period ranging from one to four years.
Pre-vesting forfeitures were estimated to be approximately 0% for the three and six months ended
June 30, 2010 and 2009 as the majority of options granted contain monthly vesting terms. In 2008,
certain stock options were granted to employees at or above the vice president level that vest upon
the attainment of specific financial performance targets. The measurement date of stock options
containing performance-based vesting is the date the stock option grant is authorized and the
specific performance goals are communicated. Compensation expense is recognized based on the
probability that the performance criteria will be met. The recognition of compensation expense
associated with performance-based vesting requires judgment in assessing the probability of meeting
the performance goals, as well as defined criteria for assessing achievement of the
performance-related goals. The continued assessment of probability may result in additional
expense recognition or expense reversal depending on the level of achievement of the performance
goals. We recorded compensation expense of approximately
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$355,000 for the three and six months ended June 30, 2009 related to stock options containing
performance-based vesting. There was no compensation expense associated with these options in the
three and six months ended June 30, 2010.
The following table includes stock-based compensation recognized in our condensed statements
of operations (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Cost of product sales |
$ | 38 | $ | 33 | $ | 55 | $ | 52 | ||||||||
Research and development |
195 | 211 | 337 | 329 | ||||||||||||
Selling, general and administrative |
1,216 | 1,196 | 2,096 | 2,007 | ||||||||||||
Total |
$ | 1,449 | $ | 1,440 | $ | 2,488 | $ | 2,388 | ||||||||
As of June 30, 2010, total unrecognized compensation cost related to stock options was
approximately $11.3 million, and the weighted average period over which it was expected to be
recognized was 3.0 years.
Income Taxes
We provide for income taxes under the liability method. This approach requires the recognition
of deferred tax assets and liabilities for the expected future tax consequences of differences
between the tax basis of assets or liabilities and their carrying amounts in the financial
statements. We provide a valuation allowance for deferred tax assets if it is more likely than not
that these items will either expire before we are able to realize their benefit or if future
deductibility is uncertain.
On January 1, 2007, we adopted the authoritative guidance relating to accounting for
uncertainty in income taxes. This guidance clarifies the recognition threshold and measurement
attributes for financial statement disclosure of tax positions taken or expected to be taken on a
tax return. The impact of an uncertain income tax position on the income tax return must be
recognized at the largest amount that is more likely than not to be sustained upon audit by the
relevant taxing authority. An uncertain tax position will not be recognized if it has less than a
50% likelihood of being sustained.
The above listing is not intended to be a comprehensive list of all of our accounting
policies. In many cases, the accounting treatment of a particular transaction is specifically
dictated by GAAP. There are also areas in which our managements judgment in selecting any
available alternative would not produce a materially different result. Please see our audited
financial statements and notes thereto included in our annual report on Form 10-K, which contain
accounting policies and other disclosures required by GAAP.
Results of Operations
Comparison of Three Months Ended June 30, 2010 and 2009
Product Sales, Net. Product sales, net were $32.9 million for the three months ended June 30,
2010 and $28.0 million for the three months ended June 30, 2009 and consisted of sales of Zegerid
Capsules and Zegerid Powder for Oral Suspension as well as shipments of the authorized generic
version of our Zegerid Capsules under our distribution and supply agreement with Prasco. The $4.9
million increase in product sales, net was comprised of approximately $5.9 million related to an
increase in the sales volume of our Zegerid products, including the related authorized generic
products, offset in part by approximately $1.0 million related to decreased average selling prices.
These increases in volume and decreases in average selling prices related to shipments of the
authorized generic version of our Zegerid Capsules to Prasco at the invoice supply price.
Promotion Revenue. Promotion revenue was $8.1 million for the three months ended June 30,
2010 and $5.6 million for the three months ended June 30, 2009 and was comprised of fees earned
under our promotion agreement with Depomed related to the promotion of Glumetza products.
Promotion revenue for the three months ended June 30, 2010 was negatively impacted by Depomeds
voluntary recall from wholesalers of 52 lots of Glumetza 500 mg tablets. In connection with the
recall, Depomed has suspended product shipments of Glumetza 500 mg tablets to its customers pending
further investigation and discussions with the FDA. Depomed has indicated that it currently
expects to resume shipments of Glumetza 500 mg tablets to its customers by mid August 2010,
however, this timing may be extended to the extent that Depomeds current testing and resupply
activities are not successful.
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Royalty Revenue. Royalty revenue was $708,000 for the three months ended June 30, 2010 and
was comprised of royalty revenue earned under our license agreement with Schering-Plough for
Zegerid OTC. Schering-Plough commenced commercial sales of Zegerid OTC in March 2010. There was
no royalty revenue for the three months ended June 30, 2009.
Other License Revenue. There was no other license revenue for the three months ended June 30,
2010, and other license revenue was $2.2 million for the three months ended June 30, 2009. For the
three months ended June 30, 2009, license revenue was comprised of the amortization of upfront
payments we received from GSK in December 2007 and Schering-Plough in November 2006. Additional
information related to the upfront payments we received from GSK and Schering-Plough is provided
below:
| In December 2007, we received a nonrefundable $11.5 million upfront payment in connection with our license and distribution agreements with GSK. To support GSKs initial launch costs, we agreed to waive the first $2.5 million of aggregate royalties payable under the agreements. Of the total $11.5 million upfront payment, the $2.5 million in waived royalty obligations was recorded as deferred revenue and is being recognized as revenue as the royalties are earned. The remaining $9.0 million was also recorded as deferred revenue and was amortized to revenue on a straight-line basis over an 18-month period through May 2009, which represented the period we were obligated to supply Zegerid products to GSK for sale in Puerto Rico and the U.S. Virgin Islands under the distribution agreement. | ||
| In November 2006, we received a nonrefundable $15.0 million upfront license fee in connection with our license agreement with Schering-Plough. The $15.0 million upfront payment was amortized to revenue on a straight-line basis over a 37-month period through the end of 2009, which represented the period during which we had significant responsibilities under the agreement. |
Cost of Product Sales. Cost of product sales was $3.8 million for the three months ended June
30, 2010 and $2.1 million for the three months ended June 30, 2009, or approximately 12% and 8% of
net product sales, respectively. Cost of product sales consists primarily of raw materials,
third-party manufacturing costs, freight and indirect personnel and other overhead costs associated
with the sales of our Zegerid prescription products as well as shipments to Prasco of the
authorized generic version of Zegerid Capsules. Cost of product sales also includes reserves for
excess, dated or obsolete commercial inventories based on an analysis of inventory on hand and on
firm purchase commitments compared to forecasts of future sales. The increase in our cost of
product sales as a percentage of net product sales was primarily attributable to a reserve of
approximately $1.5 million recognized in the three months ended June 30, 2010 against on-hand
inventories of our Zegerid products in connection with the launch of generic and authorized generic
versions of prescription Zegerid Capsules and our related decision to cease promotion of Zegerid.
License Fees and Royalties. License fees and royalties were $2.3 million for the three months
ended June 30, 2010 and $1.9 million for the three months ended June 30, 2009. License fees and
royalties consisted of royalties due to the University of Missouri based upon net product sales of
our Zegerid prescription products and products sold by GSK under our license and distribution
agreements. In the three months ended June 30, 2010, license fees and royalties also consisted of
royalties due to the University of Missouri based upon sales of Zegerid OTC by Schering-Plough
under our license agreement. License fees and royalties in both periods also included license fee
amortization from the $12.0 million upfront fee paid to Depomed under our promotion agreement
entered into in July 2008. The $12.0 million upfront fee has been capitalized and is being
amortized to license fee expense over the estimated useful life of the asset on a straight-line
basis through mid-2016.
Research and Development. Research and development expenses were $4.5 million for the three
months ended June 30, 2010 and $3.3 million for the three months ended June 30, 2009. The $1.2
million increase in our research and development expenses was primarily attributable to costs
associated with our phase III clinical program evaluating rifamycin SV MMX in patients with
travelers diarrhea which was initiated in the second quarter of 2010.
Selling, General and Administrative. Selling, general and administrative expenses were $24.9
million for the three months ended June 30, 2010 and $27.3 million for the three months ended June
30, 2009. The $2.4 million decrease in our selling, general and administrative expenses was
primarily attributable to a decrease in legal fees associated with the patent infringement
litigation against Par, a decrease in Zegerid promotional spending and decreased expenses
associated with market research and trade shows.
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Interest Income. Interest income was $24,000 for the three months ended June 30, 2010 and
$62,000 for the three months ended June 30, 2009.
Interest Expense. Interest expense was $113,000 for the three months ended June 30, 2010 and
$115,000 for the three months ended June 30, 2009. Interest expense for both years was comprised
primarily of interest due in connection with our revolving credit facility with Comerica Bank, or
Comerica.
Income Tax Expense. Income tax expense was $1,000 for the three months ended June 30, 2010
and $122,000 for the three months ended June 30, 2009. The provision for income taxes reflects our
estimate of the effective tax rate expected to be applicable for the full fiscal year. Our
effective tax rate for the three months ended June 30, 2010 and June 30, 2009 is impacted by
anticipated utilization of Federal and state income tax net operating loss carryforwards.
Comparison of Six Months Ended June 30, 2010 and 2009
Product Sales, Net. Product sales, net were $61.9 million for the six months ended June 30,
2010 and $55.6 million for the six months ended June 30, 2009 and consisted of sales of Zegerid
Capsules and Zegerid Powder for Oral Suspension as well as shipments of the authorized generic
version of our Zegerid Capsules under our distribution and supply agreement with Prasco. The $6.3
million increase in product sales, net was comprised of approximately $5.5 million related to
increased average selling prices and approximately $865,000 related to an increase in sales volume,
which volume related to shipments of the authorized generic version of our Zegerid Capsules to
Prasco at the invoice supply price.
Promotion Revenue. Promotion revenue was $16.9 million for the six months ended June 30, 2010
and $10.2 million for the six months ended June 30, 2009 and was comprised primarily of fees earned
under our promotion agreement with Depomed related to the promotion of Glumetza products.
Royalty Revenue. Royalty revenue was $2.4 million for the six months ended June 30, 2010 and
was comprised of royalty revenue earned under our license agreement with Schering-Plough for
Zegerid OTC. Schering-Plough commenced commercial sales of Zegerid OTC in March 2010. There was
no royalty revenue for the six months ended June 30, 2009.
Other License Revenue. Other license revenue was $245,000 for the six months ended June 30,
2010 and $4.9 million for the six months ended June 30, 2009. For the six months ended June 30,
2010, other license revenue was comprised of the remaining amortization of the $2.5 million upfront
payment we received in October 2009 in connection with our license agreement with Norgine. The
$2.5 million upfront payment was amortized on a straight-line basis over a three-month period
through early January 2010, which represented the period during which we had significant
responsibilities under the agreement. For the six months ended June 30, 2009, license revenue was
comprised of the amortization of upfront payments we received from GSK in December 2007 and
Schering-Plough in November 2006.
Cost of Product Sales. Cost of product sales was $5.4 million for the six months ended June
30, 2010 and $4.0 million for the six months ended June 30, 2009, or approximately 9% and 7% of net
product sales, respectively. Cost of product sales consists primarily of raw materials,
third-party manufacturing costs, freight and indirect personnel and other overhead costs associated
with the sales of our Zegerid prescription products as well as shipments to Prasco of the
authorized generic version of Zegerid Capsules. Cost of product sales also includes reserves for
excess, dated or obsolete commercial inventories based on an analysis of inventory on hand and on
firm purchase commitments compared to forecasts of future sales. The increase in our cost of
product sales as a percentage of net product sales was primarily attributable to a reserve of
approximately $1.5 million recognized in the six months ended June 30, 2010 against on-hand
inventories of our Zegerid products in connection with the launch of generic and authorized generic
versions of prescription Zegerid Capsules and our related decision to cease promotion of Zegerid.
License Fees and Royalties. License fees and royalties were $5.3 million for the six months
ended June 30, 2010 and $3.7 million for the six months ended June 30, 2009. License fees and
royalties consisted of royalties due to the University of Missouri based upon net product sales of
our Zegerid prescription products and products sold by GSK under our license and distribution
agreements. Beginning in the six months ended June 30, 2010, license fees and royalties also
consisted of royalties due to the University of Missouri based upon sales of Zegerid OTC by
Schering-Plough under our license agreement. License fees and royalties in both periods also
included license fee amortization from the $12.0 million upfront fee paid to Depomed under our
promotion agreement entered into in July 2008. The $12.0 million upfront fee has been
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capitalized and is being amortized to license fee expense over the estimated useful life of
the asset on a straight-line basis through mid-2016.
Research and Development. Research and development expenses were $9.6 million for the six
months ended June 30, 2010 and $6.4 million for the six months ended June 30, 2009. The $3.2
million increase in our research and development expenses was primarily attributable to the ongoing
budesonide MMX phase III clinical program currently being conducted under our strategic
collaboration with Cosmo entered into in December 2008. We are responsible for one-half of the
total out-of-pocket costs associated with this program. In addition, the increase was attributable
to costs associated with our phase III clinical program evaluating rifamycin SV MMX in patients
with travelers diarrhea which was initiated in the second quarter of 2010. In addition to the
costs associated with our strategic collaboration with Cosmo, the increase in our research and
development expenses was attributable to increased compensation costs associated with an increase
in research and development personnel and annual merit increases. These increases were offset in
part by a decrease in our research and development expenses due to payment of the user fee
associated with the submission of our 505(b)(2) new drug application, or NDA, to the FDA for our
new immediate-release omeprazole prescription product in a tablet formulation in the six months
ended June 30, 2009. We have determined not to commercialize the new tablet product at this time.
Research and development expenses have historically consisted primarily of costs associated
with clinical studies of our products under development as well as clinical studies designed to
further differentiate our Zegerid products from those of our competitors, development of and
preparation for commercial manufacturing of our products, compensation and other expenses related
to research and development personnel and facilities expenses. In connection with our strategic
collaboration with Cosmo entered into in December 2008, we are developing two product candidates
targeting GI conditions. Budesonide MMX is an oral corticosteroid and is currently being evaluated
for the induction of remission of mild or moderate active ulcerative colitis in a phase III
clinical program. Assuming successful and timely completion of the clinical program, we plan to
submit an NDA for budesonide MMX to the FDA in the second half of 2011. Rifamycin SV MMX is a
broad spectrum, semi-synthetic antibiotic and has been investigated in a phase II clinical program
for patients with infectious diarrhea. We began enrolling patients in the first phase III study in
travelers diarrhea in the second quarter of 2010. Assuming timely and successful completion, we
plan to initiate a second phase III clinical study in travelers diarrhea in the first half of
2011. We are unable to estimate with any certainty the research and development costs that we may
incur in the future. We have also committed, in connection with the approval of our NDAs for
Zegerid Powder for Oral Suspension, to evaluate the product in pediatric populations, including
pharmacokinetic/pharmacodynamic, or PK/PD, and safety studies. We have not yet commenced any of
the studies and have requested a waiver of this requirement from the FDA. In the future, we may
conduct additional clinical studies to further differentiate our marketed products and products
under development, as well as conduct research and development related to any future products that
we may in-license or otherwise acquire. Although we are currently focused primarily on development
of the budesonide MMX and rifamycin SV MMX product candidates, we anticipate that we will make
determinations as to which development projects to pursue and how much funding to direct to each
project on an ongoing basis in response to the scientific, clinical and commercial merits of each
project.
Selling, General and Administrative. Selling, general and administrative expenses were $51.5
million for the six months ended June 30, 2010 and $54.1 million for the six months ended June 30,
2009. The $2.6 million decrease in our selling, general and administrative expenses was primarily
attributable to a decrease in legal fees associated with the patent infringement litigation against
Par.
Interest Income. Interest income was $46,000 for the six months ended June 30, 2010 and
$154,000 for the six months ended June 30, 2009. The $108,000 decrease in interest income was
primarily attributable to a lower rate of return on our cash, cash equivalents and short-term
investments.
Interest Expense. Interest expense was $229,000 for the six months ended June 30, 2010 and
$228,000 for the six months ended June 30, 2009. Interest expense for both years was comprised
primarily of interest due in connection with our revolving credit facility with Comerica.
Income Tax Expense. Income tax expense was $256,000 for the six months ended June 30, 2010
and $222,000 for the six months ended June 30, 2009. The provision for income taxes reflects our
estimate of the effective tax rate expected to be applicable for the full fiscal year. Our
effective tax rate for the six months ended June 30, 2010 and June 30, 2009 is impacted by
anticipated utilization of Federal and state income tax net operating loss carryforwards.
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Liquidity and Capital Resources
As of June 30, 2010, cash, cash equivalents and short-term investments were $99.1 million,
compared to $93.9 million as of December 31, 2009, an increase of $5.2 million. This net increase
resulted from our net income for the six months ended June 30, 2010, adjusted for non-cash charges
and changes in operating assets and liabilities.
Net cash provided by operating activities was $4.8 million for the six months ended June 30,
2010 and $982,000 for the six months ended June 30, 2009. This increase resulted from our net
income for these periods, adjusted for non-cash charges, including $2.5 million for the six months
ended June 30, 2010 and $2.4 million for the six months ended 2009 in stock-based compensation,
$938,000 for the six months ended June 30, 2010 and $1.1 million for the six months ended June 30,
2009 in depreciation and amortization, and changes in operating assets and liabilities.
Significant working capital uses of cash for the six months ended June 30, 2010 included increases
in prepaid expenses and other current assets and decreases in accounts payable and accrued
liabilities related to payment of annual corporate bonuses and other expenses accrued in 2009.
These working capital uses of cash for the six months ended June 30, 2010 were offset in part by
decreases in inventories related to our reserves against on-hand inventories of our Zegerid
products resulting from our decision to cease promotion of Zegerid and the launch of generic
versions of prescription Zegerid Capsules. Significant working capital uses of cash for the six
months ended June 30, 2009 included decreases in deferred revenue.
Net cash used in investing activities was $4.6 million for the six months ended June 30, 2010
and $2.9 million for the six months ended June 30, 2009. These activities included purchases and
maturities/redemptions of short-term investments and purchases of property and equipment.
Net cash provided by financing activities was $499,000 for the six months ended June 30, 2010
and $375,000 for the six months ended June 30, 2009 consisting of net proceeds received from the
issuance of common stock under our employee stock purchase plan and the exercise of stock options.
We currently rely on Norwich Pharmaceuticals, Inc. as our manufacturer of Zegerid Capsules and
the related authorized generic product, and Patheon, Inc. as our manufacturer of Zegerid Powder for
Oral Suspension. We purchase commercial quantities of omeprazole, an active ingredient in our
Zegerid products, from Union Quimico Farmaceutica, S.A. At June 30, 2010, we had finished goods
and raw materials inventory purchase commitments of approximately $1.3 million.
The following summarizes our long-term contractual obligations as of June 30, 2010, excluding
potential sales-based royalty obligations and milestone payments under our agreements with the
University of Missouri, Depomed and Cosmo which are described below:
Payments Due by Period | ||||||||||||||||||||
Less than | One to | Four to | ||||||||||||||||||
Contractual Obligations | Total | One Year | Three Years | Five Years | Thereafter | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Operating leases |
$ | 4,312 | $ | 1,035 | $ | 3,277 | $ | | $ | | ||||||||||
Long-term debt |
10,390 | 190 | 10,200 | |||||||||||||||||
Other long-term contractual obligations |
375 | 267 | 108 | | | |||||||||||||||
Total |
$ | 15,077 | $ | 1,492 | $ | 13,585 | $ | | $ | | ||||||||||
Under our exclusive worldwide license agreement with the University of Missouri entered into
in January 2001 relating to specific formulations of PPIs with antacids and other buffering agents,
we are required to make milestone payments to the University of Missouri upon initial commercial
sale in specified territories outside the U.S., which may total up to $3.5 million in the
aggregate. We are also required to make milestone payments based on first-time achievement of
significant sales thresholds, up to a maximum of $83.8 million remaining under the agreement, which
includes sales by us, Prasco, Schering-Plough, GSK and Norgine. We are also obligated to pay
royalties on net sales of our Zegerid prescription products and any products sold by Prasco,
Schering-Plough, GSK and Norgine under our existing license and distribution agreements.
Under our promotion agreement with Depomed entered into in July 2008, we may be required to
pay Depomed one-time sales milestones totaling up to $16.0 million in aggregate, the first of which
milestones is in the amount of $3.0 million
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and is payable if annual Glumetza net product sales exceed $50.0 million. Under the promotion
agreement, we are required to meet certain minimum promotion obligations during the term of the
agreement. On an annual basis, we are required to make sales force expenditures at least equal
to an agreed-upon percentage of the prior years net sales, where sales force expenditures for
purposes of the promotion agreement are sales calls with specified assigned values (indexed to
inflation in future years) depending on the relative position of the call and the number of other
products promoted by the sales representatives promoting Glumetza. In addition, during the term of
the agreement, we are required to make certain minimum marketing, advertising, medical affairs and
other commercial support expenditures.
Under our license agreement, stock issuance agreement and registration rights agreement with
Cosmo entered into in December 2008, Cosmo is entitled to receive up to a total of $9.0 million in
clinical and regulatory milestones for the initial indications for the licensed products, up to
$6.0 million in clinical and regulatory milestones for a second indication for rifamycin SV MMX and
up to $57.5 million in commercial milestones. The clinical milestones include an obligation to pay
Cosmo $3.0 million upon achievement of the primary endpoints in the EU and U.S. phase III studies
for budesonide MMX with statistical significance and demonstrated adequate safety. The milestones
may be paid in cash or through issuance of additional shares of our common stock, at Cosmos
option, subject to certain limitations. We will pay tiered royalties to Cosmo ranging from 12% to
14% on net sales of any licensed products we sell. We are responsible for one-half of the total
out-of-pocket costs associated with the ongoing budesonide MMX phase III clinical program, for all
of the out-of-pocket costs for the first rifamycin SV MMX phase III U.S. registration study and for
one-half of the out-of-pocket costs for the second planned rifamycin SV MMX phase III U.S.
registration study. In the event that additional clinical work is required to obtain U.S.
regulatory approval for either of the licensed products, the parties will agree on cost sharing.
The amount and timing of cash requirements will depend on our ability to maintain and increase
market demand for, and sales of, our Glumetza prescription products, particularly in light of a
recent Glumetza 500 mg recall, voluntarily undertaken by our partner, Depomed, in June 2010, and
the ongoing supply interruption for this dosage strength, and the impact on our business of the
launch of generic and authorized generic versions of our Zegerid Capsules product and our related
decision to cease promotion of Zegerid prescription products in late June 2010. In connection with
the availability of generic versions of our Zegerid products, in future periods we expect to report
a decrease in Zegerid product sales, net and an associated decrease in accrued rebates. The
anticipated decrease in accrued rebates is primarily due to the payment of rebates accrued at
higher amounts from sales in prior periods and the expected decrease in the ongoing amount of
Zegerid sales under contract. Rebates are typically paid on a quarterly basis in arrears, however,
there may be a significant time lag between the date we determine the estimated rebate and when we
make the contractual payment. For these reasons, we expect to report a working capital use of cash
in the second half of 2010. In addition, our cash requirements will depend on market acceptance of
any other products that we may market in the future, the success of our strategic alliances, the
resources we devote to researching, developing, formulating, manufacturing, commercializing and
supporting our products, and our ability to enter into third-party collaborations.
In connection with our corporate restructuring announced in late June 2010, we expect to
record significant restructuring charges relating to employment termination benefits and contract
termination costs in the third quarter of 2010. We may not be able to realize the cost savings and
other anticipated benefits from our restructuring, and we cannot guarantee that any of our
restructuring efforts will be successful, or that we will not have to undertake additional
restructuring activities.
While we plan to retain up to approximately 110 sales representatives, including a small
number of contract sales representatives, to promote Glumetza prescription products, this reduced
commercial presence may not be adequate to grow sales of this type 2 diabetes product, particularly
in light of the recent Glumetza 500 mg recall and related ongoing supply interruption. In
addition, with reduced resources, other components of our strategic plans may be negatively
impacted, such as reduced capacity to evaluate, negotiate and fund the acquisition or license of
additional specialty pharmaceutical products. Our workforce and expense reduction efforts may have
an adverse impact on our ability to retain key personnel due to the perceived risk of future
workforce and expense reductions. These employees, whether or not directly affected by the
reduction, may seek future employment with our business partners or competitors. Even if we are
able to realize the expected cost savings from our restructuring activities, our operating results
and financial condition may continue to be adversely affected by declining product revenues.
We believe that our current cash, cash equivalents and short-term investments will be
sufficient to fund our current operations for at least the next 12 months; however, our projected
revenue may decrease or our expenses may increase and that would lead to our cash resources being
consumed earlier than we expect. Although we do not believe that we will need
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to raise additional funds to finance our current operations over the next 12 months, we may
pursue raising additional funds in connection with in-licensing or acquisition of new products or
companies. Sources of additional funds may include funds generated through equity and/or debt
financings.
In November 2008, we filed a universal shelf registration statement on Form S-3 with the
Securities and Exchange Commission, which was declared effective in December 2008. The universal
shelf registration statement replaced our previous universal shelf registration statement that
expired in December 2008. The universal shelf registration statement may permit us, from time to
time, to offer and sell up to an additional approximately $75.0 million of equity or debt
securities. However, there can be no assurance that we will be able to complete any such offerings
of securities. Factors influencing the availability of additional financing include the progress of
our commercial and development activities, investor perception of our prospects and the general
condition of the financial markets, among others.
In July 2006, we entered into our loan agreement with Comerica, which was subsequently amended
in July 2008, pursuant to which we may request advances in an aggregate outstanding amount not to
exceed $25.0 million. In December 2008, we drew down $10.0 million under the loan agreement. The
revolving loan bears interest at a variable rate of interest, per annum, most recently announced by
Comerica as its prime rate plus 0.50%, which as of June 30, 2010 was 3.75%. Interest payments on
advances made under the loan agreement are due and payable in arrears on the first calendar day of
each month during the term of the loan agreement. Amounts borrowed under the loan agreement may be
repaid and re-borrowed at any time prior to July 11, 2011. There is a non-refundable unused
commitment fee equal to 0.50% per annum on the difference between the amount of the revolving line
and the average daily balance outstanding thereunder during the term of the loan agreement, payable
quarterly in arrears. The loan agreement will remain in full force and effect for so long as any
obligations remain outstanding or Comerica has any obligation to make credit extensions under the
loan agreement.
Amounts borrowed under the loan agreement are secured by substantially all of our personal
property, excluding intellectual property. Under the loan agreement, we are subject to certain
affirmative and negative covenants, including limitations on our ability to: undergo certain
change of control events; convey, sell, lease, license, transfer or otherwise dispose of assets;
create, incur, assume, guarantee or be liable with respect to certain indebtedness; grant liens;
pay dividends and make certain other restricted payments; and make investments. In addition, under
the loan agreement, we are required to maintain a cash balance with Comerica in an amount of not
less than $4.0 million and to maintain any other cash balances with either Comerica or another
financial institution covered by a control agreement for the benefit of Comerica. We are also
subject to specified financial covenants with respect to a minimum liquidity ratio and, in
specified limited circumstances, minimum EBITDA requirements. We believe we have currently met all
of our obligations under the loan agreement.
We cannot be certain that our existing cash and marketable securities resources will be
adequate to sustain our current operations. To the extent we require additional funding, we cannot
be certain that such funding will be available to us on acceptable terms, or at all. To the extent
that we raise additional capital by issuing equity or convertible securities, our stockholders
ownership will be diluted. Any debt financing we enter into may involve covenants that restrict
our operations. If adequate funds are not available on terms acceptable to us at that time, our
ability to continue our current operations or pursue new product opportunities would be
significantly limited.
In addition, our results of operations could be materially affected by economic conditions
generally, both in the U.S. and elsewhere around the world. Continuing concerns over inflation,
energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market
and a declining residential real estate market in the U.S. have contributed to increased volatility
and diminished expectations for the economy and the markets going forward. These factors, combined
with volatile oil prices, declining business and consumer confidence and increased unemployment,
have precipitated an economic recession. Domestic and international equity markets continue to
experience heightened volatility and turmoil. These events and the continuing market upheavals may
have an adverse effect on us. In the event of a continuing market downturn, our results of
operations could be adversely affected by those factors in many negative ways, including making it
more difficult for us to raise funds if necessary, and our stock price may further decline. In
addition, we maintain significant amounts of cash and cash equivalents at one or more financial
institutions that are in excess of federally insured limits. Given the current instability of
financial institutions, we cannot be assured that we will not experience losses on these deposits.
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In March 2010, the President signed the Patient Protection and Affordable Care Act, which
makes extensive changes to the delivery of health care in the United States. This act includes
numerous provisions that affect pharmaceutical companies, some of which are effective immediately
and others of which will be taking effect over the next several years. For example, the act seeks
to expand health care coverage to the uninsured through private health insurance reforms and an
expansion of Medicaid. The act will also impose substantial costs on pharmaceutical manufacturers,
such as an increase in liability for rebates paid to Medicaid, new drug discounts that must be
offered to certain enrollees in the Medicare prescription drug benefit, an annual fee imposed on
all manufacturers of brand prescription drugs in the United States, and an expansion of an existing
program requiring pharmaceutical discounts to certain types of hospitals and federally subsidized
clinics. The act also contains cost-containment measures that could reduce reimbursement levels
for health care items and services generally, including pharmaceuticals. It also will require
reporting and public disclosure of payments and other transfers of value provided by pharmaceutical
companies to physicians and teaching hospitals. These measures could result in decreased net
revenues from our pharmaceutical products and decreased potential returns from our development
efforts.
As of June 30, 2010, we did not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance or special purpose
entities, which would have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes. In addition, we do not engage in
trading activities involving non-exchange traded contracts. As such, we are not materially exposed
to any financing, liquidity, market or credit risk that could arise if we had engaged in these
relationships.
Accounting Pronouncements
Pending Adoption of Recent Accounting Pronouncements
In October 2009, the Emerging Issues Task Force, or EITF, issued authoritative guidance on
revenue recognition with regard to multiple element arrangements. The consensus in this recently
issued guidance supersedes certain prior guidance and requires an entity to allocate arrangement
consideration at the inception of an arrangement to all of its deliverables based on their relative
selling prices (i.e., the relative selling-price method). The consensus eliminates the use of the
residual method of allocation (i.e., in which the undelivered element is measured at its estimated
selling price and the delivered element is measured as the residual of the arrangement
consideration) and requires the relative selling-price method in all circumstances in which an
entity recognizes revenue for an arrangement with multiple deliverables subject to the issued
guidance. This guidance requires both ongoing disclosures regarding an entitys multiple-element
revenue arrangements as well as certain transitional disclosures during periods after adoption.
This guidance is effective for the first fiscal year beginning on or after June 15, 2010. We do
not expect the adoption of this guidance will have a material impact on our financial statements.
Caution on Forward-Looking Statements
Any statements in this report and the information incorporated herein by reference about our
expectations, beliefs, plans, objectives, assumptions or future events or performance that are not
historical facts are forward-looking statements. You can identify these forward-looking statements
by the use of words or phrases such as believe, may, could, will, estimate, continue,
anticipate, intend, seek, plan, expect, should, or would. Among the factors that
could cause actual results to differ materially from those indicated in the forward-looking
statements are risks and uncertainties inherent in our business including, without limitation: the
extent to which Prasco, LLC is able to successfully market and distribute its authorized generic
version of Zegerid® (omeprazole/sodium bicarbonate) Capsules in 20 mg and 40 mg dosage
strengths and the potential to receive revenue under the distribution agreement; the amount and
timing of estimated charges in connection with the corporate restructuring and the ability to
reduce selling and marketing expenses following completion of the restructuring; our ability to
maintain and increase market demand for, and sales of, the Glumetza® (metformin
hydrochloride extended release tablets) prescription products we promote, particularly in light of
a recent Glumetza 500 mg voluntary recall in June 2010 and the related ongoing supply interruption
for this dosage strength, as well as the potential impact of the pending patent litigation
concerning the Glumetza products; whether budesonide MMX® or rifamycin SV
MMX® will demonstrate the desired safety and efficacy profile in the Phase III clinical
programs to merit continued development; the difficulty in predicting the timing and outcome of an
appeal of the trial courts ruling in the Zegerid patent litigation; whether any other companies
will submit Abbreviated New Drug Applications for and/or launch generic versions of Zegerid;
adverse side effects or inadequate therapeutic efficacy of our products or products we promote that
could result in product recalls, market withdrawals or product liability claims; competition from
other
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pharmaceutical or biotechnology companies and evolving market dynamics; our ability to further
diversify our sources of revenue and product portfolio; other difficulties or delays relating to
the development, testing, manufacturing and marketing of, and obtaining and maintaining regulatory
approvals for, our and our strategic partners products; fluctuations in quarterly and annual
results; our ability to obtain additional financing as needed to support our operations or future
product acquisitions; the impact of healthcare reform legislation and the recent turmoil in the
financial markets; and other risks detailed below under Part II Item 1A Risk Factors.
Although we believe that the expectations reflected in our forward-looking statements are
reasonable, we cannot guarantee future results, events, levels of activity, performance or
achievement. We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise, unless required by
law.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Under the terms of our loan agreement with Comerica Bank, or Comerica, the interest rate
applicable to any amounts borrowed by us under the credit facility will be, at our election,
indexed to either Comericas prime rate or the LIBOR rate. If we elect Comericas prime rate for
all or any portion of our borrowings, the interest rate will be variable, which would expose us to
the risk of increased interest expense if interest rates rise. If we elect the LIBOR rate for all
or any portion of our borrowings, such LIBOR rate will remain fixed only for a specified, limited
period of time after the date of our election, after which we will be required to repay the
borrowed amount, or elect a new interest rate indexed to either Comericas prime rate or the LIBOR
rate. The new rate may be higher than the earlier interest rate applicable under the loan
agreement. As of June 30, 2010, the balance outstanding under the credit facility was $10.0
million, and we had elected the prime rate plus 0.50% interest rate option, which was 3.75% as of
June 30, 2010. Under our current policies, we do not use interest rate derivative instruments to
manage our exposure to interest rate changes. A hypothetical 1% increase or decrease in the
interest rate under the loan agreement would not materially affect our interest expense at our
current level of borrowing.
In addition to market risk related to our loan agreement with Comerica, we are exposed to
market risk primarily in the area of changes in U.S. interest rates and conditions in the credit
markets, particularly because the majority of our investments are in short-term marketable
securities. We do not have any material foreign currency or other derivative financial
instruments. Our short-term investment securities have consisted of corporate debt securities,
government agency securities and U.S. Treasury securities which are classified as
available-for-sale and therefore reported on the balance sheet at estimated market value.
Our results of operations could be materially affected by economic conditions generally, both
in the U.S. and elsewhere around the world. Continuing concerns over inflation, energy costs,
geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining
residential real estate market in the U.S. have contributed to increased volatility and diminished
expectations for the economy and the markets going forward. These factors, combined with volatile
oil prices, declining business and consumer confidence and increased unemployment, have
precipitated an economic recession. Domestic and international equity markets continue to
experience heightened volatility and turmoil. These events and the continuing market upheavals may
have an adverse effect on us. In the event of a continuing market downturn, our results of
operations could be adversely affected by those factors in many negative ways, including making it
more difficult for us to raise funds if necessary, and our stock price may further decline. In
addition, we maintain significant amounts of cash and cash equivalents at one or more financial
institutions that are in excess of federally insured limits. Given the current instability of
financial institutions, we cannot be assured that we will not experience losses on these deposits.
Item 4. | Controls and Procedures |
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and
forms and that such information is accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as appropriate, to allow for timely decisions
regarding required disclosure. In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
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As required by Securities and Exchange Commission Rule 13a-15(b), we carried out an
evaluation, under the supervision and with the participation of our management, including our chief
executive officer and chief financial officer, of the effectiveness of the design and operation of
our disclosure controls and procedures as of the end of the quarter covered by this report. Based
on the foregoing, our chief executive officer and chief financial officer concluded that our
disclosure controls and procedures were effective at the reasonable assurance level.
There has been no change in our internal control over financial reporting during our most
recent fiscal quarter 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
Par Pharmaceutical, Inc. Zegerid® Patent Litigation
In April 2010, the U.S. District Court for the District of Delaware ruled that five patents
covering Zegerid Capsules and Zegerid Powder for Oral Suspension (U.S. Patent Nos. 6,489,346;
6,645,988; 6,699,885; 6,780,882; and 7,399,772) are invalid due to obviousness. These patents were
the subject of lawsuits we filed in 2007 against Par Pharmaceutical, Inc., or Par, for
infringement. The lawsuits were filed in response to ANDAs filed by Par with the FDA. In May 2010,
we filed an appeal of the District Courts ruling to the U.S. Court of Appeals for the Federal
Circuit. Although we intend to vigorously defend and enforce our patent rights, we are not able to
predict the timing or outcome of the appeal.
In early July 2010, Par commenced its commercial sale of its generic version of our Zegerid
Capsules prescription product. We anticipate that Par will launch its generic version of our
Zegerid Powder for Oral Suspension product once it receives FDA approval to market that product.
Pursuant to FDA rules and regulations, we believe that Par, as the first ANDA filer with respect to
our Zegerid prescription products, will have a six-month period of exclusivity from the date it
launches its generic products during which all other ANDA filers will not be allowed to market or
sell their generic products. After the expiration of the six-month exclusivity period, additional
FDA-approved generic versions, if any, of these Zegerid products may become available.
As a result of Pars decision to launch its generic version of our Zegerid Capsules
prescription product, in late June 2010, under our distribution and supply agreement with Prasco,
Prasco commenced shipments of our authorized generic of prescription Zegerid Capsules in 20 mg and
40 mg dosage strengths in the U.S., and we ceased our commercial promotion of Zegerid prescription
products.
The launch of generic Zegerid Capsules prescription products will adversely impact sales of
our Zegerid brand prescription products and have a negative impact on our financial condition and
results of operations, including causing a significant decrease in our revenues and cash flows.
Even if physicians prescribe Zegerid products, third-party payors and pharmacists can substitute
generic versions of Zegerid. In many cases, insurers and other healthcare payment organizations
encourage the use of generic brands through their prescription benefits coverage and payment or
reimbursement policies. Insurers and other healthcare payment organizations may make generic
alternatives of Zegerid more attractive to patients by providing different amounts of coverage or
out-of-pocket expenses so that the net cost of the generic product to the patient is less than the
net cost of our branded product.
The District Courts ruling also negatively impacts the patent protection for the products
being commercialized in the U.S. and its territories pursuant to our over-the-counter license with
Schering-Plough and our distribution agreement with GSK for Puerto Rico and the U.S. Virgin
Islands, which in turn may impact the amount of, or our ability to receive, milestone payments and
royalties under our agreements with these strategic partners. The ruling may also negatively
impact the patent protection for the products being commercialized pursuant to our ex-US licenses
with GSK and Norgine. Although the U.S. ruling is not binding in countries outside the U.S.,
similar challenges to those raised in the U.S. litigation may be raised in territories outside the
U.S.
Regardless of how the litigation is ultimately resolved, the litigation has been and will
continue to be costly, time-consuming and distracting to management, which could have a material
adverse effect on our business.
University of Missouri Application for Patent Reissue
In December 2007, the University of Missouri filed an Application for Reissue of U.S. Patent
No. 5,840,737, or the 737 patent, with the U.S. Patent and Trademark Office, or PTO. The 737
patent is one of six issued patents listed in the Approved Drug Products with Therapeutic
Equivalence Evaluations, or the Orange Book, for Zegerid Powder for Oral Suspension. The 737
patent is not one of the four patents listed in the Orange Book for Zegerid Capsules. It is not
feasible to predict the impact that the reissue proceeding may have on the scope and validity of
the 737 patent claims. If the claims of the 737 patent ultimately are narrowed substantially or
invalidated by the PTO, the extent of the patent coverage afforded to our Zegerid family of
products could be further impaired. In addition, we expect the University of Missouri will
disclose to the PTO the District Courts ruling described above, and we cannot predict the impact
such disclosure will have on the reissue proceedings.
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C.B. Fleet Co., Inc. Phospho-soda® Product Liability Litigation
In October 2009, we became aware of two lawsuits filed by individual plaintiffs in Ohio state
court relating to C.B. Fleet Co., Inc., or Fleet, and claiming injuries purportedly caused by
Fleets Phospho-soda®, sodium phosphate oral solution product. The complaints name
Fleet, Santarus, the Cleveland Clinic Foundation, the Research Foundation of the American Society
of Colon and Rectal Surgeons, the Society of American Gastrointestinal and Endoscopic Surgeons and
several other individuals as defendants. The complaints allege, among other things, that the
defendants fraudulently concealed, misrepresented and suppressed material medical and scientific
information about Fleets Phospho-soda product. The plaintiffs are seeking compensatory damages,
exemplary damages, damages for loss of consortium, damages under the Ohio Consumer Protection Act,
and attorneys fees and expenses. We co-promoted Fleets Phospho-soda® EZ-Prep Bowel
Cleansing System, a different sodium phosphate oral solution product manufactured by Fleet, under a
co-promotion agreement, which we and Fleet entered into in August 2007 and which expired in October
2008. In November 2009, we filed notices to remove the lawsuits to the United States District
Court for the Northern District of Ohio, and plaintiffs filed motions to remand the actions back to
Ohio state court. In April 2010, we filed motions requesting that we be dismissed from these
lawsuits, as well as responses to plaintiffs motions to remand.
Under the terms of the co-promotion agreement, we have requested that Fleet indemnify us in
connection with these matters. In addition, we have tendered notice of these matters to our
insurance carriers pursuant to the terms of our insurance policies. Due to the uncertainty of the
ultimate outcome of these matters and our ability to maintain indemnification and/or insurance
coverage, we cannot predict the effect, if any, this matter will have on our business. Regardless
of how this litigation is ultimately resolved, this matter may be costly, time-consuming and
distracting to our management, which could have a material adverse effect on our business.
Depomed, Inc. Glumetza Patent Litigation
In November 2009, Depomed, Inc., or Depomed, filed a lawsuit in the United States District
Court for the Northern District of California against Lupin Limited and its wholly-owned
subsidiary, Lupin Pharmaceutical, Inc., collectively referred to herein as Lupin, for infringement
of the patents listed in the Orange Book for Glumetza. The lawsuit was filed in response to an
ANDA and Paragraph IV certification filed with the FDA by Lupin regarding Lupins intent to market
generic versions of 500 mg and 1000 mg tablets for Glumetza prior to the expiration of the Orange
Book patents. Depomed commenced the lawsuit within the requisite 45 day time period, placing an
automatic stay on the FDA from approving Lupins proposed products for 30 months or until a
decision is rendered by the District Court, which is adverse to the Orange Book patents, whichever
may occur earlier. Absent a court decision, the 30-month stay is expected to expire in May 2012.
Lupin has prepared and filed an answer in the case, principally asserting non-infringement and
invalidity of the Orange Book patents, and has also filed counterclaims. Discovery is currently
underway and a hearing for claim construction, or Markman hearing, is scheduled for January 2011.
Under the terms of our promotion agreement with Depomed, Depomed has assumed responsibility
for managing and paying for this action, subject to certain consent rights held by us regarding any
potential settlements or other similar types of dispositions. Although Depomed has indicated that
it intends to vigorously defend and enforce its patent rights, we are not able to predict the
timing or outcome of this action.
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Item 1A. Risk Factors
Certain factors may have a material adverse effect on our business, financial condition and
results of operations, and you should carefully consider them. Accordingly, in evaluating our
business, we encourage you to consider the following discussion of risk factors in its entirety, in
addition to other information contained in this report as well as our other public filings with the
Securities and Exchange Commission, or SEC.
In the near-term, the success of our business will depend on many factors, including:
| the impact on our business and financial condition of Par Pharmaceutical, Inc.s, or Pars, decision to launch its generic version of our Zegerid® (omeprazole/sodium bicarbonate) Capsules prescription product, our related decision to cease promotion of our Zegerid products and launch an authorized generic product, and our corporate restructuring and workforce reduction; | ||
| our ability to maintain and increase market demand for, and sales of, the Glumetza® (metformin hydrochloride extended release tablets) prescription products we promote, particularly in light of a recent Glumetza 500 mg voluntary recall in June 2010 and the related ongoing supply interruption for this dosage strength, as well as the potential impact of the pending patent litigation concerning the Glumetza products; | ||
| our ability to successfully advance the development (including successful completion of the ongoing and planned phase III clinical studies), obtain regulatory approval for and commercialize our development product candidates, budesonide MMX® and rifamycin SV MMX; | ||
| our ability to achieve continued progress under our strategic alliances, including our over-the-counter, or OTC, license agreement with Schering-Plough HealthCare Products, Inc., or Schering-Plough, a subsidiary of Merck & Co., Inc., our license agreement with Glaxo Group Limited, an affiliate of GlaxoSmithKline plc, or GSK, and our license agreement with Norgine B.V., or Norgine, and the potential for early termination of, or reduced payments under, these agreements; and | ||
| our ability to in-license or acquire additional products, including our ability to in-license or acquire such products on favorable terms or at all, the impact of any such transactions on our financial resources and our ability to successfully integrate any potential new products into our existing operations. |
Each of these factors, as well as other factors that may impact our business, are described in
more detail in the following discussion. Although the factors highlighted above are among the most
significant, any of the following factors could materially adversely affect our business or cause
our actual results to differ materially from those contained in forward-looking statements we have
made in this report and those we may make from time to time, and you should consider all of the
factors described when evaluating our business.
Risks Related to Our Business and Industry
Due to Pars decision to launch its generic product, we expect future sales of our Zegerid
prescription products to be significantly less than historical sales, which will negatively impact
our overall financial results and may negatively impact our strategic alliances.
In April 2010, the U.S. District Court for the District of Delaware ruled that five patents
covering Zegerid Capsules and Zegerid Powder for Oral Suspension (U.S. Patent Nos. 6,489,346;
6,645,988; 6,699,885; 6,780,882; and 7,399,772) are invalid due to obviousness. These patents were
the subject of lawsuits we filed in 2007 against Par for infringement. The lawsuits were filed in
response to abbreviated new drug applications, or ANDAs, filed by Par with the U.S. Food and Drug
Administration, or FDA. In May 2010, we filed an appeal of the District Courts ruling to the U.S.
Court of Appeals for the Federal Circuit. Although we intend to vigorously defend and enforce our
patent rights, we are not able to predict the timing or outcome of the appeal.
In early July 2010, Par commenced its commercial sale of its generic version of our Zegerid
Capsules prescription product. We anticipate that Par will launch its generic version of our
Zegerid Powder for Oral Suspension product once it
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receives FDA approval to market that product. Pursuant to FDA rules and regulations, we
believe that Par, as the first ANDA filer with respect to our Zegerid prescription products, will
have a six-month period of exclusivity from the date it launches its generic products during which
all other ANDA filers will not be allowed to market or sell their generic products. After the
expiration of the six-month exclusivity period, additional FDA-approved generic versions, if any,
of these Zegerid products may become available.
In late June 2010, under our distribution and supply agreement with Prasco and as a result of
Pars decision to launch its generic version of our Zegerid Capsules prescription product, Prasco
commenced shipments of our authorized generic of prescription Zegerid Capsules in 20 mg and 40 mg
dosage strengths in the U.S., and we ceased our commercial promotion of Zegerid prescription
products.
The launch of generic Zegerid Capsules prescription products will adversely impact sales of
our Zegerid brand prescription products and have a negative impact on our financial condition and
results of operations, including causing a significant decrease in our revenues and cash flows.
Even if physicians prescribe Zegerid products, third-party payors and pharmacists can substitute
generic versions of Zegerid. In many cases, insurers and other healthcare payment organizations
encourage the use of generic brands through their prescription benefits coverage and payment or
reimbursement policies. Insurers and other healthcare payment organizations may make generic
alternatives of Zegerid more attractive to patients by providing different amounts of coverage or
out-of-pocket expenses so that the net cost of the generic product to the patient is less than the
net cost of our branded product.
Sales of our Zegerid brand and authorized generic products may also be negatively impacted by
the performance of our third-party manufacturers and our ability to maintain commercial
manufacturing arrangements necessary to meet commercial demand for our products. The occurrence of
adverse side effects or inadequate therapeutic efficacy of the Zegerid products, and any resulting
product liability claims or product recalls could also impact our ability to increase sales of
these products. For example, the FDA has recently required proton pump inhibitor, or PPI,
manufacturers to highlight the association of high-dose or long-term PPI therapy with increased
risk for osteoporosis-related fractures of the hip, wrist or spine as part of the prescribing
information.
The District Courts ruling also negatively impacts the patent protection for the products
being commercialized in the U.S. and its territories pursuant to our over-the-counter license with
Schering-Plough and our distribution agreement with GSK for Puerto Rico and the U.S. Virgin
Islands, which in turn may impact the amount of, or our ability to receive, milestone payments and
royalties under our agreements with these strategic partners. The ruling may also negatively
impact the patent protection for the products being commercialized pursuant to our ex-US licenses
with GSK and Norgine. Although the U.S. ruling is not binding in countries outside the U.S.,
similar challenges to those raised in the U.S. litigation may be raised in territories outside the
U.S.
Although we have entered into an authorized generic agreement to mitigate the effect of declining
sales of Zegerid prescription products, we will need to pursue additional strategies to replace our
lost revenues.
As a result of Pars decision to launch its generic version of our Zegerid Capsules
prescription product, Prasco commenced shipments of an authorized generic of prescription Zegerid
Capsules in 20 mg and 40 mg dosage strengths in the U.S. under the Prasco label in late June 2010.
Under our distribution and supply agreement, Prasco has agreed to purchase all of its authorized
generic product requirements from us and will pay a specified invoice supply price for such
products. Prasco is also obligated to pay us a percentage of the gross margin on sales of the
authorized generic products. However, we expect the amounts we receive from Prasco under this
agreement will be significantly less than the gross margin we previously recognized on sales of
Zegerid prescription products. Furthermore, due to the availability of other generic products, we
would expect Prascos authorized generics market share to be less than the previous market share
for our Zegerid prescription products. Our ability to receive revenues from the sale of the Prasco
authorized generics is also subject to risks associated with the distribution and supply agreement,
including the potential for early termination of the agreement and Prascos control over the
resources it devotes to the Zegerid-equivalent product relative to Prascos other product
offerings. While the launch of Prascos authorized generics may mitigate to some extent the effect
on our business of reduced revenues and cash flows from declining sales of Zegerid prescription
products, we will need to pursue additional strategies to replace these lost revenues.
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We may not be able to realize the cost savings and other anticipated benefits from our corporate
restructuring, and our financial condition may deteriorate.
As a result of Pars decision to launch a generic version of our Zegerid Capsules prescription
product, we determined in late June 2010 to cease promotion of Zegerid prescription products and
implement a corporate restructuring, including a workforce reduction of approximately 37%, or
approximately 120 employees, in our commercial organization and other selected operations. At the
same time, we also significantly reduced the number of contract sales representatives that we
utilize. We expect to record significant restructuring charges relating to employment termination
benefits and contract termination costs in the third quarter of 2010. We may not be able to realize
the cost savings and other anticipated benefits from our restructuring, and we cannot guarantee
that any of our restructuring efforts will be successful, or that we will not have to undertake
additional restructuring activities.
We plan to retain up to approximately 110 sales representatives, including a small number of
contract sales representatives, to promote Glumetza. We cannot be certain that this reduced
commercial presence will be adequate to grow sales of this type 2 diabetes product, particularly in
light of the recent Glumetza 500 mg recall and related ongoing supply interruption. In addition,
with reduced resources, other components of our strategic plans may be negatively impacted, such as
reduced capacity to evaluate, negotiate and fund the acquisition or license of additional specialty
pharmaceutical products. Our workforce and expense reduction efforts may have an adverse impact on
our ability to retain key personnel due to the perceived risk of future workforce and expense
reductions. These employees, whether or not directly affected by the reduction, may seek future
employment with our business partners or competitors. Even if we are able to realize the expected
cost savings from our restructuring activities, our operating results and financial condition may
continue to be adversely affected by declining product revenues.
We are dependent upon our ability to maintain and increase sales of the Glumetza prescription
products we promote as a source of revenue, and we cannot be certain about the extent to which our
efforts will be negatively impacted by the recent recall of Glumetza 500mg and the related ongoing
supply interruption.
Our ability to maintain and increase sales of the Glumetza products we promote will depend on
several factors, including:
| our ability to successfully maintain and increase market demand for, and sales of, the Glumetza prescription products through the promotional efforts of our field sales representatives; | ||
| the impact of the recent Glumetza 500 mg recall, voluntarily undertaken by our partner, Depomed, in June 2010, as well as the related ongoing supply interruption of this dosage strength and any additional actions that the FDA may require Depomed to take; | ||
| the ability of Depomed to maintain patent coverage for Glumetza, including whether a favorable outcome is obtained in the pending patent infringement lawsuit; | ||
| the potential to obtain greater acceptance of the products by physicians and patients and obtain and maintain distribution at the retail level; | ||
| the occurrence of adverse side effects or inadequate therapeutic efficacy of the Glumetza products, and any resulting product liability claims or additional product recalls; | ||
| the availability of adequate levels of reimbursement coverage for the products from third-party payors, particularly in light of the availability of other branded and generic competitive products; and | ||
| the performance of third-party manufacturers and our ability to maintain commercial manufacturing arrangements necessary to meet commercial demand for the products. |
We promote the Glumetza products under a promotion agreement that we entered into with
Depomed, Inc., or Depomed, in July 2008. Depomed is currently conducting a voluntary recall of 52
lots of Glumetza 500 mg tablets due to the presence of trace amounts of a chemical called
2,4,6-tribromoanisole, or TBA, in bottles containing Glumetza 500 mg tablets. Depomed is
cooperating with the FDA on the recall, which has been conducted to date at the wholesaler level.
The
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recall does not impact the 1000 mg formulation of Glumetza. Depomed has indicated that it
initiated the recall following an investigation of a single product complaint of a smell and taste
consistent with TBA, which may cause temporary, non-serious gastrointestinal upset when present in
amounts detectable by smell. Depomed has indicated that the recall is precautionary and is not due
to risks to patient health.
In connection with the recall, Depomed has suspended product shipments of Glumetza 500 mg to
its customers pending further investigation and discussions with the FDA. Depomed has indicated
that it currently expects to resume shipments of Glumetza 500 mg tablets to its customers by mid
August 2010, however, this timing may be extended to the extent that Depomeds current testing and
resupply activities are not successful.
Pursuant to the terms of the promotion agreement, Depomed has sole responsibility for recalls
related to Glumetza and is required to reimburse us for our costs incurred in connection with
participating in the Glumetza recall, as well as provide indemnification for third party claims.
We have limited control over these recall activities, including with respect to Depomeds
interaction with the FDA, its contract manufacturer and the Glumetza wholesalers. We cannot be sure
whether Depomed will be able to begin resupplying Glumetza 500 mg in a timely manner or whether
additional recall activities will be required, including activities at the pharmacy level in
addition to the activities currently underway at the wholesaler level. In addition, if Depomed is
not able to establish resupply at the manufacturing facility currently utilized for Glumetza 500
mg, Depomed may be required to move the manufacturing of Glumetza 500 mg to an alternate site,
which would likely result in an extended delay before the product would be available for commercial
sale.
The supply disruption for Glumetza 500 mg described above has adversely impacted Santarus
Glumetza promotion revenues in the second fiscal quarter of 2010 and is expected to adversely
affect Santarus Glumetza promotion revenues in the third fiscal quarter of 2010 and potentially
beyond. Although our promotion agreement generally provides for indemnification of third party
claims relating to these matters, we may nevertheless also suffer damage to our reputation and
potential for product liability claims.
Our ability to increase sales of the Glumetza products is also subject to risks associated
with that agreement, including the potential for termination of the promotion arrangement and
Depomeds ability to maintain patent protection for the Glumetza products. We cannot be certain
that our continued marketing of the Glumetza products will result in increased demand for, and
sales of, those products. If we fail to successfully commercialize the Glumetza products, we may
be unable to generate sufficient revenues to grow our business and sustain profitability, and our
business, financial condition and results of operations would be adversely affected.
Our budesonide MMX and rifamycin SV MMX product candidates will require significant development
activities and ultimately may not be approved by the U.S. Food and Drug Administration, or FDA, and
any failure or delays associated with these activities or the FDAs approval of such products would
increase our costs and time to market.
We are currently developing our budesonide MMX and rifamycin SV MMX product candidates under a
strategic collaboration with Cosmo Technologies Limited, or Cosmo, and in connection with those
development programs we face substantial risks of failure that are inherent in developing
pharmaceutical products. The pharmaceutical industry is subject to stringent regulation by many
different agencies at the federal, state and international levels. For example, our product
candidates must satisfy rigorous standards of safety and efficacy before the FDA will approve them
for commercial use.
Product development is generally a long, expensive and uncertain process. Successful
development of product formulations depends on many factors, including our ability to select key
components, establish a stable formulation (for both development and commercial use), develop a
product that demonstrates our intended safety and efficacy profile, and transfer from development
stage to commercial-scale operations. Any delays we encounter during our product development
activities would in turn adversely affect our ability to commercialize the product under
development.
Once we have manufactured formulations of our product candidates that we believe will be
suitable for clinical testing, we then must complete our clinical testing, and failure can occur at
any stage of testing. These clinical tests must comply with FDA and other applicable regulations.
We may encounter delays based on our inability to timely enroll enough patients to complete our
clinical studies. We may suffer significant setbacks in advanced clinical studies, even after
showing promising results in earlier studies. The results of later clinical studies may not
replicate the results of prior clinical
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studies. Based on results at any stage of clinical studies, we may decide to discontinue
development of a product candidate. We or the FDA may suspend clinical studies at any time if the
patients participating in the studies are exposed to unacceptable health risks or if the FDA finds
deficiencies in our applications to conduct the clinical studies or in the conduct of our studies.
Moreover, not all product candidates in clinical studies will receive timely, or any, regulatory
approval.
In addition, before the FDA approves one of our product candidates, the FDA may choose to
conduct an inspection of one or more clinical sites where our clinical studies were conducted.
These inspections may be conducted by the FDA both at U.S. clinical sites as well as overseas. Any
restrictions on the ability of FDA investigators to travel overseas to conduct such inspections,
either because of financial or other reasons including political unrest, disease outbreaks or
terrorism, could delay the inspection of our overseas sites and consequently delay FDA approval of
our product candidates.
Even if clinical studies are completed as planned, their results may not support our
assumptions or our product claims. The clinical study process may fail to demonstrate that our
products are safe for humans or effective for their intended uses. Our product development costs
will increase and our product revenues will be delayed if we experience delays in testing or
regulatory approvals or if we need to perform more or larger clinical studies than planned. In
addition, such failures could cause us to abandon a product entirely. If we fail to take any
current or future product from the development stage to market, we will have incurred significant
expenses without the possibility of generating revenues, and our business will be adversely
affected.
Budesonide MMX is currently being evaluated for the treatment of ulcerative colitis in a phase
III clinical program. Enrollment in two multicenter, double-blind phase III clinical studies to
evaluate budesonide MMX for the induction of remission in patients with mild or moderate active
ulcerative colitis has been completed in North America and Europe, both of which are intended to
support U.S. regulatory approval. Enrollment in the European phase III clinical study induction
phase was completed in December 2009 and enrollment in the U.S. clinical program induction phase
was completed in March 2010. Additionally, up to approximately 150 patients from the European and
U.S. programs are expected to continue in a 12-month, double-blind, extended use study, the results
of which the FDA requested be included in the phase III clinical program to support a U.S.
regulatory submission.
We currently anticipate that we will have preliminary results from both the European phase III
clinical program and the U.S. phase III clinical program, excluding the extension study, in
September 2010. Assuming successful and timely completion of the phase III clinical program and
extension study, we plan to submit an NDA for budesonide MMX to the FDA in the second half of 2011.
In June 2010, we initiated a phase III clinical program evaluating rifamycin SV MMX in
patients with travelers diarrhea. Assuming timely and successful completion of this first study,
we plan to initiate a second phase III clinical study in travelers diarrhea in the first half of
2011. It is anticipated that a European phase III clinical study in the same indication will be
conducted by Cosmos European partner Dr. Falk Pharma GmbH, or Dr. Falk. Assuming successful and
timely completion of the phase III clinical program, Santarus and Dr. Falk plan to share their
clinical data for inclusion in each companys respective regulatory submissions, and Santarus plans
to submit an NDA for rifamycin SV MMX to the FDA in 2012.
We cannot be certain that the ongoing and planned clinical development programs will proceed
in a timely manner. We also cannot be certain that the budesonide MMX and rifamycin SV MMX product
candidates will achieve the desired safety and efficacy profile in one or more of the ongoing or
future clinical studies or that the other development activities will be completed in a successful
and timely manner. For example, the phase II clinical study for the budesonide MMX product
candidate was pilot in nature and involved a different design than the phase III clinical studies.
In addition, each of the two phase III clinical studies evaluated two dosage strengths of
budesonide MMX. Each study was statistically powered at 80 percent, and the goal of the primary
statistical analysis will be to evaluate the incidence of clinical remission after eight weeks
using a p-value of 0.025 to assess whether a treatment difference in clinical remission is achieved
between the budesonide MMX treatment groups and placebo. As a result of the study design, there
may be a higher degree of uncertainty regarding the potential outcome of the phase III clinical
studies.
Any failures or delays in the product development or clinical programs relating to our product
candidates could adversely affect our ability to commercialize one or more of our development-stage
products and the timing for commercial availability, which in turn could adversely affect our
business.
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Our reliance on third-party clinical investigators and clinical research organizations may result
in delays in completing, or a failure to complete, clinical studies or we may be unable to use the
clinical data gathered if they fail to comply with our patient enrollment criteria, our clinical
protocols or regulatory requirements, or otherwise fail to perform under our agreements with them.
As an integral component of our clinical development programs, we engage clinical
investigators and clinical research organizations, or CROs, to enroll patients and conduct and
manage our clinical studies, including CROs located both within and outside the U.S. In addition,
it is anticipated that U.S. regulatory approval for each of the budesonide MMX and rifamycin SV MMX
product candidates will be supported in part by clinical studies being conducted by Cosmo or its
European partners, in addition to the clinical studies that we will oversee or conduct. As a
result, many key aspects of this process have been and will be out of our direct control and are
impacted by general conditions both within and outside the U.S. If the CROs and other third
parties that we rely on for patient enrollment and other portions of our clinical studies fail to
perform the clinical studies in a timely and satisfactory manner and in compliance with applicable
U.S. and foreign regulations, we could face significant delays in completing our clinical studies
or we may be unable to rely in the future on the clinical data generated. If these clinical
investigators and CROs do not carry out their contractual duties or obligations or fail to meet
expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised
due to their failure to adhere to our patient enrollment criteria, our clinical protocols,
regulatory requirements or for other reasons, our clinical studies may be extended, delayed or
terminated, we may be required to repeat one or more of our clinical studies and we may be unable
to obtain or maintain regulatory approval for or successfully commercialize our products.
Our ability to generate revenues also depends on the success of our strategic alliances with
Schering-Plough, GSK and Norgine.
Our ability to generate revenues in the longer term will also depend on whether our strategic
alliances with GSK, Schering-Plough and Norgine lead to the successful commercialization of
additional omeprazole products using our proprietary PPI technology, and we cannot be certain that
we will receive any additional milestone payments or sales-based royalties from these alliances.
In October 2006, we entered into an OTC license agreement with Schering-Plough, pursuant to which
we granted exclusive rights under our proprietary PPI technology to develop, manufacture, market
and sell omeprazole products for the OTC market in the U.S. and Canada. Schering-Plough received
FDA approval to market Zegerid OTC® (omeprazole 20 mg/sodium bicarbonate 1100 mg
capsules), its first Zegerid formulation under the license agreement, in December 2009.
Schering-Plough commenced commercial sales of Zegerid OTC in March 2010. In November 2007, we
entered into a license agreement and a distribution agreement granting exclusive rights to GSK
under our proprietary PPI technology to develop, manufacture and commercialize prescription and OTC
products in up to 114 specified countries within Africa, Asia, the Middle-East, and Central and
South America, and to distribute and sell Zegerid brand prescription products in Puerto Rico and
the U.S. Virgin Islands. GSK is pursuing marketing approval authorization in various countries
covered by the license agreement. In October 2009, we entered into a license agreement granting
certain exclusive rights to Norgine under our proprietary PPI technology to develop, manufacture
and commercialize prescription products in specified markets in Western, Central and Eastern Europe
and in Israel.
Under these agreements, we depend on the efforts of Schering-Plough, GSK and Norgine, and we
have limited control over their commercialization efforts. We are also subject to the risk of
termination of each of these agreements. Schering-Plough may terminate its license agreement in
its entirety on 180 days prior written notice to us at any time. The Schering-Plough license
agreement also may be terminated by either party if the other party is in material breach of its
material obligations, subject to certain limitations. The GSK license and distribution agreements
may be terminated by either party in the event of the other partys uncured material breach or
bankruptcy or insolvency. In addition, GSK may terminate the license and distribution agreements
on six months prior written notice to us at any time. The Norgine license agreement may be
terminated by either party in the event of the other partys uncured material breach or bankruptcy
or insolvency. In addition, Norgine may terminate the license agreement on 12 months prior
written notice to us at any time.
The recent negative District Court ruling in the patent litigation involving our Zegerid
prescription products also negatively impacts the patent protection for the products being
commercialized in the U.S. and its territories pursuant to our OTC license with Schering-Plough and
our distribution agreement with GSK for Puerto Rico and the U.S. Virgin Islands. With regard to
our OTC license with Schering-Plough, we are not currently aware that any ANDAs have been filed
proposing to market generic versions of Zegerid OTC. With regard to our distribution agreement
with GSK, due to the launch of third party and authorized generic versions of our Zegerid
prescription products, we are coordinating with GSK to
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terminate and wind-down activities under the distribution agreement for Puerto Rico and the
U.S. Virgin Islands in the near future. The ruling may also negatively impact the patent
protection for the products being commercialized pursuant to our ex-US licenses with GSK and
Norgine. Although the U.S. ruling is not binding in countries outside the U.S., similar challenges
to those raised in the U.S. litigation may be raised in territories outside the U.S.
We cannot be certain that these strategic partners will continue to devote significant
resources to the sale or development of products under the agreements, particularly in light of the
recent launch of third party and authorized generic Zegerid products. Any determination by
Schering-Plough, GSK or Norgine to cease promotion or development of products under our strategic
alliances would limit our potential to receive additional payments under these agreements, and
adversely affect our ability to generate sufficient revenues to grow our business and sustain
profitability. Even if these strategic partners determine to continue to pursue our alliances, we
will only receive specified milestone payments and royalties on net sales and may not enjoy the
same financial rewards as we would have had we developed and launched the related products
ourselves. In addition, the royalties payable to us under our license agreement with
Schering-Plough are subject to reduction in the event it is ultimately determined by the courts
(with the decision being unappealable or unappealed within the time allowed for appeal) that there
is no valid claim of the licensed patents covering the manufacture, use or sale of the Zegerid OTC
product and third parties have received marketing approval for, and are conducting bona fide
ongoing commercial sales of, generic versions of the licensed products. Any of these limitations on
our ability to continue to receive anticipated revenue under our strategic alliances could have a
material adverse effect on our business, financial condition and results of operations.
The markets in which we compete are intensely competitive and many of our competitors have
significantly more resources and experience, which may limit our commercial opportunity.
The pharmaceutical industry is intensely competitive, particularly in the gastrointestinal, or
GI, and diabetes fields in which our currently marketed products compete and our development-stage
products may compete, and there are many other currently marketed products that are
well-established and successful, as well as development programs underway. In addition, many of
our competitors are large, well-established companies in the pharmaceutical field. Given our
relatively small size and the nature of the GI and diabetes markets, we may not be able to compete
effectively.
In addition, many of our competitors, either alone or together with their collaborative
partners, may have significantly greater experience in:
| developing prescription and OTC drugs; | ||
| undertaking preclinical testing and human clinical studies; | ||
| formulating and manufacturing drugs; | ||
| obtaining FDA and other regulatory approvals of drugs; | ||
| launching, marketing, distributing and selling drugs; and | ||
| enforcing and maintaining patent rights. |
As a result, they may have a greater ability to undertake more extensive research and
development, manufacturing, marketing and other programs. Many of these companies may succeed in
developing products earlier than we do, completing the regulatory process and showing safety and
efficacy of products more rapidly than we do or developing products that are more effective than
our products. Additionally, many of our competitors have greater resources to conduct clinical
studies differentiating their products, as compared to our limited resources. Further, the
products they develop may be based on new and different technology and may exhibit benefits
relative to our products.
Many of these companies with which we compete also have significantly greater financial and
other resources than we do. Larger pharmaceutical companies typically have significantly larger
field sales force organizations and invest significant amounts in advertising and marketing their
products, including through the purchase of television advertisements and the use of other
direct-to-consumer methods. As a result, these larger companies are able to reach a greater number
of physicians and consumers and reach them more frequently than we can with our smaller sales
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organization.
If we are unable to compete successfully, our business, financial condition and results of
operations will be materially adversely affected.
Our Glumetza and Zegerid prescription products currently compete with many other drug products and,
in the case of Zegerid, face competition from generic equivalents, which will negatively impact our
market share and limit our ability to generate revenues.
The Glumetza prescription products compete with many other products, including:
| other branded immediate-release and extended-release metformin products (such as Fortamet®, Glucophage® and Glucophage XR®); | ||
| generic immediate-release and extended-release metformin products; and | ||
| other prescription diabetes treatments. |
In addition, various companies are developing new products that may compete with the Glumetza
products in the future. For example, Depomed has announced that it has licensed rights to Merck to
develop products combining sitagliptin, the active ingredient in Mercks Januvia®
product, with extended-release metformin utilizing Depomeds extended-release technology. The
Glumetza prescription products are also the subject of a pending ANDA and related patent
infringement litigation. If the litigation is resolved unfavorably to our licensor, Depomed, we
may face competition from generic versions of 500 mg and 1000 mg dosage strengths of Glumetza prior
to patent expiry.
Our Zegerid prescription products compete with many other products, including:
| Pars third party generic version and Prascos authorized generic version of Zegerid Capsules; | ||
| branded PPI prescription products (such as Nexium®, Aciphex® and Kapidex/Dexliant); | ||
| other generic PPI prescription products (such as delayed-release omeprazole, delayed-release lansoprazole and delayed-release pantoprazole); | ||
| OTC PPI products (such as Prilosec OTC®, Prevacid® 24HR and store-brand versions); and | ||
| other prescription and/or OTC acid-reducing agents (such as histamine-2 receptor antagonists and antacids). |
In addition, the availability of Zegerid OTC and any other products developed by
Schering-Plough using our proprietary PPI technology for the U.S. OTC market could decrease demand
or negatively impact reimbursement coverage for our prescription products in the U.S.
We or our strategic partners may also face competition for our products from lower-priced
products from foreign countries that have placed price controls on pharmaceutical products.
Proposed federal legislative changes may expand consumers ability to import lower-priced versions
of our products and competing products from Canada and other developed countries. Further, several
states and local governments have implemented importation schemes for their citizens, and, in the
absence of federal action to curtail such activities, we expect other states and local governments
to launch importation efforts. The importation of foreign products that compete with our own
products could negatively impact our business and prospects.
The existence of numerous competitive products may put downward pressure on pricing and market
share, which in turn may adversely affect our business, financial condition and results of
operations.
If we are unable to maintain adequate levels of reimbursement for our products on reasonable
pricing terms, the commercial success of our products may be severely hindered.
Our ability to sell our products may depend in large part on the extent to which reimbursement
for the costs of our products is available from private health insurers, managed care
organizations, government entities and others. Third-party payors are increasingly attempting to
contain their costs. We cannot predict actions third-party payors may take, or whether they will
limit the coverage and level of reimbursement for our products or refuse to provide any coverage at
all. Reduced or partial reimbursement coverage could make our products less attractive to patients,
suppliers and prescribing physicians and may not be adequate for us to maintain price levels
sufficient to realize an appropriate return on our investment in our
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products or compete on price.
In many cases, insurers and other healthcare payment organizations encourage the use of
alternative generic brands and OTC products through their prescription benefits coverage and
reimbursement policies. The competition among pharmaceutical companies to have their products
approved for reimbursement also results in downward pricing pressure in the industry and in the
markets where our products compete. In some cases, we aggressively discount our products in order
to obtain reimbursement coverage, and we may not be successful in any efforts we take to mitigate
the effect of a decline in average selling prices for our products. Declines in our average selling
prices also reduce our gross margins.
If the products we promote and sell are not included within an adequate number of formularies
or adequate payment or reimbursement levels are not provided, or if those policies increasingly
favor generic products, we will have difficulty sustaining market acceptance of our products and
our business will be materially adversely affected.
We depend on a limited number of wholesaler customers for retail distribution of our Zegerid
products, and if we lose any of our significant wholesaler customers, our business could be harmed.
Our wholesaler customers for our Zegerid products include some of the nations leading
wholesale pharmaceutical distributors, such as Cardinal Health, Inc., McKesson Corporation and
AmerisourceBergen Corporation, and major drug chains. Sales to Cardinal, McKesson and
AmerisourceBergen accounted for approximately 27%, 24% and 15%, respectively, of our annual
revenues during 2009 and 30%, 23% and 17%, respectively, of our revenues for the six months ended
June 30, 2010. The loss of any of these wholesaler customers accounts or a material reduction in
their purchases could harm our business, financial condition or results of operations. In addition,
although we frequently face pricing pressure from our wholesaler customers, we expect this pressure
to increase with the availability of generic versions of our Zegerid prescription products.
Furthermore, we may experience significant returns by these wholesaler customers of quantities of
Zegerid prescription products currently held by them, if these wholesalers do not expect sufficient
demand at the pharmacy level to result in the ultimate sale of these products.
We do not currently have any manufacturing facilities and instead rely on third-party
manufacturers.
We rely on third-party manufacturers to provide us with an adequate and reliable supply of our
products on a timely basis, and we do not currently have any of our own manufacturing or
distribution facilities. Our manufacturers must comply with U.S. regulations, including the FDAs
current good manufacturing practices, applicable to the manufacturing processes related to
pharmaceutical products, and their facilities must be inspected and approved by the FDA and other
regulatory agencies on an ongoing basis as part of their business. In addition, because several of
our key manufacturers are located outside of the U.S., they must also comply with applicable
foreign laws and regulations.
We have limited control over our third-party manufacturers, including with respect to
regulatory compliance and quality assurance matters. Any delay or interruption of supply related to
a third-party manufacturers failure to comply with regulatory or other requirements would limit
our ability to make sales of our products. Any manufacturing defect or error discovered after
products have been produced and distributed could result in even more significant consequences,
including costly recall procedures, re-stocking costs, damage to our reputation and potential for
product liability claims. With respect to any future products under development, if the FDA finds
significant issues with any of our manufacturers during the pre-approval inspection process, the
approval of those products could be delayed while the manufacturer addresses the FDAs concerns, or
we may be required to identify and obtain the FDAs approval of a new supplier. This could result
in significant delays before manufacturing of our products can begin, which in turn would delay
commercialization of our products. In addition, the importation of pharmaceutical products into the
U.S. is subject to regulation by the FDA, and the FDA can refuse to allow an imported product into
the U.S. if it is not satisfied that the product complies with applicable laws or regulations.
For our Zegerid prescription products, we currently rely on Norwich Pharmaceuticals, Inc.,
located in New York, as the sole third-party manufacturer of Zegerid Capsules and the related
authorized generic product. In addition, we rely on a single third-party manufacturer, Patheon
Inc., using a manufacturing facility located in Canada, for the supply of Zegerid Powder for Oral
Suspension. We currently rely on a single third-party supplier located outside of the U.S., Union
Quimico Farmaceutica, S.A., or Uquifa, for the supply of omeprazole, which is an active
pharmaceutical ingredient in each of our current Zegerid products. We are obligated under our
supply agreement with Uquifa to purchase all of our requirements of omeprazole from this supplier.
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For the Glumetza products, we rely on Depomed to oversee product manufacturing and supply. In
turn, Depomed relies on a single third-party manufacturer for each of the Glumetza products.
For our budesonide MMX and rifamycin SV MMX product candidates, we rely on Cosmo to
manufacture and supply all of our drug product requirements.
Any significant problem that these sole source manufacturers or suppliers experience could
result in a delay or interruption in the supply to us or our partners until the manufacturer or
supplier cures the problem or until we or our partners locate an alternative source of supply. In
addition, because these sole source manufacturers and suppliers provide services to a number of
other pharmaceutical companies, they may experience capacity constraints or choose to prioritize
one or more of their other customers.
Although alternative sources of supply exist, the number of third-party manufacturers with the
manufacturing and regulatory expertise and facilities necessary to manufacture the finished forms
of our pharmaceutical products or the key ingredients in our products is limited, and it would take
a significant amount of time to arrange for alternative manufacturers. Any new supplier of products
or key ingredients would be required to qualify under applicable regulatory requirements and would
need to have sufficient rights under applicable intellectual property laws to the method of
manufacturing such products or ingredients. The FDA may require us to conduct additional clinical
studies, collect stability data and provide additional information concerning any new supplier
before we could distribute products from that supplier. Obtaining the necessary FDA approvals or
other qualifications under applicable regulatory requirements and ensuring non-infringement of
third-party intellectual property rights could result in a significant interruption of supply and
could require the new supplier to bear significant additional costs which may be passed on to us.
Our reporting and payment obligations under governmental purchasing and rebate programs are complex
and may involve subjective decisions, and any failure to comply with those obligations could
subject us to penalties and sanctions, which in turn could have a material adverse effect on our
business and financial condition.
As a condition of reimbursement by various federal and state healthcare programs, we must
calculate and report certain pricing information to federal and state healthcare agencies. The
regulations regarding reporting and payment obligations with respect to governmental programs are
complex. Our calculations and methodologies are subject to review and challenge by the applicable
governmental agencies, and it is possible that such reviews could result in material changes. In
addition, because our processes for these calculations and the judgments involved in making these
calculations involve subjective decisions and complex methodologies, these calculations are subject
to the risk of errors. Any failure to comply with the government reporting and payment obligations
could result in civil and/or criminal sanctions.
Regulatory approval for our currently marketed products is limited by the FDA to those specific
indications and conditions for which clinical safety and efficacy have been demonstrated.
Any regulatory approval is limited to those specific diseases and indications for which our
products are deemed to be safe and effective by the FDA. In addition to the FDA approval required
for new formulations, any new indication for an approved product also requires FDA approval. If we
are not able to obtain FDA approval for any desired future indications for our products, our
ability to effectively market and sell our products may be reduced and our business may be
adversely affected.
While physicians may choose to prescribe drugs for uses that are not described in the
products labeling and for uses that differ from those tested in clinical studies and approved by
the regulatory authorities, our ability to promote the products is limited to those indications
that are specifically approved by the FDA. These off-label uses are common across medical
specialties and may constitute an appropriate treatment for many patients in varied circumstances.
Regulatory authorities in the U.S. generally do not regulate the behavior of physicians in their
choice of treatments. Regulatory authorities do, however, restrict communications by pharmaceutical
companies on the subject of off-label use. If our promotional activities fail to comply with these
regulations or guidelines, we may be subject to warnings from, or enforcement action by, these
authorities. In addition, our failure to follow FDA rules and guidelines relating to promotion and
advertising may cause the FDA to delay its approval or refuse to approve a product, the suspension
or withdrawal of an approved product from the market, recalls, fines, disgorgement of money,
operating restrictions, injunctions or criminal prosecution, any of which could harm our business.
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We are subject to ongoing regulatory review of our currently marketed products.
Following receipt of regulatory approval, any products that we market continue to be subject
to extensive regulation. These regulations impact many aspects of our operations, including the
manufacture, labeling, packaging, adverse event reporting, storage, distribution, advertising,
promotion and record keeping related to the products. The FDA also frequently requires
post-marketing testing and surveillance to monitor the effects of approved products or place
conditions on any approvals that could restrict the commercial applications of these products. For
example, in connection with the approval of our NDAs for Zegerid Powder for Oral Suspension, we
committed to commence clinical studies to evaluate the product in pediatric populations in 2005.
We have not yet commenced any of the studies and have requested a waiver of this requirement from
the FDA. In addition, the subsequent discovery of previously unknown problems with the product may
result in restrictions on the product, including withdrawal of the product from the market. If we
fail to comply with applicable regulatory requirements, we may be subject to fines, suspension or
withdrawal of regulatory approvals, product recalls, seizure of products, disgorgement of money,
operating restrictions and criminal prosecution.
In addition to FDA restrictions on marketing of pharmaceutical products, several other types
of state and federal laws have been applied to restrict certain marketing practices in the
pharmaceutical industry in recent years. These laws include anti-kickback statutes and false claims
statutes. The federal healthcare program anti-kickback statute prohibits, among other things,
knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in
return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any
healthcare item or service reimbursable under Medicare, Medicaid or other federally financed
healthcare programs. This statute has been interpreted to apply to arrangements between
pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on
the other. Violations of the anti-kickback statute are punishable by imprisonment, criminal fines,
civil monetary penalties and exclusion from participation in federal healthcare programs. Although
there are a number of statutory exemptions and regulatory safe harbors protecting certain common
activities from prosecution or other regulatory sanctions, the exemptions and safe harbors are
drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases
or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe
harbor. Our practices may not in all cases meet all of the criteria for safe harbor protection from
anti-kickback liability.
Federal false claims laws prohibit any person from knowingly presenting, or causing to be
presented, a false claim for payment to the federal government, or knowingly making, or causing to
be made, a false statement to have a false claim paid. Recently, several pharmaceutical and other
healthcare companies have been prosecuted under these laws for allegedly inflating drug prices they
report to pricing services, which in turn are used by the government to set Medicare and Medicaid
reimbursement rates, and for allegedly providing free product to customers with the expectation
that the customers would bill federal programs for the product. In addition, certain marketing
practices, including off-label promotion, may also violate false claims laws. The majority of
states also have statutes or regulations similar to the federal anti-kickback law and false claims
laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in
several states, apply regardless of the payor. Sanctions under these federal and state laws may
include civil monetary penalties, exclusion of a manufacturers products from reimbursement under
government programs, criminal fines and imprisonment.
The Patient Protection and Affordable Care Act, enacted in 2010, imposes new reporting and
disclosure requirements for pharmaceutical and device manufacturers with regard to payments or
other transfers of value made to physicians and teaching hospitals, effective March 30, 2013. Such
information will be made publicly available in a searchable format beginning September 30, 2013.
In addition, pharmaceutical and device manufacturers will also be required to report and disclose
investment interests held by physicians and their immediate family members during the preceding
calendar year. Failure to submit required information may result in civil monetary penalties of up
to $150,000 per year (and up to $1 million per year for knowing failures), for all payments,
transfers of value or ownership or investment interests not reported in an annual submission.
If not preempted by this federal law, several states require pharmaceutical companies to
report expenses relating to the marketing and promotion of pharmaceutical products and to report
gifts and payments to individual physicians in the states. Other states prohibit providing various
other marketing related activities. Still other states require the posting of information relating
to clinical studies and their outcomes. In addition, certain states, such as California, Nevada,
and Massachusetts, require pharmaceutical companies to implement compliance programs or marketing
codes. Currently, several additional states are considering similar proposals. Compliance with
these laws is difficult and time consuming, and companies that do not comply with these state laws
face civil penalties. Because of the breadth of these laws and the
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narrowness of the safe harbors, it is possible that some of our business activities could be
subject to challenge under one or more of such laws. Such a challenge could have a material adverse
effect on our business, financial condition, results of operations and growth prospects.
In addition, as part of the sales and marketing process, pharmaceutical companies frequently
provide samples of approved drugs to physicians. This practice is regulated by the FDA and other
governmental authorities, including, in particular, requirements concerning record keeping and
control procedures. Any failure to comply with the regulations may result in significant criminal
and civil penalties as well as damage to our credibility in the marketplace.
We are subject to new legislation, regulatory proposals and managed care initiatives that may
increase our costs and adversely affect our ability to market our products.
In March 2010, the President signed the Patient Protection and Affordable Care Act, which
makes extensive changes to the delivery of health care in the United States. This act includes
numerous provisions that affect pharmaceutical companies, some of which are effective immediately
and others of which will be taking effect over the next several years. For example, the act seeks
to expand health care coverage to the uninsured through private health insurance reforms and an
expansion of Medicaid. The act will also impose substantial costs on pharmaceutical manufacturers,
such as an increase in liability for rebates paid to Medicaid, new drug discounts that must be
offered to certain enrollees in the Medicare prescription drug benefit, an annual fee imposed on
all manufacturers of brand prescription drugs in the United States, and an expansion of an existing
program requiring pharmaceutical discounts to certain types of hospitals and federally subsidized
clinics. The act also contains cost-containment measures that could reduce reimbursement levels
for health care items and services generally, including pharmaceuticals. It also will require
reporting and public disclosure of payments and other transfers of value provided by pharmaceutical
companies to physicians and teaching hospitals. These measures could result in decreased net
revenues from our pharmaceutical products and decreased potential returns from our development
efforts.
In addition, there have been a number of other legislative and regulatory proposals aimed at
changing the pharmaceutical industry. These include proposals to permit reimportation of
pharmaceutical products from other countries and proposals concerning safety matters. For example,
in an attempt to protect against counterfeiting and diversion of drugs, a bill was introduced in
the previous Congress that would establish an electronic drug pedigree and track-and-trace system
capable of electronically recording and authenticating every sale of a drug unit throughout the
distribution chain. This bill or a similar bill may be introduced in Congress in the future.
California has already enacted legislation that requires development of an electronic pedigree to
track and trace each prescription drug at the saleable unit level through the distribution system
(an electronic pedigree would be generated by the attachment of a device incorporating a unique
identifier to each container of prescription drugs, which would be read electronically and tracked
through a database as it passes through each stage of the distribution chain). Californias
electronic pedigree requirement is scheduled to take effect beginning in January 2015. Compliance
with California and any future federal or state electronic pedigree requirements will likely
require an increase in our operational expenses and will likely be administratively burdensome. As
a result of these and other new proposals, we may determine to change our current manner of
operation, provide additional benefits or change our contract arrangements, any of which could have
a material adverse effect on our business, financial condition and results of operations.
We face a risk of product liability claims and may not be able to obtain adequate insurance.
Our business exposes us to potential liability risks that may arise from the clinical testing,
manufacture and sale of our products and product candidates. These risks exist even if a product is
approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by
the FDA. Any product liability claim or series of claims brought against us could significantly
harm our business by, among other things, reducing demand for our products, injuring our reputation
and creating significant adverse media attention and costly litigation. Plaintiffs have received
substantial damage awards in some jurisdictions against pharmaceutical companies based upon claims
for injuries allegedly caused by the use of their products. Any judgment against us that is in
excess of our insurance policy limits would have to be paid from our cash reserves, which would
reduce our capital resources. Although we have product and clinical study liability insurance with
a coverage limit of $15.0 million, this coverage may prove to be inadequate. Furthermore, we cannot
be certain that our current insurance coverage will continue to be available for our commercial or
clinical study activities on reasonable terms, if at all. Further, we may not have sufficient
capital resources to pay a judgment, in which case our creditors could levy against our assets,
including our intellectual property.
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In October 2009, we became aware of two lawsuits filed by individual plaintiffs in Ohio state
court relating to C.B. Fleet Co., Inc., or Fleet, and claiming injuries purportedly caused by
Fleets Phospho-soda®, sodium phosphate oral solution product. The complaints name
Fleet, Santarus, the Cleveland Clinic Foundation, the Research Foundation of the American Society
of Colon and Rectal Surgeons, the Society of American Gastrointestinal and Endoscopic Surgeons and
several other individuals as defendants. The complaints allege, among other things, that the
defendants fraudulently concealed, misrepresented and suppressed material medical and scientific
information about Fleets Phospho-soda product. The plaintiffs are seeking compensatory damages,
exemplary damages, damages for loss of consortium, damages under the Ohio Consumer Protection Act,
and attorneys fees and expenses. We co-promoted Fleets Phospho-soda® EZ-Prep Bowel
Cleansing System, a different sodium phosphate oral solution product manufactured by Fleet, under a
co-promotion agreement, which we and Fleet entered into in August 2007 and which expired in October
2008. In November 2009, we filed notices to remove the lawsuits to the United States District
Court for the Northern District of Ohio, and plaintiffs filed motions to remand the actions back to
Ohio state court. In April 2010, we filed motions requesting that we be dismissed from these
lawsuits, as well as responses to plaintiffs motions to remand.
Under the terms of the co-promotion agreement, we have requested that Fleet indemnify us in
connection with these matters. In addition, we have tendered notice of these matters to our
insurance carriers pursuant to the terms of our insurance policies. Due to the uncertainty of the
ultimate outcome of these matters and our ability to maintain indemnification and/or insurance
coverage, we cannot predict the effect, if any, this matter will have on our business. Regardless
of how this litigation is ultimately resolved, this matter may be costly, time-consuming and
distracting to our management, which could have a material adverse effect on our business.
We rely on third parties to perform many necessary services for our commercial products, including
services related to the distribution, storage and transportation of our products.
We have retained third-party service providers to perform a variety of functions related to
the sale and distribution of our products, key aspects of which are out of our direct control. For
example, we rely on one third-party service provider to provide key services related to warehousing
and inventory management, distribution, contract administration and chargeback processing, accounts
receivable management and call center management, and, as a result, most of our inventory is stored
at a single warehouse maintained by the service provider. We place substantial reliance on this
provider as well as other third-party providers that perform services for us, including entrusting
our inventories of products to their care and handling. If these third-party service providers fail
to comply with applicable laws and regulations, fail to meet expected deadlines, or otherwise do
not carry out their contractual duties to us, or encounter physical or natural damage at their
facilities, our ability to deliver product to meet commercial demand would be significantly
impaired. In addition, we utilize third parties to perform various other services for us relating
to sample accountability and regulatory monitoring, including adverse event reporting, safety
database management and other product maintenance services. If the quality or accuracy of the data
maintained by these service providers is insufficient, our ability to continue to market our
products could be jeopardized or we could be subject to regulatory sanctions. We do not currently
have the internal capacity to perform these important commercial functions, and we may not be able
to maintain commercial arrangements for these services on reasonable terms.
If we are unable to retain key personnel, our business will suffer.
We are a small company and, as of June 30, 2010, had 331 employees. As a result of Pars
decision to launch a generic version of our Zegerid Capsules prescription product, in late June
2010, we determined to cease promotion of our Zegerid prescription products, launch an authorized
generic version of our Zegerid Capsules prescription product and implement a corporate
restructuring, including a significant workforce reduction in our commercial organization and other
selected operations. At the same time, we also significantly reduced the number of contract sales
representatives that we utilize. We anticipate that we will have approximately 215 employees
following the completion of our corporate restructuring.
Our success depends on our continued ability to retain and motivate highly qualified
management, clinical, manufacturing, product development, business development and sales and
marketing personnel. We may not be able to recruit and retain qualified personnel in the future,
due to competition for personnel among pharmaceutical businesses, and the failure to do so could
have a significant negative impact on our future product revenues and business results.
Furthermore, any negative perceptions associated with our recent corporate restructuring may make
it even more difficult for us to retain and motivate our remaining personnel, including our
remaining field sales representatives.
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Our success also depends on a number of key senior management personnel, particularly Gerald
T. Proehl, our President and Chief Executive Officer. Although we have employment agreements with
our executive officers, these agreements are terminable at will at any time with or without notice
and, therefore, we cannot be certain that we will be able to retain their services. In addition,
although we have a key person insurance policy on Mr. Proehl, we do not have key person
insurance policies on any of our other employees that would compensate us for the loss of their
services. If we lose the services of one or more of these individuals, replacement could be
difficult and may take an extended period of time and could impede significantly the achievement of
our business objectives.
Our future growth may depend on our ability to identify and in-license or acquire additional
products, and if we do not successfully do so, or otherwise fail to integrate any new products into
our operations, we may have limited growth opportunities.
We are seeking to acquire or in-license products, businesses or technologies that we believe
are a strategic fit with our business strategy. Future in-licenses or acquisitions, however, may
entail numerous operational and financial risks, including:
| exposure to unknown liabilities; | ||
| disruption of our business and diversion of our managements time and attention to develop acquired products or technologies; | ||
| a reduction of our current financial resources; | ||
| difficulty or inability to secure financing to fund development activities for such acquired or in-licensed technologies; | ||
| incurrence of substantial debt or dilutive issuances of securities to pay for acquisitions; and | ||
| higher than expected acquisition and integration costs. |
We have limited resources to identify and execute the acquisition or in-licensing of
third-party products, businesses and technologies and integrate them into our current
infrastructure. In particular, we may compete with larger pharmaceutical companies and other
competitors in our efforts to establish new collaborations and in-licensing opportunities. These
competitors likely will have access to greater financial resources than us and may have greater
expertise in identifying and evaluating new opportunities. Moreover, we may devote resources to
potential acquisitions or in-licensing opportunities that are never completed, or we may fail to
realize the anticipated benefits of such efforts.
Risks Related to Our Intellectual Property
The protection of our intellectual property rights is critical to our success and any failure on
our part to adequately maintain such rights would materially affect our business.
We regard the protection of patents, trademarks and other proprietary rights that we own or
license as critical to our success and competitive position. Laws and contractual restrictions,
however, may not be sufficient to prevent unauthorized use or misappropriation of our technology or
deter others from independently developing products that are substantially equivalent or superior
to our products.
Patents
Our commercial success will depend in part on the patent rights we have licensed or will
license and on patent protection for our own inventions related to the products that we market and
intend to market. Our success also depends on maintaining these patent rights against third-party
challenges to their validity, scope or enforceability. Our patent position is subject to
uncertainties similar to other biotechnology and pharmaceutical companies. For example, the U.S.
Patent and Trademark Office, or PTO, or the courts may deny, narrow or invalidate patent claims,
particularly those that concern biotechnology and pharmaceutical inventions.
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We may not be successful in securing or maintaining proprietary or patent protection for our
products, and protection that we have and do secure may be challenged and possibly lost. In
addition, our competitors may develop products similar to ours using methods and technologies that
are beyond the scope of our intellectual property rights. Other drug companies may challenge the
scope, validity and enforceability of our patent claims and may be able to develop generic versions
of our products if we are unable to maintain our proprietary rights. We also may not be able to
protect our intellectual property rights against third-party infringement, which may be difficult
to detect.
Zegerid Products and Related PPI Technology and Pending Patent Litigation
We have entered into an exclusive, worldwide license agreement with the University of Missouri
for patents and pending patent applications relating to specific formulations of PPIs with antacids
and other buffering agents and methods of using these formulations. Currently, there are six
issued U.S. patents that have provided coverage for our Zegerid products (U.S. Patent Nos.
5,840,737; 6,489,346; 6,645,988; 6,699,885; 6,780,882; and 7,399,772), all of which are subject to
the University of Missouri license agreement. These patents were recently found to be invalid by
ruling of the U.S. District Court for the District of Delaware, which ruling is being appealed, as
further described below.
There are also several pending U.S. patent applications relating to our Zegerid products and
technology, some of which are subject to the University of Missouri license agreement and some of
which we own. The issued patents generally cover pharmaceutical compositions combining PPIs with
buffering agents, such as antacids, and methods of treating GI disorders by administering solid or
liquid forms of such compositions, and each of the patents expires in July 2016. In addition to
the U.S. patent coverage, several international patents have been issued, including in Australia,
Austria, Belgium, Canada, Cyprus, Denmark, Finland, France, Germany, Greece, Ireland, Israel,
Italy, Luxembourg, Mexico, Monaco, Netherlands, New Zealand, Poland, Portugal, Russia, Singapore,
South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Turkey and the United Kingdom, all
of which are subject to the University of Missouri license agreement. There are also several
pending international patent applications, some of which are subject to the University of Missouri
license agreement and some of which we own. The issued claims in these international patents vary
between the different countries and include claims covering pharmaceutical compositions combining
PPIs with buffering agents and the use of these compositions in the manufacture of drug products
for the treatment of GI disorders.
We consult with the University of Missouri in its pursuit of the patent applications that we
have licensed, but the University of Missouri remains primarily responsible for prosecution of the
applications. We cannot control the amount or timing of resources that the University of Missouri
devotes on our behalf. It may not assign as great a priority to prosecution of patent applications
relating to technology we license as we would if we were undertaking such prosecution ourselves. As
a result of this lack of control and general uncertainties in the patent prosecution process, we
cannot be sure that any additional patents will ever be issued. Issued patents generally require
the payment of maintenance or similar fees to continue their validity. We rely on the University of
Missouri to do this, subject to our obligation to provide reimbursement, and the Universitys
failure to do so could result in the forfeiture of patents not maintained. In addition, the
initial U.S. patent from the University of Missouri does not have corresponding international or
foreign counterpart applications and there can be no assurance that we will be able to obtain
foreign patent rights to protect each of our products in all foreign countries of interest.
Zegerid® Patent Litigation
In April 2010, the U.S. District Court for the District of Delaware ruled that five patents
covering Zegerid Capsules and Zegerid Powder for Oral Suspension (U.S. Patent Nos. 6,489,346;
6,645,988; 6,699,885; 6,780,882; and 7,399,772) are invalid due to obviousness. These patents were
the subject of lawsuits we filed in 2007 against Par for infringement. The lawsuits were filed in
response to ANDAs filed by Par with the FDA. In May 2010, we filed an appeal of the District
Courts ruling to the U.S. Court of Appeals for the Federal Circuit. Although we intend to
vigorously defend and enforce our patent rights, we are not able to predict the timing or outcome
of the appeal.
In early July 2010, Par commenced its commercial sale of its generic version of our Zegerid
Capsules prescription product. We anticipate that Par will launch its generic version of our
Zegerid Powder for Oral Suspension product once it receives FDA approval to market that product.
Pursuant to FDA rules and regulations, we believe that Par, as the first ANDA filer with respect to
our Zegerid prescription products, will have a six-month period of exclusivity from the date it
launches its generic products during which all other ANDA filers will not be allowed to market or
sell their generic
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products. After the expiration of the six-month exclusivity period, additional FDA-approved
generic versions, if any, of these Zegerid products may become available.
In late June 2010, under our distribution and supply agreement with Prasco and as a result of
Pars decision to launch its generic version of our Zegerid Capsules prescription product, Prasco
commenced shipments of our authorized generic of prescription Zegerid Capsules in 20 mg and 40 mg
dosage strengths in the U.S., and we ceased our commercial promotion of Zegerid prescription
products.
The launch of generic Zegerid Capsules prescription products will adversely impact sales of
our Zegerid brand prescription products and have a negative impact on our financial condition and
results of operations, including causing a significant decrease in our revenues and cash flows.
Even if physicians prescribe Zegerid products, third-party payors and pharmacists can substitute
generic versions of Zegerid. In many cases, insurers and other healthcare payment organizations
encourage the use of generic brands through their prescription benefits coverage and payment or
reimbursement policies. Insurers and other healthcare payment organizations may make generic
alternatives of Zegerid more attractive to patients by providing different amounts of coverage or
out-of-pocket expenses so that the net cost of the generic product to the patient is less than the
net cost of our branded product.
The District Courts ruling also negatively impacts the patent protection for the products
being commercialized in the U.S. and its territories pursuant to our over-the-counter license with
Schering-Plough and our distribution agreement with GSK for Puerto Rico and the U.S. Virgin
Islands, which in turn may impact the amount of, or our ability to receive, milestone payments and
royalties under our agreements with these strategic partners. The ruling may also negatively
impact the patent protection for the products being commercialized pursuant to our ex-US licenses
with GSK and Norgine. Although the U.S. ruling is not binding in countries outside the U.S.,
similar challenges to those raised in the U.S. litigation may be raised in territories outside the
U.S.
Regardless of how the litigation is ultimately resolved, the litigation has been and will
continue to be costly, time-consuming and distracting to management, which could have a material
adverse effect on our business.
University of Missouri Application for Patent Reissue
In December 2007, the University of Missouri filed an Application for Reissue of U.S. Patent
No. 5,840,737, or the 737 patent, with the U.S. Patent and Trademark Office, or PTO. The 737
patent is one of six issued patents listed in the Approved Drug Products with Therapeutic
Equivalence Evaluations, or the Orange Book, for Zegerid Powder for Oral Suspension. The 737
patent is not one of the four patents listed in the Orange Book for Zegerid Capsules. It is not
feasible to predict the impact that the reissue proceeding may have on the scope and validity of
the 737 patent claims. If the claims of the 737 patent ultimately are narrowed substantially or
invalidated by the PTO, the extent of the patent coverage afforded to our Zegerid family of
products could be further impaired. In addition, we expect the University of Missouri will
disclose to the PTO the District Courts ruling described above, and we cannot predict the impact
such disclosure will have on the reissue proceedings.
Glumetza Extended Release Tablets and Pending Patent Litigation
We have exclusive rights to promote the Glumetza products in the U.S. under our promotion
agreement with Depomed. Currently, there are 4 issued U.S. patents that provide coverage for the
Glumetza 500 mg dose product (U.S. Patent Nos. 6,340,475 (expires in September 2016); 6,635,280
(expires in September 2016); 6,488,962 (expires in June 2020); and 6,723,340 (expires in October
2021)). There is one issued U.S. patent that provides coverage for the Glumetza 1000 mg dose
product (U.S. Patent No. 6,488,962 (expires in June 2020)). The issued patents generally cover
various aspects of the delivery technology utilized in each of the Glumetza products. In addition,
there is one pending U.S. patent application that covers the Glumetza 1000 mg dose product.
We consult with Depomed concerning the patent rights relating to the Glumetza products, but
Depomed remains primarily responsible for prosecution of the applications. We cannot control the
amount or timing of resources that Depomed devotes to these activities. It may not assign as great
a priority to prosecution of patent applications as we would if we were undertaking such
prosecution ourselves. As a result of this lack of control and general uncertainties in the patent
prosecution process, we cannot be sure that any additional patents will ever be issued. Issued
patents generally require the payment of maintenance or similar fees to continue their validity. We
rely on Depomed to do this, and Depomeds failure to
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do so could result in the forfeiture of patents not maintained.
Depomed, Inc. Glumetza Patent Litigation
In November 2009, Depomed filed a lawsuit in the United States District Court for the Northern
District of California against Lupin Limited and its wholly-owned subsidiary, Lupin Pharmaceutical,
Inc., collectively referred to herein as Lupin, for infringement of the patents listed in the
Orange Book for Glumetza. The lawsuit was filed in response to an ANDA and Paragraph IV
certification filed with the FDA by Lupin regarding Lupins intent to market generic versions of
500 mg and 1000 mg tablets for Glumetza prior to the expiration of the Orange Book patents.
Depomed commenced the lawsuit within the requisite 45 day time period, placing an automatic stay on
the FDA from approving Lupins proposed products for 30 months or until a decision is rendered by
the District Court, which is adverse to the Orange Book patents, whichever may occur earlier.
Absent a court decision, the 30-month stay is expected to expire in May 2012. Lupin has prepared
and filed an answer in the case, principally asserting non-infringement and invalidity of the
Orange Book patents, and has also filed counterclaims. Discovery is currently underway and a
hearing for claim construction, or Markman hearing, is scheduled for January 2011.
Under the terms of our promotion agreement with Depomed, Depomed has assumed responsibility
for managing and paying for this action, subject to certain consent rights held by us regarding any
potential settlements or other similar types of dispositions. Although Depomed has indicated that
it intends to vigorously defend and enforce its patent rights, we are not able to predict the
timing or outcome of this action.
Budesonide MMX and Rifamycin SV MMX
We have exclusive rights to develop and commercialize the budesonide MMX and rifamycin SV MMX
product candidates in the U.S. under our strategic collaboration with Cosmo. Currently, there are
two issued U.S. patents that provide coverage for the budesonide MMX product candidate (U.S. Patent
Nos. 7,431,943 and 7,410,651), as well as one pending U.S. patent application. The issued patents
cover the MMX technology generally and the MMX technology with budesonide, and each of these
patents expires in June 2020. There is one issued U.S. patent that provides coverage for the
rifamycin SV MMX product candidate (U.S. Patent No. 7,431,943), which expires in June 2020, and one
pending U.S. patent application. The issued patent covers the MMX technology generally.
We consult with Cosmo concerning the patent rights relating to the budesonide MMX and
rifamycin SV MMX product candidates, but Cosmo remains primarily responsible for prosecution of the
applications. We cannot control the amount or timing of resources that Cosmo devotes to these
activities. It may not assign as great a priority to prosecution of patent applications as we
would if we were undertaking such prosecution ourselves. As a result of this lack of control and
general uncertainties in the patent prosecution process, we cannot be sure that any additional
patents will ever be issued. Issued patents generally require the payment of maintenance or similar
fees to continue their validity. We rely on Cosmo to do this, and Cosmos failure to do so could
result in the forfeiture of patents not maintained.
Trade Secrets and Proprietary Know-how
We also rely upon unpatented proprietary know-how and continuing technological innovation in
developing our products. Although we require our employees, consultants, advisors and current and
prospective business partners to enter into confidentiality agreements prohibiting them from
disclosing or taking our proprietary information and technology, these agreements may not provide
meaningful protection for our trade secrets and proprietary know-how. Further, people who are not
parties to confidentiality agreements may obtain access to our trade secrets or know-how. Others
may independently develop similar or equivalent trade secrets or know-how. If our confidential,
proprietary information is divulged to third parties, including our competitors, our competitive
position in the marketplace will be harmed and our ability to successfully penetrate our target
markets could be severely compromised.
Trademarks
Our trademarks are important to our success and competitive position. We have received U.S.
and European Union, or EU, trademark registration for our corporate name, Santarus®. We
also have received trademark registration in the U.S., EU, Canada and Japan for our brand name,
Zegerid®, and have applied for trademark registration for various other names and logos.
We have licensed to Schering-Plough the right to use various Zegerid related trademarks, including
Zegerid
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OTC®, in connection with their licensed OTC products. Any objections we receive
from the PTO, foreign trademark authorities or third parties relating to our registered trademarks
and pending applications could require us to incur significant expense in defending the objections
or establishing alternative names. There is no guarantee we will be able to secure any of our
pending trademark applications with the PTO or comparable foreign authorities.
If we do not adequately protect our rights in our various trademarks from infringement, any
goodwill that has been developed in those marks would be lost or impaired. We could also be forced
to cease using any of our trademarks that are found to infringe upon or otherwise violate the
trademark or service mark rights of another company, and, as a result, we could lose all the
goodwill which has been developed in those marks and could be liable for damages caused by any such
infringement or violation.
Third parties may choose to file patent infringement claims against us, which litigation would be
costly, time-consuming and distracting to management and could be materially adverse to our
business.
The products we currently market, and those we may market in the future, may infringe patent
and other rights of third parties. In addition, our competitors, many of which have substantially
greater resources than us and have made significant investments in competing technologies or
products, may seek to apply for and obtain patents that will prevent, limit or interfere with our
ability to make, use and sell products either in the U.S. or international markets. Intellectual
property litigation in the pharmaceutical industry is common, and we expect this to continue.
If we or our third-party manufacturers or suppliers are unsuccessful in any challenge to our
rights to manufacture, market and sell our products, we may be required to license the disputed
rights, if the holder of those rights is willing, or to cease manufacturing and marketing the
challenged products, or, if possible, to modify our products to avoid infringing upon those rights.
If we or our third-party manufacturers or suppliers are unsuccessful in defending our rights, we
could be liable for royalties on past sales or more significant damages, and we could be required
to obtain and pay for licenses if we are to continue to manufacture and sell our products. These
licenses may not be available and, if available, could require us to pay substantial upfront fees
and future royalty payments. Any patent owner may seek preliminary injunctive relief in connection
with an infringement claim, as well as a permanent injunction, and, if successful in the claim, may
be entitled to lost profits from infringing sales, attorneys fees and interest and other amounts.
Any damages could be increased if there is a finding of willful infringement. Even if we and our
third-party manufacturers and suppliers are successful in defending an infringement claim, the
expense, time delay and burden on management of litigation could have a material adverse effect on
our business.
Our immediate-release PPI technology is licensed from the University of Missouri and any loss of
our license rights would harm our business and affect our ability to market our products.
Our immediate-release PPI technology is based on technology and patent rights exclusively
licensed from the University of Missouri. A loss or adverse modification of our technology license
from the University of Missouri could materially harm our ability to commercialize our current
Zegerid products and other products based on that licensed technology that we or our strategic
partners develop or commercialize. The University of Missouri may claim that new patents or new
patent applications that result from new research performed by the University of Missouri are not
part of the licensed technology.
The licenses from the University of Missouri expire in each country when the last patent for
licensed technology expires in that country and the last patent application for licensed technology
in that country is abandoned. In addition, our rights under the University of Missouri license are
subject to early termination under specified circumstances, including our material and uncured
breach of the license agreement or our bankruptcy or insolvency. Further, we are required to use
commercially reasonable efforts to develop and sell products based on the technology we licensed
from the University of Missouri to meet market demand. If we fail to meet these obligations in
specified countries, after giving us an opportunity to cure the failure, the University of Missouri
can terminate our license or render it nonexclusive with respect to those countries. To date, we
believe we have met all of our obligations under the University of Missouri agreement. However, in
the event that the University of Missouri is able to terminate the license agreement for one of the
reasons specified in the license agreement, we would lose our rights to develop, market and sell
immediate-release PPI products based on those licensed technologies.
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Risks Related to Our Financial Results and Need for Financing
We may incur operating losses in the future and may not be able to sustain profitability.
The extent of our future operating losses and our ability to sustain profitability are highly
uncertain. We have been engaged in developing and commercializing drugs and have generated
significant operating losses since our inception in December 1996. Our commercial activities and
continued product development and clinical activities will require significant expenditures. For
the six months ended June 30, 2010, we recognized $81.4 million in total revenues, and, as of June
30, 2010, we had an accumulated deficit of $281.1 million.
As a result of Pars decision to launch its generic version of our Zegerid Capsules
prescription product, we determined in late June 2010 to cease promotion of our Zegerid
prescription products and implement a corporate restructuring. As a result, we expect to record
significant restructuring charges relating to employment termination benefits and contract
termination costs in the third quarter of 2010. However, we may not be able to realize the cost
savings and other anticipated benefits from our restructuring, and we cannot guarantee that any of
our restructuring efforts will be successful, or that we will not have to undertake additional
restructuring activities
We may incur additional operating losses and capital expenditures as we support the continued
marketing of the Glumetza products and any other products we commercialize, and continue our
product development and clinical research programs.
Our quarterly financial results are likely to fluctuate significantly due to uncertainties about
future sales levels for our currently marketed products and future costs associated with our
development-stage products.
Our quarterly operating results are difficult to predict and may fluctuate significantly from
period to period, particularly because the commercial success of, and demand for, currently
marketed products, as well as the success and costs of our development programs are uncertain and
therefore our future prospects are uncertain. For example, we expect our revenues from the sale of
Zegerid prescription products to decrease significantly in the third quarter of 2010 stemming from
the recent launch of Pars generic version of our Zegerid Capsules prescription product. The level
of our revenues and results of operations at any given time will be based primarily on the
following factors:
| the availability of third party generic versions of our Zegerid prescription products; | ||
| our potential to receive revenue under a distribution and supply agreement with Prasco for the sale of authorized generic Zegerid products; | ||
| whether we are able to maintain patent protection for our products, including whether favorable outcomes are obtained in our pending appeal relating to our Zegerid prescription products and a pending patent infringement lawsuit relating to our Glumetza prescription product; | ||
| commercial success of the Glumetza prescription products, particularly in light of the recent Glumetza 500 mg recall, voluntarily undertaken by our partner, Depomed, in June 2010, and the related ongoing supply interruption of this dosage strength; | ||
| results of clinical studies and other development programs, including the ongoing and planned clinical programs for the budesonide MMX and rifamycin SV MMX product candidates; | ||
| progress under our strategic alliances with Schering-Plough, GSK and Norgine, including the impact on these alliances from generic competition and the potential for early termination of, or reduced payments under, the related agreements; | ||
| our ability to obtain regulatory approval for any future products we develop or in-license; | ||
| interruption in the manufacturing or distribution of our products, including the products we promote; | ||
| timing of new product offerings, acquisitions, licenses or other significant events by us, our strategic partners or |
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our competitors; | |||
| legislative changes, including healthcare reform, affecting the products we may offer or those of our competitors; and | ||
| the effect of competing technological and market developments. |
Because of these factors, our operating results in one or more future quarters may fail to
meet the expectations of securities analysts or investors, which could cause our stock price to
decline significantly.
To the extent we need to raise additional funds in connection with the licensing or acquisition of
new products or to continue our operations, we may be unable to raise capital when needed.
We believe that our current cash, cash equivalents and short-term investments will be
sufficient to fund our current operations for at least the next 12 months; however, our projected
revenue may decrease or our expenses may increase and that would lead to our cash resources being
consumed earlier than we expect. Although we do not believe that we will need to raise additional
funds to finance our current operations over the next 12 months, we may pursue raising additional
funds in connection with licensing or acquisition of new products. Sources of additional funds may
include funds generated through equity and/or debt financing.
In November 2008, we filed a universal shelf registration statement on Form S-3 with the SEC,
which was declared effective in December 2008. The universal shelf registration statement replaced
our previous universal shelf registration statement that expired in December 2008. The universal
shelf registration statement may permit us, from time to time, to offer and sell up to
approximately $75.0 million of equity or debt securities. However, there can be no assurance that
we will be able to complete any such offerings of securities. Factors influencing the availability
of additional financing include the progress of our commercial and development activities, investor
perception of our prospects and the general condition of the financial markets, among others.
In July 2006, we entered into a loan agreement with Comerica Bank, or Comerica, which we
subsequently amended in July 2008, pursuant to which we may request advances in an aggregate
outstanding amount not to exceed $25.0 million. Amounts borrowed under the loan agreement may be
repaid and re-borrowed at any time prior to July 11, 2011. In December 2008, we borrowed $10.0
million under the loan agreement. Our ability to borrow additional amounts under the loan
agreement depends upon a number of conditions and restrictions, and we cannot be certain that we
will satisfy all borrowing conditions at a time when we desire to borrow such amounts under the
loan agreement. For example, we have made comprehensive representations and warranties to Comerica
as our lender, and all of these representations and warranties generally must be true and correct
at the time of any proposed borrowing. Furthermore, we are subject to a number of affirmative and
negative covenants, each of which must be satisfied at the time of any proposed borrowing. If we
have not satisfied these various conditions, or an event of default otherwise has occurred, we may
be unable to borrow additional amounts under the loan agreement, and may be required to repay any
amounts previously borrowed. In addition, given the current financial market conditions, our
continued ability to borrow under the loan agreement may be dependent on the financial solvency of
banks in general, including Comerica.
We cannot be certain that our existing cash and marketable securities resources will be
adequate to sustain our current operations. To the extent we require additional funding, we cannot
be certain that such funding will be available to us on acceptable terms, or at all. If adequate
funds are not available on terms acceptable to us at that time, our ability to continue our current
operations or pursue new product opportunities would be significantly limited.
Our current and any future indebtedness under our loan agreement with Comerica could adversely
affect our financial health.
Under our loan agreement with Comerica, we may incur a significant amount of indebtedness.
Such indebtedness could have important consequences. For example, it could:
| impair our ability to obtain additional financing in the future for working capital needs, capital expenditures and general corporate purposes; |
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| increase our vulnerability to general adverse economic and industry conditions; | ||
| make it more difficult for us to satisfy other debt obligations we may incur in the future; | ||
| require us to dedicate a substantial portion of our cash flows from operations to the payment of principal and interest on our indebtedness, thereby reducing the availability of our cash flows to fund working capital needs, capital expenditures and other general corporate purposes; | ||
| limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; | ||
| place us at a disadvantage compared to our competitors that have less indebtedness; and | ||
| expose us to higher interest expense in the event of increases in interest rates because our indebtedness under the loan agreement with Comerica bears interest at a variable rate. |
If an event of default occurs under the loan agreement, we may be unable to borrow additional
amounts, and may be required to repay any amounts previously borrowed. The events of default under
the loan agreement include, among other things, a material adverse effect on (i) our business
operations, condition (financial or otherwise) or prospects, (ii) our ability to repay the
obligations under the loan agreement or otherwise perform our obligations under the loan agreement,
or (iii) our interest in, or the value, perfection or priority of Comericas security interest in
the collateral, which generally includes all of our cash and accounts receivable, but excludes
intellectual property. At this time, Comerica has not taken any action to declare an event of
default under the loan agreement stemming from the Par litigation, our decision to cease promotion
of Zegerid prescription products or our corporate restructuring, but we cannot be certain that
Comerica will not seek to declare an event of default in the future for this or another reason.
For a description of the loan agreement, see Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and Capital Resources.
Covenants in our loan agreement with Comerica may limit our ability to operate our business.
Under our loan agreement with Comerica, we are subject to specified affirmative and negative
covenants, including limitations on our ability: to undergo certain change of control events; to
convey, sell, lease, license, transfer or otherwise dispose of assets; to create, incur, assume,
guarantee or be liable with respect to certain indebtedness; to grant liens; to pay dividends and
make certain other restricted payments; and to make investments. In addition, under the loan
agreement we are required to maintain a balance of cash with Comerica in an amount of not less than
$4.0 million and to maintain any other cash balances with either Comerica or another financial
institution covered by a control agreement for the benefit of Comerica. We are also subject to
specified financial covenants with respect to a minimum liquidity ratio and, in specified limited
circumstances, minimum EBITDA requirements, as defined in the loan agreement.
If we default under the loan agreement because of a covenant breach or otherwise, all
outstanding amounts could become immediately due and payable, which would negatively impact our
liquidity and reduce the availability of our cash flows to fund working capital needs, capital
expenditures and other general corporate purposes.
Our ability to use our net operating losses to offset taxes that would otherwise be due could be
limited or lost entirely if we do not continue to generate taxable income in a timely manner or if
we trigger an ownership change pursuant to Section 382 of the Internal Revenue Code which, if we
continue to generate taxable income, could materially and adversely affect our business, financial
condition, and results of operations.
As of December 31, 2009, we had Federal and state income tax net operating loss carryforwards,
or NOLs, of approximately $161.1 million and $142.8 million, respectively. Our ability to use our
NOLs to offset taxes that would otherwise be due is dependent upon our generation of future taxable
income before the expiration dates of the NOLs, and we cannot predict with certainty whether we
will be able to generate future taxable income. In addition, even if we generate taxable income,
realization of our NOLs to offset taxes that would otherwise be due could be restricted by annual
limitations on use of NOLs triggered by an ownership change under Section 382 of the Internal
Revenue Code and similar state provisions. An ownership change may occur when there is a 50% or
greater change in total ownership of our company by one or more 5% shareholders within a three-year
period. The loss of some or all of our NOLs could materially and adversely affect our business,
financial condition and results of operations. In addition, California and
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certain states have suspended use of NOLs for certain taxable years, and other states may
consider similar measures. As a result, we may incur higher state income tax expense in the
future. Depending on our future tax position, continued suspension of our ability to use NOLs in
states in which we are subject to income tax could have an adverse impact on our operating results
and financial condition.
Our results of operations and liquidity needs could be materially negatively affected by market
fluctuations and economic downturn.
Our results of operations could be materially negatively affected by economic conditions
generally, both in the U.S. and elsewhere around the world. Continuing concerns over inflation,
energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market
and a declining residential real estate market in the U.S. have contributed to increased volatility
and diminished expectations for the economy and the markets going forward. These factors, combined
with volatile oil prices, declining business and consumer confidence and increased unemployment,
have precipitated an economic recession. Domestic and international equity markets continue to
experience heightened volatility and turmoil. These events and the continuing market upheavals may
have an adverse effect on us. In the event of a continuing market downturn, our results of
operations could be adversely affected by those factors in many ways, including making it more
difficult for us to raise funds if necessary, and our stock price may decline. In addition, we
maintain significant amounts of cash and cash equivalents at one or more financial institutions
that are in excess of federally insured limits. Given the current instability of financial
institutions, we cannot be assured that we will not experience losses on these deposits.
In addition, concern about the stability of markets generally and the strength of
counterparties specifically has led many lenders and institutional investors to reduce, and in some
cases, cease to provide credit to businesses and consumers.
In connection with the reporting of our financial condition and results of operations, we are
required to make estimates and judgments which involve uncertainties, and any significant
differences between our estimates and actual results could have an adverse impact on our financial
position, results of operations and cash flows.
Our discussion and analysis of our financial condition and results of operations are based on
our financial statements, which have been prepared in accordance with U.S. generally accepted
accounting principles, or GAAP. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and liabilities. In particular, as part of
our revenue recognition policy, our estimates of product returns, rebates and chargebacks require
our most subjective and complex judgment due to the need to make estimates about matters that are
inherently uncertain. Any significant differences between our actual results and our estimates
under different assumptions or conditions could negatively impact our financial position, results
of operations and cash flows.
Risks Related to the Securities Markets and Ownership of Our Common Stock
Our stock price has been and may continue to be volatile, and our stockholders may not be able to
sell their shares at attractive prices.
The market prices for securities of specialty biopharmaceutical companies in general have been
highly volatile and may continue to be highly volatile in the future. For example, during the year
ended December 31, 2009, the trading prices for our common stock ranged from a high of $5.82 to a
low of $1.05, and on July 15, 2010, the closing trading price for our common stock was $2.62. In
addition, we have not paid cash dividends since our inception and do not intend to pay cash
dividends in the foreseeable future. Furthermore, our loan agreement with Comerica prohibits us
from paying dividends. Therefore, investors will have to rely on appreciation in our stock price
and a liquid trading market in order to achieve a gain on their investment.
The trading price of our common stock may continue to fluctuate substantially as a result of
one or more of the following factors:
| developments relating to generic versions of our Zegerid products, including the currently-available versions offered by Par and Prasco, and any additional generic products that may be offered in the future; | ||
| the outcomes of the pending appeal relating to our Zegerid prescription products and the pending litigation |
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concerning the Glumetza prescription products we promote; | |||
| announcements concerning our product development programs, results of our clinical studies or status of our regulatory submissions; | ||
| other announcements concerning our commercial progress and activities, including sales and revenue trends; | ||
| regulatory developments and related announcements in the U.S., including announcements by the FDA, and foreign countries; | ||
| developments, including announcements concerning progress, delays or terminations, pursuant to our strategic alliances with Schering-Plough, GSK and Norgine or our promotion arrangement for Glumetza; | ||
| our entering into licenses, strategic partnerships and similar arrangements, or the termination of such arrangements; | ||
| other disputes or developments concerning proprietary rights, including patents and trade secrets, litigation matters, and our ability to patent or otherwise protect our products and technologies; | ||
| conditions or trends in the pharmaceutical and biotechnology industries, including the impact of healthcare reform; | ||
| fluctuations in stock market prices and trading volumes of similar companies or of the markets generally; | ||
| changes in, or our failure to meet or exceed, investors and securities analysts expectations; | ||
| announcements of technological innovations or new commercial products by us or our competitors; | ||
| actual or anticipated fluctuations in our or our competitors quarterly or annual operating results; | ||
| announcements concerning borrowings under our loan agreement, takedowns under our existing universal shelf registration statement or other developments relating to the loan agreement, universal shelf registration statement or our other financing activities; | ||
| acquisition of products or businesses by us or our competitors; | ||
| announcements made by, or events affecting, our strategic partners, our contract sales force provider, our suppliers or other third parties that provide services to us; | ||
| litigation and government inquiries; or | ||
| economic and political factors, including wars, terrorism and political unrest. |
Our stock price could decline and our stockholders may suffer dilution in connection with future
issuances of equity or debt securities.
Although we do not believe that we will need to raise additional funds to finance our current
operations over the next 12 months, we may pursue raising additional funds in connection with
licensing or acquisition of new products. Sources of additional funds may include funds generated
through equity and/or debt financing, or through strategic collaborations or licensing agreements.
To the extent we conduct substantial future offerings of equity or debt securities, such offerings
could cause our stock price to decline. For example, we may issue securities under our existing
universal shelf registration statement or we may pursue alternative financing arrangements.
The exercise of outstanding options and warrants and future equity issuances, including future
public offerings or future private placements of equity securities and any additional shares issued
in connection with acquisitions, will also result in dilution to investors. The market price of our
common stock could fall as a result of resales of any of these shares of
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common stock due to an increased number of shares available for sale in the market.
Future sales of our common stock by our stockholders may depress our stock price.
A concentrated number of stockholders hold significant blocks of our outstanding common stock.
Sales by our current stockholders of a substantial number of shares, or the expectation that such
sales may occur, could significantly reduce the market price of our common stock. In addition,
certain of our executive officers have from time to time established programmed selling plans under
Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, for the purpose of effecting sales
of common stock, and other employees and affiliates, including our directors and executive
officers, may choose to establish similar plans in the future. If any of our stockholders cause
securities to be sold in the public market, the sales could reduce the trading price of our common
stock. These sales also could impede our ability to raise future capital.
We may become involved in securities or other class action litigation that could divert
managements attention and harm our business.
The stock market has from time to time experienced significant price and volume fluctuations
that have affected the market prices for the common stock of pharmaceutical and biotechnology
companies. These broad market fluctuations may cause the market price of our common stock to
decline. In the past, following periods of volatility in the market price of a particular
companys securities, securities class action litigation has often been brought against that
company. In addition, over the last few years, several class action lawsuits have been filed
against pharmaceutical companies alleging that the companies sales representatives have been
misclassified as exempt employees under the Federal Fair Labor Standards Act and applicable state
laws. One appellate court decision found sales representatives are exempt and a very recent
appellate court decision found sales representatives are not exempt. Given this split of opinion
by the courts and lack of clarity on the issue, we cannot be certain as to how the lawsuits will
ultimately be resolved. Although we have not been the subject of these types of lawsuits, we may
be targeted in the future. Litigation often is expensive and diverts managements attention and
resources, which could adversely affect our business.
Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent
a change in control, even if an acquisition would be beneficial to our stockholders, which could
adversely affect our stock price and prevent attempts by our stockholders to replace or remove our
current management.
Our certificate of incorporation and bylaws contain provisions that may delay or prevent a
change in control, discourage bids at a premium over the market price of our common stock and
adversely affect the market price of our common stock and the voting and other rights of the
holders of our common stock.
These provisions include:
| dividing our board of directors into three classes serving staggered three-year terms; | ||
| prohibiting our stockholders from calling a special meeting of stockholders; | ||
| permitting the issuance of additional shares of our common stock or preferred stock without stockholder approval; | ||
| prohibiting our stockholders from making certain changes to our certificate of incorporation or bylaws except with 66 2/3% stockholder approval; and | ||
| requiring advance notice for raising business matters or nominating directors at stockholders meetings. |
We are also subject to provisions of the Delaware corporation law that, in general, prohibit
any business combination with a beneficial owner of 15% or more of our common stock for five years
unless the holders acquisition of our stock was approved in advance by our board of directors.
Together, these charter and statutory provisions could make the removal of management more
difficult and may discourage transactions that otherwise could involve payment of a premium over
prevailing market prices for our common stock.
In addition, in November 2004, we adopted a stockholder rights plan, which was subsequently
amended in April 2006 and December 2008. Although the rights plan will not prevent a takeover, it
is intended to encourage anyone seeking to
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acquire our company to negotiate with our board prior to attempting a takeover by potentially
significantly diluting an acquirers ownership interest in our outstanding capital stock. The
existence of the rights plan may also discourage transactions that otherwise could involve payment
of a premium over prevailing market prices for our common stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
Not applicable.
Issuer Purchases of Equity Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Removed and Reserved
Item 5. Other Information
Not applicable.
Item 6. Exhibits
Exhibit | ||
Number | Description | |
3.1(1)
|
Amended and Restated Certificate of Incorporation | |
3.2(2)
|
Amended and Restated Bylaws | |
3.3(3)
|
Certificate of Designations for Series A Junior Participating Preferred Stock | |
4.1(3)
|
Form of Common Stock Certificate | |
4.2(4)
|
Amended and Restated Investors Rights Agreement, dated April 30, 2003, among us and the parties named therein | |
4.3(4)
|
Amendment No. 1 to Amended and Restated Investors Rights Agreement, dated May 19, 2003, among us and the parties named therein | |
4.4(4)*
|
Stock Restriction and Registration Rights Agreement, dated January 26, 2001, between us and The Curators of the University of Missouri | |
4.5(4)
|
Form of Common Stock Purchase Warrant | |
4.6(3)
|
Rights Agreement, dated as of November 12, 2004, between us and American Stock Transfer & Trust Company, which includes the form of Certificate of Designations of the Series A Junior Participating Preferred Stock of Santarus, Inc. as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C | |
4.7(5)
|
First Amendment to Rights Agreement, dated as of April 19, 2006, between us and American Stock Transfer & Trust Company |
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Exhibit | ||
Number | Description | |
4.8(6)
|
Second Amendment to Rights Agreement, dated December 10, 2008, between us and American Stock Transfer & Trust Company | |
4.9(7)
|
Warrant to Purchase Shares of Common Stock, dated February 3, 2006, issued by us to Kingsbridge Capital Limited | |
4.10(7)
|
Registration Rights Agreement, dated February 3, 2006, between us and Kingsbridge Capital Limited | |
4.11(8)
|
Registration Rights Agreement, dated December 10, 2008, between us and Cosmo Technologies Limited | |
4.12(8)
|
Amendment No. 1 to Registration Rights Agreement, dated April 23, 2009, between us and Cosmo Technologies Limited | |
10.1+
|
Distribution and Supply Agreement, dated April 26, 2010, between us and Prasco, LLC | |
10.2+
|
Amendment No. 3 to Service Agreement, dated June 30, 2010, between us and Ventiv Commercial Services, LLC (d/b/a inVentiv Commercial Services, LLC) | |
31.1
|
Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934 | |
31.2
|
Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934 | |
32
|
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(1) | Incorporated by reference to the Quarterly Report on Form 10-Q of Santarus, Inc. for the quarter ended March 31, 2004, filed with the Securities and Exchange Commission on May 13, 2004. | |
(2) | Incorporated by reference to the Current Report on Form 8-K of Santarus, Inc., filed with the Securities and Exchange Commission on December 5, 2008. | |
(3) | Incorporated by reference to the Current Report on Form 8-K of Santarus, Inc., filed with the Securities and Exchange Commission on November 17, 2004. | |
(4) | Incorporated by reference to the Registration Statement on Form S-1 of Santarus, Inc. (Registration No. 333-111515), filed with the Securities and Exchange Commission on December 23, 2003, as amended. | |
(5) | Incorporated by reference to the Current Report on Form 8-K of Santarus, Inc., filed with the Securities and Exchange Commission on April 21, 2006. | |
(6) | Incorporated by reference to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 15, 2008. | |
(7) | Incorporated by reference to the Current Report on Form 8-K of Santarus, Inc., filed with the Securities and Exchange Commission on February 3, 2006. | |
(8) | Incorporated by reference to the Registration Statement on Form S-3 of Santarus, Inc. (Registration No. 333-156806), filed with the Securities and Exchange Commission on January 20, 2009, as amended. | |
* | Santarus, Inc. has been granted confidential treatment with respect to certain portions of this exhibit (indicated by asterisks), which portions have been omitted and filed separately with the Securities and Exchange Commission. | |
+ | Application has been made to the Securities and Exchange Commission to seek confidential treatment of certain provisions. Omitted material for which confidential treatment has been requested has been filed separately with the Securities and |
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Exchange Commission. | ||
| These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of Santarus, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: August 2, 2010
/s/ Debra P. Crawford | ||||
Debra P. Crawford, | ||||
Senior Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) |
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