Attached files
file | filename |
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EX-10.9 - EX-10.9 - SANTARUS INC | a57770exv10w9.htm |
EX-2.1 - EX-2.1 - SANTARUS INC | a57770exv2w1.htm |
EX-10.3 - EX-10.3 - SANTARUS INC | a57770exv10w3.htm |
EX-10.4 - EX-10.4 - SANTARUS INC | a57770exv10w4.htm |
EX-10.2 - EX-10.2 - SANTARUS INC | a57770exv10w2.htm |
EX-10.6 - EX-10.6 - SANTARUS INC | a57770exv10w6.htm |
EX-10.7 - EX-10.7 - SANTARUS INC | a57770exv10w7.htm |
EX-10.5 - EX-10.5 - SANTARUS INC | a57770exv10w5.htm |
EX-10.10 - EX-10.10 - SANTARUS INC | a57770exv10w10.htm |
EX-32 - EX-32 - SANTARUS INC | a57770exv32.htm |
EX-31.2 - EX-31.2 - SANTARUS INC | a57770exv31w2.htm |
EX-31.1 - EX-31.1 - SANTARUS INC | a57770exv31w1.htm |
EX-10.8 - EX-10.8 - SANTARUS INC | a57770exv10w8.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 September 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 filerþ | 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 October 29, 2010 was 58,824,058.
SANTARUS, INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
TABLE OF CONTENTS
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57 | ||||||||
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EX-2.1 | ||||||||
EX-10.2 | ||||||||
EX-10.3 | ||||||||
EX-10.4 | ||||||||
EX-10.5 | ||||||||
EX-10.6 | ||||||||
EX-10.7 | ||||||||
EX-10.8 | ||||||||
EX-10.9 | ||||||||
EX-10.10 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32 |
i
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Santarus, Inc.
Consolidated Balance Sheets
(in thousands, except
share and per share amounts)
(unaudited)
(unaudited)
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 61,104 | $ | 86,129 | ||||
Short-term investments |
3,997 | 7,815 | ||||||
Accounts receivable, net |
7,235 | 16,253 | ||||||
Inventories, net |
2,441 | 5,336 | ||||||
Prepaid expenses and other current assets |
5,369 | 3,797 | ||||||
Total current assets |
80,146 | 119,330 | ||||||
Long-term restricted cash |
1,400 | 1,400 | ||||||
Property and equipment, net |
837 | 875 | ||||||
Intangible assets, net |
14,632 | 9,750 | ||||||
Goodwill |
2,904 | | ||||||
Other assets |
6 | 6 | ||||||
Total assets |
$ | 99,925 | $ | 131,361 | ||||
Liabilities and stockholders equity |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued liabilities |
$ | 35,767 | $ | 58,676 | ||||
Allowance for product returns |
13,482 | 12,846 | ||||||
Current portion of deferred revenue |
| 245 | ||||||
Total current liabilities |
49,249 | 71,767 | ||||||
Deferred revenue, less current portion |
2,634 | 2,678 | ||||||
Long-term debt |
10,000 | 10,000 | ||||||
Other long-term liabilities |
2,340 | | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $0.0001 par value; 10,000,000 shares authorized at
September 30, 2010 and December 31, 2009; no shares issued and
outstanding at September 30, 2010 and December 31, 2009 |
| | ||||||
Common stock, $0.0001 par value; 100,000,000 shares authorized at
September 30, 2010 and December 31, 2009; 58,817,281 and
58,344,932
shares issued and outstanding at September 30, 2010 and
December 31,
2009, respectively |
6 | 6 | ||||||
Additional paid-in capital |
342,507 | 337,312 | ||||||
Accumulated other comprehensive loss |
| (1 | ) | |||||
Accumulated deficit |
(306,811 | ) | (290,401 | ) | ||||
Total stockholders equity |
35,702 | 46,916 | ||||||
Total liabilities and stockholders equity |
$ | 99,925 | $ | 131,361 | ||||
See accompanying notes.
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Table of Contents
Santarus, Inc.
Consolidated Statements of Operations
(in thousands, except
share and per share amounts)
(unaudited)
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Product sales, net |
$ | 10,972 | $ | 31,488 | $ | 72,848 | $ | 87,032 | ||||||||
Promotion revenue |
6,791 | 6,749 | 23,715 | 16,929 | ||||||||||||
Royalty revenue |
311 | | 2,689 | | ||||||||||||
Other license revenue |
| 1,216 | 245 | 6,149 | ||||||||||||
Total revenues |
18,074 | 39,453 | 99,497 | 110,110 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Cost of product sales |
1,189 | 2,009 | 6,555 | 5,993 | ||||||||||||
License fees and royalties |
16,046 | 2,017 | 21,304 | 5,695 | ||||||||||||
Research and development |
4,427 | 3,441 | 13,984 | 9,814 | ||||||||||||
Selling, general and
administrative |
14,997 | 26,331 | 66,464 | 80,383 | ||||||||||||
Restructuring charges |
7,258 | | 7,258 | | ||||||||||||
Total costs and expenses |
43,917 | 33,798 | 115,565 | 101,885 | ||||||||||||
Income (loss) from operations |
(25,843 | ) | 5,655 | (16,068 | ) | 8,225 | ||||||||||
Other income (expense): |
||||||||||||||||
Interest income |
22 | 25 | 68 | 179 | ||||||||||||
Interest expense |
(116 | ) | (117 | ) | (345 | ) | (345 | ) | ||||||||
Total other income (expense) |
(94 | ) | (92 | ) | (277 | ) | (166 | ) | ||||||||
Income (loss) before income taxes |
(25,937 | ) | 5,563 | (16,345 | ) | 8,059 | ||||||||||
Income tax expense |
(191 | ) | 223 | 65 | 445 | |||||||||||
Net income (loss) |
$ | (25,746 | ) | $ | 5,340 | $ | (16,410 | ) | $ | 7,614 | ||||||
Net income (loss) per share: |
||||||||||||||||
Basic |
$ | (0.44 | ) | $ | 0.09 | $ | (0.28 | ) | $ | 0.13 | ||||||
Diluted |
$ | (0.44 | ) | $ | 0.09 | $ | (0.28 | ) | $ | 0.13 | ||||||
Weighted average shares outstanding used to calculate
net income (loss) per share: |
||||||||||||||||
Basic |
58,622,206 | 58,052,418 | 58,480,222 | 57,932,135 | ||||||||||||
Diluted |
58,622,206 | 60,109,860 | 58,480,222 | 59,018,999 |
See accompanying notes.
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Table of Contents
Santarus, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
(unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Operating activities |
||||||||
Net income (loss) |
$ | (16,410 | ) | $ | 7,614 | |||
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities: |
||||||||
Depreciation and amortization |
1,506 | 1,563 | ||||||
Unrealized gain on trading securities, net |
(2 | ) | (46 | ) | ||||
Stock-based compensation |
4,153 | 3,494 | ||||||
Issuance of common stock for technology license agreement |
150 | | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable, net |
9,019 | (4,113 | ) | |||||
Inventories, net |
2,895 | 130 | ||||||
Prepaid expenses and other current assets |
(1,572 | ) | (1,362 | ) | ||||
Accounts payable and accrued liabilities |
(23,375 | ) | 1,986 | |||||
Allowance for product returns |
636 | 1,997 | ||||||
Deferred revenue |
(289 | ) | (5,981 | ) | ||||
Net cash provided by (used in) operating activities |
(23,289 | ) | 5,282 | |||||
Investing activities |
||||||||
Purchases of short-term investments |
(14,243 | ) | (7,825 | ) | ||||
Sales and maturities of short-term investments |
14,231 | 8,618 | ||||||
Redemption of investments |
3,850 | 250 | ||||||
Purchases of property and equipment |
(269 | ) | (193 | ) | ||||
Acquisition of intangible assets |
(5,000 | ) | | |||||
Net cash paid for business combination |
(842 | ) | | |||||
Net cash provided by (used) in investing activities |
(2,273 | ) | 850 | |||||
Financing activities |
||||||||
Exercise of stock options |
212 | 116 | ||||||
Issuance of common stock, net |
325 | 331 | ||||||
Net cash provided by financing activities |
537 | 447 | ||||||
Increase (decrease) in cash and cash equivalents |
(25,025 | ) | 6,579 | |||||
Cash and cash equivalents at beginning of the period |
86,129 | 49,886 | ||||||
Cash and cash equivalents at end of the period |
$ | 61,104 | $ | 56,465 | ||||
See accompanying notes.
3
Table of Contents
Santarus, Inc.
Notes to Consolidated 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 physician specialists. 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 consolidated 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 consolidated 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 nine months ended September 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. Principles of Consolidation
The unaudited interim consolidated financial statements of the Company include the accounts of
Santarus, Inc. and its wholly owned subsidiary, Covella Pharmaceuticals, Inc. (Covella). The
Company does not have any interest in variable interest entities. All material intercompany
transactions and balances have been eliminated in consolidation.
In September 2010, the Company acquired the worldwide rights to SAN-300, a humanized
anti-VLA-1 antibody, through the acquisition of Covella pursuant to the terms of an Agreement and
Plan of Merger (the Merger Agreement) with Covella, Lawrence C. Fritz, as the stockholder
representative, and SAN Acquisition Corp., a wholly owned subsidiary of the Company (Merger Sub).
In connection with the consummation of the transactions contemplated by the Merger Agreement,
Merger Sub merged with Covella, and Covella survived as a wholly owned subsidiary of the Company.
4. 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
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Table of Contents
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; | ||
| 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 $13.5 million as of September 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 $19.0 million as of
September 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
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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 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 recognizes as an addition to product sales, net when Prasco reports to the Company 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 are 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.
5. Stock-Based Compensation
For the three months ended September 30, 2010 and 2009 and the nine months ended September 30,
2010 and 2009, the Company recognized approximately $1.7 million, $1.1 million, $4.2 million and
$3.5 million of total stock-based compensation, respectively. For the three and nine months ended
September 30, 2010, stock-based compensation included approximately $352,000 related to the
Companys corporate restructuring implemented in the third quarter of 2010. The Company 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. For the nine months
ended September 30, 2009, stock-based compensation included approximately $355,000 related to stock
options containing performance-based vesting. As of September 30, 2010, total unrecognized
compensation cost related to stock options and employee stock purchase plan rights was
approximately $8.7 million, and the weighted average period over which it was expected to be
recognized was 2.8 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.
6. Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income
(loss). Other comprehensive income (loss) includes certain changes in stockholders equity that
are excluded from net income (loss), specifically unrealized gains and losses on securities
available-for-sale. Comprehensive income (loss) consists of the following (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income (loss) |
$ | (25,746 | ) | $ | 5,340 | $ | (16,410 | ) | $ | 7,614 | ||||||
Unrealized gain (loss) on
investments |
(1 | ) | (2 | ) | 1 | (2 | ) | |||||||||
Comprehensive income (loss) |
$ | (25,747 | ) | $ | 5,338 | $ | (16,409 | ) | $ | 7,612 | ||||||
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7. Net Income (Loss) Per Share
Basic income (loss) per share is calculated by dividing the net income (loss) by the weighted
average number of common shares outstanding for the period, without consideration for common stock
equivalents. Diluted income (loss) per share is computed by dividing the net income (loss) 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, contingently issuable shares, options and warrants are considered to be common stock
equivalents and are only included in the calculation of diluted income (loss) per share when their
effect is dilutive. Potentially dilutive securities totaling 17.6 million shares and 10.0 million
shares for the three months ended September 30, 2010 and 2009 and 16.9 million shares and
11.0 million shares for the nine months ended September 30, 2010 and 2009, respectively, were
excluded from the calculation of diluted income (loss) per share because of their anti-dilutive
effect.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Numerator: |
||||||||||||||||
Net income (loss) (in thousands) |
$ | (25,746 | ) | $ | 5,340 | $ | (16,410 | ) | $ | 7,614 | ||||||
Denominator: |
||||||||||||||||
Weighted average common shares
outstanding for basic net income
(loss) per share |
58,622,206 | 58,052,418 | 58,480,222 | 57,932,135 | ||||||||||||
Net effect of dilutive common
stock equivalents |
| 2,057,442 | | 1,086,864 | ||||||||||||
Denominator for diluted net
income (loss) per share |
58,622,206 | 60,109,860 | 58,480,222 | 59,018,999 | ||||||||||||
Net income (loss) per share |
||||||||||||||||
Basic |
$ | (0.44 | ) | $ | 0.09 | $ | (0.28 | ) | $ | 0.13 | ||||||
Diluted |
$ | (0.44 | ) | $ | 0.09 | $ | (0.28 | ) | $ | 0.13 | ||||||
8. Segment Reporting
Management has determined that the Company operates in one business segment which is the
acquisition, development and commercialization of pharmaceutical products.
9. Available-for-Sale Securities
The Company has classified its debt securities 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 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
September 30, 2010 and December 31, 2009 (in thousands). All available-for-sale securities held as
of September 30, 2010 and December 31, 2009 have contractual maturities within one year. There
were no material gross realized gains or losses on sales of available-for-sale securities for the
three and nine months ended September 30, 2010 and the year ended December 31, 2009.
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Amortized | Market | Unrealized | ||||||||||
Cost | Value | Gain (Loss) | ||||||||||
September 30, 2010: |
||||||||||||
U.S. government-sponsored enterprise securities |
$ | 5,397 | $ | 5,397 | $ | | ||||||
U.S. Treasury securities |
| | | |||||||||
$ | 5,397 | $ | 5,397 | $ | | |||||||
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 | ) | ||||||
The classification of available-for-sale securities in the Companys balance sheets is as
follows (in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Short-term investments |
$ | 3,997 | $ | 3,967 | ||||
Restricted cash |
1,400 | 1,400 | ||||||
$ | 5,397 | $ | 5,367 | |||||
As of December 31, 2009, the Company held auction rate securities (ARS) and Auction Rate
Securities Rights (ARS Rights) which were classified as trading securities. The Company
classified the balance of its ARS and ARS Rights totaling $3.8 million in aggregate as short-term
investments in the balance sheet as of December 31, 2009.
10. 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 assets and liabilities measured at fair value on a recurring basis at September
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 | |||||||||||||
Assets: |
||||||||||||||||
Money market funds |
$ | 8,901 | $ | | $ | | $ | 8,901 | ||||||||
U.S. Treasury securities |
6,899 | | | 6,899 | ||||||||||||
U.S. governmentsponsored enterprise
securities |
| 50,701 | | 50,701 | ||||||||||||
$ | 15,800 | $ | 50,701 | $ | | $ | 66,501 | |||||||||
Liabilities: |
||||||||||||||||
Contingent consideration |
$ | | $ | | $ | 1,900 | $ | 1,900 | ||||||||
$ | | $ | | $ | 1,900 | $ | 1,900 | |||||||||
The following table provides a summary of changes in fair value of the Companys Level 3
assets and liabilities for the three and nine months ended September 30, 2010 and 2009 (in
thousands):
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Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Auction Rate Securities and Rights: |
||||||||||||||||
Beginning balance |
$ | 1,750 | $ | 4,239 | $ | 3,848 | $ | 4,250 | ||||||||
Redemptions and sales, at par |
(1,750 | ) | (200 | ) | (3,850 | ) | (250 | ) | ||||||||
Net unrealized gain included in net
income (loss) |
| 7 | 2 | 46 | ||||||||||||
Ending balance |
$ | | $ | 4,046 | $ | | $ | 4,046 | ||||||||
Contingent Consideration: |
||||||||||||||||
Beginning balance |
$ | | $ | | $ | | $ | | ||||||||
Transfers in from business combination |
1,900 | | 1,900 | | ||||||||||||
Ending balance |
$ | 1,900 | $ | | $ | 1,900 | $ | | ||||||||
Level 3 assets included ARS and ARS Rights. Due to conditions in the global credit markets,
these securities 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 approximately
$1.8 million.
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. The assumptions used in preparing the discounted cash flow model included estimates
for interest rates, timing and amount of cash flows and expected holding period of the ARS and ARS
Rights.
Level 3 liabilities include contingent milestone and royalty obligations the Company may pay
related to the acquisition of Covella. The fair value of the contingent consideration has been
determined using a probability-weighted discounted cash flow model. The key assumptions in
applying this approach are the discount rate and the probability assigned to the milestone or
royalty being achieved. Management will remeasure the fair value of the contingent consideration
at each reporting period, with any change in its fair value resulting from either the passage of
time or events occurring after the acquisition date, such as changes in the estimate of the
probability of achieving the milestone or royalty, being recorded in the current periods statement
of operations.
11. Balance Sheet Details
Inventories, net consist of the following (in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Raw materials |
$ | 853 | $ | 1,071 | ||||
Finished goods |
3,749 | 4,269 | ||||||
4,602 | 5,340 | |||||||
Allowance for excess and obsolete inventory |
(2,161 | ) | (4 | ) | ||||
$ | 2,441 | $ | 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 Zegerid Capsules and the related authorized generic
product and Zegerid Powder for Oral Suspension. 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. As of September 30, 2010,
inventories also included raw materials to be used in the manufacture of
Cycloset® (bromocriptine mesylate) tablets, which the Company plans to launch
in November 2010. The Company provides reserves for potentially excess, dated or obsolete
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inventories based on an analysis of inventory on hand and on firm purchase commitments,
compared to forecasts of future sales. As of September 30, 2010, the Company reserved
approximately $227,000 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 September 30, 2010, the Company reserved approximately $1.9 million against on-hand
inventories of its 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.
Accounts payable and accrued liabilities consist of the following (in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Accounts payable |
$ | 3,482 | $ | 8,782 | ||||
Accrued compensation and benefits |
3,773 | 7,525 | ||||||
Accrued rebates |
17,938 | 31,268 | ||||||
Accrued license fees and royalties |
984 | 1,831 | ||||||
Accrued contract sales organization expenses |
611 | 1,573 | ||||||
Accrued research and development expenses |
4,151 | 3,421 | ||||||
Accrued restructuring charges |
1,271 | | ||||||
Income taxes payable |
| 1,267 | ||||||
Other accrued liabilities |
3,557 | 3,009 | ||||||
$ | 35,767 | $ | 58,676 | |||||
12. 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 September 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. On August
27, 2010, the Company entered into an amendment to the Amended Loan Agreement with Comerica that
extends the maturity date of the revolving line of credit from July 11, 2011 to July 11, 2013.
Amounts borrowed under the Amended Loan Agreement may be repaid and re-borrowed at any time prior
to July 11, 2013, and any outstanding principal drawn during the term of the loan facility is due
and payable on July 11, 2013. 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.
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13. Significant Agreements
Distribution and Supply Agreement with Prasco
In April 2010, the Company entered into a distribution and supply 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.
Distribution and License Agreement with S2 and VeroScience
In September 2010, the Company entered into a distribution and license agreement with S2
Therapeutics, Inc. (S2) and VeroScience, LLC (VeroScience) granting the Company exclusive
rights to manufacture and commercialize the prescription product Cycloset in the U.S., subject to
the right of S2 to promote Cycloset as described below. Cycloset is approved by the U.S. Food and
Drug Administration (FDA) as an adjunct to diet and exercise to improve glycemic control in
adults with type 2 diabetes mellitus both as mono-therapy and in combination with other oral
diabetes medications.
Under the terms of the distribution and license agreement, the Company is paying to S2 and
VeroScience an upfront fee totaling $5.0 million. The $5.0 million upfront fee has been
capitalized and included in intangible assets and is being amortized to license fee expense over
the estimated useful life of the asset on a straight-line basis through early 2015. Total
amortization expense for the three and nine months ended September 30, 2010 was approximately
$93,000. The Company will record all sales of Cycloset and will pay a product royalty to S2 and
VeroScience of 35% of the gross margin associated with net sales of Cycloset up to $100 million of
cumulative total gross margin, increasing to 40% thereafter. Gross margin is defined as net sales
less cost of goods sold. In the event net sales of Cycloset exceed $100 million in a calendar
year, the Company will pay an additional 3% of the gross margin to S2 and VeroScience on
incremental net sales over $100 million.
The Company plans to launch Cycloset in November 2010. The Company is responsible for
overseeing the manufacturing and distribution of Cycloset, and accordingly, S2s existing
agreements relating to the manufacture of Cycloset have been assumed by the Company. The Company
is also responsible for all costs associated with its sales force and for all other sales and
marketing-related expenses associated with its promotion of Cycloset. S2 retains the right to
co-promote Cycloset at its sole cost and expense under the same trademark in portions of the U.S.
where the Company is not actively promoting Cycloset. VeroScience, the holder of the U.S.
regulatory approval for Cycloset, is responsible for overseeing regulatory matters. A joint
steering committee consisting of representatives from the three companies has been formed to share
information concerning the Cycloset development, manufacturing and promotion efforts in the U.S.
License Agreement and Supply Agreement with Pharming
In September 2010, the Company entered into a license agreement and a supply agreement with
Pharming Group N.V., on behalf of itself and each of its affiliates, including Pharming
Intellectual Property B.V. and Pharming Technologies B.V. (Pharming), under which the Company was
granted certain non-exclusive rights to develop and manufacture, and certain exclusive rights to
commercialize Rhucin® (recombinant human C1 inhibitor) in the United States,
Canada and Mexico (the Territory) for the treatment of acute attacks of hereditary angioedema
(the Initial Indication) and other future indications, as further described below.
License Agreement
Under the license agreement, Pharming granted the Company the non-exclusive right to develop
and manufacture and the exclusive right to commercialize licensed products in the Territory.
In partial consideration of the licenses granted under the license agreement, the Company paid
Pharming a $15.0 million upfront fee in September 2010 and will pay an additional $5.0 million
milestone upon FDA acceptance for filing of a
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Biologic License Application (BLA) for Rhucin. The Company may also pay Pharming additional
success-based clinical and commercial milestones, including upon achievement of certain aggregate
net sales levels of Rhucin. As consideration for the licenses and rights granted under the license
agreement, and as compensation for the commercial supply of Rhucin by Pharming pursuant to the
supply agreement described below, the Company will pay Pharming a tiered supply price, based on a
percentage of net sales of Rhucin, subject to reduction in certain events. The Company recorded
license fee expense of $15.0 million in the three months ended September 30, 2010, representing the
upfront fee paid in September 2010.
Under the license agreement, Pharming is responsible for conducting clinical development of
Rhucin for the Initial Indication and all costs of such clinical development. Pharming will also
be responsible for preparing and filing the BLA for the Initial Indication in the U.S. The Company
will be responsible for seeking regulatory approval for the Initial Indication for each other
country in the Territory.
The Company and Pharming will share responsibility for conducting clinical development of
Rhucin for the treatment or prevention of renal transplantation rejection in humans (the
Transplant Indication), and will equally share the costs of such clinical development. The
Company will be responsible for preparing and filing the drug approval application for the
Transplant Indication throughout the Territory and for seeking regulatory approval to market and
sell Rhucin for such indication.
Either party may propose the development of Rhucin for an additional indication in the
Territory, to which the other party may opt-in.
The Company has agreed to use commercially reasonable efforts to promote, sell and distribute
Rhucin in the Territory, including launching Rhucin for the Initial Indication in the U.S. within
120 days following receipt of U.S. regulatory approval. During the term of the license agreement,
Pharming has agreed not to, and to insure that its distributors and dealers do not, sell Rhucin to
any customer in the Territory. Both parties have agreed not to manufacture, develop, promote,
market or distribute any other forms of C1 inhibitors for use in the Territory during the term.
Supply Agreement
Under the supply agreement, Pharming will manufacture and exclusively supply to the Company,
and the Company will exclusively order from Pharming, Rhucin at the supply price for
commercialization activities. Pharming will manufacture and supply recombinant human C1 inhibitor
products to the Company at cost for development activities.
Pharming will maintain any drug master files and the Company will have a right to reference
any such drug master files for the purpose of obtaining regulatory approval of Rhucin in the
Territory. Pharming will be responsible for obtaining and maintaining all manufacturing approvals
and related costs.
In the event of a supply failure, the Company has certain step-in rights to cure any payment
defaults under Pharmings third party manufacturing agreements or to assume sole responsibility for
manufacturing and supply. In connection with the supply agreement, the Company entered into a
separate agreement with Pharming under which the Company was granted certain property interests to
manufacturing related intellectual property and access to manufacturing materials and know-how, in
order to assume such manufacturing and supply responsibilities under certain circumstances.
14. Acquisition of Covella Pharmaceuticals, Inc.
Merger Agreement
In September 2010, the Company acquired the worldwide rights to SAN-300 through the
acquisition of Covella pursuant to the terms of the Merger Agreement with Covella, Lawrence C.
Fritz, as the stockholder representative, and Merger Sub. In connection with the consummation of
the transactions contemplated by the Merger Agreement, Merger Sub merged with Covella, and Covella
survived as a wholly owned subsidiary of the Company.
Prior to the Companys acquisition of Covella, Covella was a privately held company owned by a
small number of stockholders, including Westfield Capital Management Company, LP (Westfield),
among others. As of March 31, 2010, based on disclosure in the Companys Definitive Proxy
Statement filed on April 23, 2010, Westfield was a beneficial owner
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of 12% of the Companys common stock. Westfield owned approximately 3.5% of the outstanding
capital stock of Covella prior to the acquisition by the Company. In addition to its portion of
the merger consideration, Westfield also received $600,000 as repayment of debt owed by Covella.
Under the terms of the Merger Agreement, the Company paid to the Covella stockholders upfront
consideration of $862,000 in cash, including the $600,000 Westfield repayment. The Company also
issued to the Covella stockholders 181,342 unregistered shares of the Companys common stock
(subject to a 12-month lock-up period). The Company assumed responsibility for payment of
approximately $467,000 in Covella liabilities and will make clinical and regulatory milestone
payments based on success in developing product candidates in addition to a royalty on net sales of
any commercial products resulting from the SAN-300 technology. See contingent consideration
liability discussed below.
Both the Company and Covella agreed to customary representations, warranties and covenants in
the Merger Agreement. The Covella stockholders agreed to indemnify the Company for certain
matters, including breaches of representations and warranties and covenants included in the Merger
Agreement, up to a maximum specified amount and subject to other limitations. The Company agreed
to indemnify the Covella stockholders for certain matters, including breaches of representations,
warranties and covenants included in the Merger Agreement, up to a maximum specified amount and
subject to other limitations.
Amended License with Biogen
In connection with the Merger Agreement, the Company and Covella entered into an Amendment to
License Agreement dated September 10, 2010 with Biogen Idec MA Inc. (Biogen), amending an
existing license agreement dated January 22, 2009 between Covella and Biogen (the Amended
License). Under the terms of the Amended License, Biogen has granted Covella an exclusive,
worldwide license to patents and certain know-how and other intellectual property owned and
controlled by Biogen relating to the SAN-300 development program. Covella is required to use
commercially reasonable efforts to develop and commercialize at least one licensed product.
In connection with the execution of the Amended License, the Company paid to Biogen $50,000 in
cash and issued to Biogen 55,970 unregistered shares of the Companys common stock. In addition,
the Company is obligated to make clinical, regulatory and sales milestone payments to Biogen based
on success in developing and commercializing product candidates and will pay a royalty on net sales
of any products developed under the Amended License.
Under the Amended License, Biogen has a right of first offer to supply Covellas requirements
of licensed products and a right of negotiation in the event that the Company decides to sublicense
the right to commercialize a licensed product to a third party.
Purchase Price
The acquisition of Covella was accounted for using the acquisition method of accounting in
accordance with the revised authoritative guidance for business combinations and, accordingly, the
Company has included the results of operations of Covella in its consolidated statement of
operations from the date of acquisition. Neither separate financial statements nor pro forma
results of operations have been presented because the acquisition does not meet the qualitative or
quantitative materiality tests under Regulation S-X. Approximately $352,000 of costs associated
with the Companys acquisition of Covella has been included in selling, general and administrative
expenses for the nine months ended September 30, 2010.
The estimated purchase price is determined as follows (in thousands):
Cash paid on closing date |
$ | 862 | ||
Fair value of Santarus common stock issued to sellers on closing date |
355 | |||
Contingent consideration liability |
1,900 | |||
$ | 3,117 | |||
In addition to cash payments, the Company issued to the Covella stockholders 181,342
unregistered shares of the Companys common stock (subject to a 12-month lock-up period to expire
on September 10, 2011). The total fair value of the common stock issued was approximately
$355,000. The Company estimated a fair value of $1.9564 per share, which reflects a discount of
approximately 27% on the $2.68 closing price of its common stock on September 9, 2010. For a
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publicly traded stock, the fair value of a single unrestricted share of common stock is
assumed to be equivalent to the quoted market price on the valuation date. However, since the
181,342 shares of common stock issued to the Covella stockholders are subject to a 12-month trading
restriction, the Company calculated a discount for lack of marketability (DLOM) applicable to the
quoted market price. The Company calculated the DLOM associated with the contractual restriction
using the Black-Scholes valuation model for a hypothetical put option with the following
assumptions: life of the option of one year; risk-free interest rate of 0.27%; volatility of 70%;
and dividend rate of 0%.
The purchase price, including the value of the consideration transferred, and the purchase
price allocation for the acquisition of Covella set forth below are preliminary and subject to
change as more detailed analysis is completed and additional information with respect to the fair
value of the assets and liabilities acquired becomes available. The preliminary allocation of the
purchase price for the acquisition of Covella is as follows (in thousands):
Cash |
$ | 20 | ||
Intangible assets |
1,100 | |||
Goodwill |
2,904 | |||
Liabilities assumed |
(467 | ) | ||
Deferred tax liabilities (long-term) |
(440 | ) | ||
$ | 3,117 | |||
Intangible assets acquired consisted of in-process research and development (IPR&D)
determined to be approximately $1.1 million. The fair value of the IPR&D has been determined using
the multi-period excess earnings method which is a form of the discounted cash flow model. The
approach was based on probability-adjusted projected net cash flows attributable to the IPR&D
discounted using a weighted average cost of capital. The IPR&D is considered an indefinite-lived
intangible asset until the completion or abandonment of the associated research and development
efforts. The IPR&D asset will be subject to impairment testing and will not be amortized until the
development process is complete.
Contingent Consideration Liability
Under the terms of the Merger Agreement, the Company is obligated to make clinical and
regulatory milestone payments based on success in developing product candidates in addition to a
royalty on net sales of any commercial products resulting from the SAN-300 technology. The fair
value of the contingent consideration at the closing date was determined to be approximately $1.9
million using a probability-weighted discounted cash flow. The key assumptions in applying this
approach were the discount rate and the probability assigned to the milestone or royalty being
achieved. Management will remeasure the fair value of the contingent consideration at each
reporting period, with any change in its fair value being recorded in the current periods
statement of operations. Changes in the fair value may result from either the passage of time or
events occurring after the acquisition date, such as changes in the estimate of the probability of
achieving the milestone or royalty. The fair value of the contingent consideration is included in
long-term liabilities in the Companys consolidated balance sheet at September 30, 2010.
15. 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 34%, or 113 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 provided 60-day Worker Adjustment and
Retraining Notification Act notices to the affected employees to inform them that their employment
would end at the conclusion of the 60-day period. The Company began notifying affected employees
in July 2010 and substantially completed its restructuring plan in the third quarter of 2010.
The Company offered 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 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 was
contingent upon such employees execution of a separation agreement, which includes a general
release of claims
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against the Company. As a result of the restructuring, the Company recorded a
restructuring charge of $7.3 million in the
three months ended September 30, 2010, which is included on a separate line in the Companys
consolidated statement of operations. The Company does not expect to incur significant additional
charges. The balance of the liability for restructuring charges is included in other current
liabilities in the Companys consolidated balance sheet as of September 30, 2010, and the
components are summarized in the following table (in thousands):
Three Months Ended | ||||||||||||||||||||
September 30, 2010 | ||||||||||||||||||||
Balance | Balance | |||||||||||||||||||
July 1, | Charges to | Cash | Non-Cash | September 30, | ||||||||||||||||
2010 | Expense | Payments | Charges | 2010 | ||||||||||||||||
One-time termination
benefits |
$ | | $ | 5,168 | $ | (4,608 | ) | $ | | $ | 560 | |||||||||
Contract termination costs |
| 1,738 | (1,027 | ) | | 711 | ||||||||||||||
Stock-based compensation |
| 352 | | (352 | ) | | ||||||||||||||
Total |
$ | | $ | 7,258 | $ | (5,635 | ) | $ | (352 | ) | $ | 1,271 | ||||||||
16. Contingencies
Zegerid and Zegerid OTC 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) were invalid due to obviousness. These patents
were the subject of lawsuits the Company filed in 2007 in response to abbreviated new drug
applications (ANDAs) filed by Par with the 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 September 2010, Schering-Plough HealthCare Products, Inc., a subsidiary of Merck & Co.,
Inc. (Schering-Plough) filed lawsuits in the U.S. District Court for the District of New Jersey
against each of Par and Perrigo Research and Development Company (Perrigo) for infringement of
the patents listed in the Orange Book for Zegerid OTC® (U.S. Patent Nos.
6,489,346; 6,645,988; 6,699,885; and 7,399,772). The Company and the University of Missouri,
licensors of the listed patents, are joined in the lawsuits as co-plaintiffs. Par and Perrigo had
filed ANDAs with the FDA regarding each companys intent to market a generic version of Zegerid OTC
prior to the expiration of the listed patents. The parties in each of these lawsuits have agreed
to stay the court proceedings until the earlier of the outcome of the pending appeal related to the
Zegerid prescription product litigation or receipt of tentative regulatory approval for the
proposed generic Zegerid OTC products. The Company is not able to predict the timing or outcome of
these lawsuits.
Any adverse outcome in the litigation described above would adversely impact the Companys
Zegerid and Zegerid OTC business, including the amount of, or the Companys ability to receive,
milestone payments and royalties under its agreement with Schering-Plough. For example, the
royalties payable to the Company under its 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. The ruling may also negatively impact the patent
protection for the products being commercialized pursuant to the Companys ex-US licenses with
GlaxoSmithKline, plc (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 these litigation matters are 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.
Glumetza Patent Litigation
In November 2009, Depomed filed a lawsuit in the U.S. 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 following patents listed in the Orange Book for
Glumetza: U.S. Patent Nos. 6,340,475; 6,635,280; and 6,488,962. The
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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 asserted 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 asserted 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 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.
Fleet 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 U.S.
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.
In July 2010, a global settlement was entered in related multi-district litigation involving
Fleet. Plaintiffs counsel has most recently indicated that the plaintiffs in the cases were
opting in to the global settlement. Despite the decision to opt in to the global settlement,
the plaintiffs continue to prosecute their cases, including through the filing of responses to the
pending motions to dismiss.
In October 2010, the Company filed motions to enforce the settlement agreement, asserting that
as part of the global settlement, all of plaintiffs claims are extinguished as against Fleet and
all of Fleets indemnitees, including Santarus. Plaintiffs have filed their responses, asserting
that the global settlement does not release the Company for alleged independent acts and willful
misconduct.
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 the Companys 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 the Companys management, which could
have a material adverse effect on the Company.
17. Subsequent Event
Under the Companys license agreement, stock issuance agreement and registration rights
agreement with Cosmo Technologies Limited (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.
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Based upon the results of the U.S. and European Phase III
clinical studies for budesonide MMX, Cosmo earned a $3.0 million clinical milestone in November
2010. The milestone may be paid in cash or through issuance of additional shares of the Companys
common stock, at Cosmos option, subject to certain limitations.
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 consolidated 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.
Overview
We are a specialty biopharmaceutical company focused on acquiring, developing and
commercializing proprietary products that address the needs of patients treated by physician
specialists.
Our commercial organization currently promotes Glumetza® (metformin hydrochloride
extended release tablets) in the U.S. We commenced promotion of Glumetza in October 2008 under a
promotion agreement with Depomed, Inc., or Depomed. We plan to launch Cycloset®
(bromocriptine mesylate) tablets in the U.S. in November 2010 under a distribution and license
agreement with S2 Therapeutics, Inc., or S2, and VeroScience, LLC, or VeroScience. Both Glumetza
and Cycloset are prescription products indicated to improve glycemic control in adult patients with
type 2 diabetes.
In addition to our commercial products, we are focused on progressing the development of the
following development product candidates:
| budesonide MMX®, an oral corticosteroid that is currently being investigated in a phase III clinical program for the induction of remission of mild or moderate active ulcerative colitis, which we have rights to under a strategic collaboration with Cosmo Technologies Limited, or Cosmo; | ||
| rifamycin SV MMX®, a broad spectrum, semi-synthetic antibiotic that is currently being investigated in a phase III clinical program in patients with travelers diarrhea, which we have rights to under a strategic collaboration with Cosmo; | ||
| Rhucin® (recombinant human C1 inhibitor), is being investigated in a phase III clinical program for treatment of acute attacks of hereditary angioedema, and a phase II proof of concept study is planned in early antibody mediated rejection, or AMR, in renal transplant patients, which we have rights to under license and supply agreements with Pharming Group NV, or Pharming; and | ||
| SAN-300, an early stage anti-VLA-1 antibody development compound that we expect to develop for the treatment of rheumatoid arthritis, commencing with a phase I clinical study, which we have rights to under a license agreement with Biogen Idec MA, or Biogen, and in connection with our acquisition of Covella Pharmaceuticals, Inc., or Covella. |
Prior to June 30, 2010, our commercial organization promoted Zegerid®
(omeprazole/sodium bicarbonate) prescription products, which are immediate-release formulations of
the proton pump inhibitor, or PPI, omeprazole. Following an April 2010 lower court decision that
the patents covering our Zegerid products were invalid due to obviousness and in connection with
the launch of a generic version of the products, we determined in late June 2010 to cease promotion
of the Zegerid products and implement a corporate restructuring, including a workforce reduction.
At this same time, we also launched an authorized generic version of our Zegerid Capsules product
under a distribution and supply agreement with Prasco LLC, or Prasco.
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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 U.S. and Canada. We have also licensed 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). In addition, we have licensed
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.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on
our consolidated 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.
Principles of Consolidation
Our unaudited interim consolidated financial statements include the accounts of Santarus and
its wholly owned subsidiary, Covella. We do not have any interest in variable interest entities.
All material intercompany transactions and balances have been eliminated in consolidation.
In September 2010, we acquired the worldwide rights to SAN-300 through the acquisition of
Covella pursuant to the terms of an Agreement and Plan of Merger, or the Merger Agreement, with
Covella, Lawrence C. Fritz, as the stockholder representative, and SAN Acquisition Corp., our
wholly owned subsidiary, or Merger Sub. In connection with the consummation of the transactions
contemplated by the Merger Agreement, Merger Sub merged with Covella, and Covella survived as our
wholly owned subsidiary.
Business Combinations
We accounted for the acquisition of Covella in accordance with the revised authoritative
guidance for business combinations. This guidance establishes principles and requirements for
recognizing and measuring the total consideration transferred to and the assets acquired and
liabilities assumed in the acquired target in a business combination. The consideration paid to
acquire Covella was required to be measured at fair value and included cash consideration, the
issuance of our common stock and contingent consideration, which includes our obligation to make
clinical and regulatory milestone payments based on success in developing product candidates in
addition to a royalty on net sales of any commercial products resulting from the SAN-300
technology. After the total consideration transferred was calculated by determining the fair value
of the contingent consideration plus the upfront cash and stock consideration, we assigned the
purchase price of Covella to the fair value of the assets acquired and liabilities assumed. This
allocation of the purchase price resulted in recognition of intangible assets related to in-process
research and development, or IPR&D, and goodwill. The determination and allocation of the
consideration transferred requires us to make significant estimates and assumptions, especially at
the acquisition date with respect to the fair value of the contingent consideration. The key
assumptions in determining the fair value were the discount rate and the probability assigned to
the milestone or royalty being achieved. We will remeasure the fair value of the contingent
consideration at each reporting period, with any change in its fair value being recorded in the
current periods statement of operations. Changes in the fair value may result from either the
passage of time or events occurring after the acquisition date, such as changes in the estimate of
the probability of achieving the milestone or royalty.
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Goodwill and Intangible Assets
Goodwill represents the excess of the cost over the fair value of net assets acquired from
business combinations. Our intangible assets are comprised primarily of acquired IPR&D and license
agreements. We periodically assess the carrying value of our goodwill and intangible assets, which
requires us to make assumptions and judgments regarding the future cash flows of these assets. The
assets are considered to be impaired if we determine that the carrying value may not be recoverable
based upon our assessment of the following events or changes in circumstances:
| the assets ability to generate income from operations and positive cash flow in future periods; | ||
| loss of legal ownership or title to the asset; | ||
| significant changes in our strategic business objectives and utilization of the asset(s); and | ||
| the impact of significant negative industry, regulatory or economic trends. |
Goodwill is not amortized and IPR&D will not be amortized until the related development
process is complete. License agreements and other intangible assets are amortized over their
estimated useful lives. If the assets are considered to be impaired, the impairment we recognize
is the amount by which the carrying value of the assets exceeds the fair value of the assets. Fair
value is determined by a combination of third-party sources and forecasted discounted cash flows.
In addition, we base the useful lives and related amortization expense on our estimate of the
period that the assets will generate revenues or otherwise be used. We also periodically review
the lives assigned to our intangible assets to ensure that our initial estimates do not exceed any
revised estimated periods from which we expect to realize cash flows from the technologies. A
change in any of the above-mentioned factors or estimates could result in an impairment charge
which could negatively impact our results of operations. We have not recognized any impairment
charges on our goodwill or intangible assets through September 30, 2010.
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 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
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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 $13.5 million as of September 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 $19.0 million as of September
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 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. 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 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 are 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
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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 Zegerid Capsules and the related authorized generic
product and Zegerid Powder for Oral Suspension. Also included in inventories are product samples
of the Glumetza products which we purchase from Depomed under our promotion agreement. As of
September 30, 2010, inventories also included raw materials to be used in the manufacture of
Cycloset tablets, which we plan to launch in November 2010. 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 nine months ended
September 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 $355,000 for the nine months ended
September 30, 2009 related to stock options containing performance-based vesting. There was no
compensation expense associated with these options in the three and nine months ended September 30,
2010.
The following table includes stock-based compensation recognized in our consolidated
statements of operations (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Cost of product sales |
$ | 52 | $ | 30 | $ | 107 | $ | 82 | ||||||||
Research and development |
190 | 135 | 527 | 464 | ||||||||||||
Selling, general and administrative |
1,071 | 941 | 3,167 | 2,948 | ||||||||||||
Restructuring charges |
352 | | 352 | | ||||||||||||
Total |
$ | 1,665 | $ | 1,106 | $ | 4,153 | $ | 3,494 | ||||||||
As of September 30, 2010, total unrecognized compensation cost related to stock options was
approximately $8.7 million, and the weighted average period over which it was expected to be
recognized was 2.8 years.
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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 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 September 30, 2010 and 2009
Product Sales, Net. Product sales, net were $11.0 million for the three months ended
September 30, 2010 and $31.5 million for the three months ended September 30, 2009 and consisted of
sales of Zegerid Capsules and Zegerid Powder for Oral Suspension as well as sales of the authorized
generic version of Zegerid Capsules under our distribution and supply agreement with Prasco. The
$20.5 million decrease in product sales, net was comprised of approximately $21.1 million related
to a decrease in the sales volume of our Zegerid products, including the related authorized generic
products, offset in part by approximately $631,000 related to increased average selling prices.
These decreases in volume resulted from Par Pharmaceutical, Inc.s, or Pars, commencement of its
commercial sale of its generic version of our Zegerid Capsules prescription products in late June
2010.
Promotion Revenue. Promotion revenue was $6.8 million for the three months ended September
30, 2010 and $6.8 million for the three months ended September 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 September 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 U.S. Food and Drug Administration,
or FDA. Depomed currently expects to resume Glumetza 500 mg product shipments in December 2010 or
early 2011.
Royalty Revenue. Royalty revenue was $311,000 for the three months ended September 30, 2010
and was comprised primarily 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 September 30, 2009.
Other License Revenue. There was no other license revenue for the three months ended
September 30, 2010, and other license revenue was $1.2 million for the three months ended September
30, 2009. For the three months ended September 30, 2009, license revenue was comprised of the
amortization of the $15.0 million upfront payment we received from Schering-Plough in November
2006. 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 $1.2 million for the three months ended
September 30, 2010 and $2.0 million for the three months ended September 30, 2009, or approximately
11% and 6% 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
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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 certain fixed
costs being applied to decreased sales volumes.
License Fees and Royalties. License fees and royalties consist of royalties due to the
University of Missouri based upon net product sales of our Zegerid prescription products, sales of
Zegerid OTC by Schering-Plough under our license agreement, and products sold by GSK under our
license agreement. In addition, license fees and royalties include milestone payments and upfront
fees expensed or amortized under license agreements.
License fees and royalties were $16.0 million for the three months ended September 30, 2010
and $2.0 million for the three months ended September 30, 2009. The $14.0 million increase in
license fees and royalties was primarily due to the $15.0 million upfront fee we paid to Pharming
in connection with the license and supply agreements we entered into in September 2010. The
increase also included $200,000 paid to Biogen under our license agreement and license fee
amortization from the $5.0 million upfront fee we are paying to S2 and VeroScience under a
distribution and license agreement we entered into in September 2010. The $5.0 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 early 2015. The increase in license fees and
royalties was offset in part by a decrease in royalties due to the University of Missouri due to
lower sales of our Zegerid prescription products.
Research and Development. Research and development expenses were $4.4 million for the three
months ended September 30, 2010 and $3.4 million for the three months ended September 30, 2009.
The $1.0 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 and start-up costs
associated with our phase II proof of concept study evaluating Rhucin in early AMR in renal
transplant patients.
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 a new drug application, or 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. We have acquired rights to Rhucin under license and supply agreements with Pharming.
Rhucin is being investigated in a phase III clinical program for the treatment of acute attacks of
hereditary angioedema which is currently being funded by Pharming. A phase II proof of concept
study is planned in early AMR in renal transplant patients. We are responsible for one-half of the
costs of this phase II study. We have acquired the exclusive worldwide rights to SAN-300 through
the acquisition of Covella and a related license agreement with Biogen Idec MA, or Biogen. SAN-300
is an inhibitor of the integrin VLA-1 and has shown activity in multiple preclinical models of
inflammatory and autoimmune diseases. We believe that SAN-300 may have potential application as a
drug candidate in multiple inflammatory and autoimmune diseases, including rheumatoid arthritis,
inflammatory bowel disease, psoriasis and organ transplantation. We expect to begin a
dose-escalation Phase I clinical study 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 and the development of Rhucin and
SAN-300, we anticipate that we will make determinations as to which development
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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 $15.0
million for the three months ended September 30, 2010 and $26.3 million for the three months ended
September 30, 2009. The $11.3 million decrease in our selling, general and administrative expenses
was primarily attributable to a decrease in compensation, benefits and related employee costs and a
decrease in Zegerid promotional spending related to our decision to cease promotion of our Zegerid
prescription products and implement a corporate restructuring in the third quarter of 2010. The
decrease in our selling, general and administrative expenses was also attributable to a decrease in
legal fees associated with the patent infringement litigation against Par.
Restructuring Charges. As a result of our restructuring plan, we recorded a restructuring
charge of $7.3 million in the three months ended September 30, 2010, consisting of $5.2 million in
one-time termination benefits including pay during the Worker Adjustment and Retraining
Notification Act, or WARN, notice period in lieu of work, severance and healthcare benefits, $1.7
million in contract termination costs and $352,000 of non-cash stock-based compensation. Our
decision to cease promotion of our Zegerid prescription products and implement a corporate
restructuring resulted from Pars decision to launch a generic version of our Zegerid prescription
products in late June 2010. The corporate restructuring included a workforce reduction of
approximately 34%, or 113 employees, in our commercial organization and certain other operations.
We also determined to significantly reduce the number of contract sales representatives that we
utilize. We provided 60-day WARN notices to the affected employees to inform them that their
employment would end at the conclusion of the 60-day period. We began notifying affected employees
in July 2010 and substantially completed our restructuring plan in the third quarter of 2010.
We offered 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, we 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 was contingent upon such
employees execution of a separation agreement, which includes a general release of claims against
us.
Interest Income. Interest income was $22,000 for the three months ended September 30, 2010
and $25,000 for the three months ended September 30, 2009.
Interest Expense. Interest expense was $116,000 for the three months ended September 30, 2010
and $117,000 for the three months ended September 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 $(191,000) for the three months ended September 30,
2010 and $223,000 for the three months ended September 30, 2009. We generated an estimated pre-tax
loss for the three months ended September 30, 2010 as compared to estimated pre-tax income for the
three months ended September 30, 2009.
Comparison of Nine Months Ended September 30, 2010 and 2009
Product Sales, Net. Product sales, net were $72.8 million for the nine months ended September
30, 2010 and $87.0 million for the nine months ended September 30, 2009 and consisted of sales of
Zegerid Capsules and Zegerid Powder for Oral Suspension as well as sales of the authorized generic
version of our Zegerid Capsules under our distribution and supply agreement with Prasco. The $14.2
million decrease in product sales, net was comprised of approximately $19.0 million related to a
decrease in the sales volume of our Zegerid products, including the related authorized generic
products, offset in part by approximately $4.8 million related to increased average selling prices.
These decreases in volume resulted from Pars commencement of its commercial sale of its generic
version of our Zegerid Capsules prescription products in late June 2010.
Promotion Revenue. Promotion revenue was $23.7 million for the nine months ended September
30, 2010 and $16.9 million for the nine months ended September 30, 2009 and was comprised primarily
of fees earned under our promotion agreement with Depomed related to the promotion of Glumetza
products.
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Royalty Revenue. Royalty revenue was $2.7 million for the nine months ended September 30,
2010 and was comprised primarily 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 nine months ended September 30, 2009.
Other License Revenue. Other license revenue was $245,000 for the nine months ended September
30, 2010 and $6.2 million for the nine months ended September 30, 2009. For the nine months ended
September 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 nine months ended September 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 $6.6 million for the nine months ended
September 30, 2010 and $6.0 million for the nine months ended September 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 nine months ended September 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 consist of royalties due to the
University of Missouri based upon net product sales of our Zegerid prescription products, sales of
Zegerid OTC by Schering-Plough under our license agreement and products sold by GSK under our
license agreement. In addition, license fees and royalties include milestone payments and upfront
fees expensed or amortized under license agreements. License fees and royalties were $21.3 million
for the nine months ended September 30, 2010 and $5.7 million for the nine months ended September
30, 2009. The $15.6 million increase in license fees and royalties was primarily due to the $15.0
million upfront fee we paid to Pharming in connection with the license and supply agreements we
entered into in September 2010. The increase in license fees and royalties was also attributable
to an increase in royalties due to the University of Missouri related to sales of Zegerid OTC by
Schering-Plough under our license agreement offset in part by lower sales of our Zegerid
prescription products.
Research and Development. Research and development expenses were $14.0 million for the nine
months ended September 30, 2010 and $9.8 million for the nine months ended September 30, 2009. The
$4.2 million increase in our research and development expenses was primarily attributable to the
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 the development of our product candidates under 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) NDA to the
FDA for our immediate-release omeprazole prescription product in a tablet formulation in the nine
months ended September 30, 2009. We have determined not to commercialize the tablet product at
this time.
Selling, General and Administrative. Selling, general and administrative expenses were $66.5
million for the nine months ended September 30, 2010 and $80.4 million for the nine months ended
September 30, 2009. The $13.9 million decrease in our selling, general and administrative expenses
was primarily attributable to a decrease in compensation, benefits and related employee costs and a
decrease in Zegerid promotional spending related to our decision to cease promotion of our Zegerid
prescription products and implement a corporate restructuring in the third quarter of 2010. The
decrease in our selling, general and administrative expenses was also attributable to a decrease in
legal fees associated with the patent infringement litigation against Par.
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Restructuring Charges. As a result of our restructuring plan, we recorded a restructuring
charge of $7.3 million in the nine months ended September 30, 2010, consisting of $5.2 million in
one-time termination benefits including pay during the WARN notice period in lieu of work,
severance and healthcare benefits, $1.7 million in contract termination costs and $352,000 of
non-cash stock-based compensation. We substantially completed our restructuring plan in the third
quarter of 2010 and do not expect to incur significant additional charges.
Interest Income. Interest income was $68,000 for the nine months ended September 30, 2010 and
$179,000 for the nine months ended September 30, 2009. The $111,000 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 $345,000 for the nine months ended September 30, 2010
and $345,000 for the nine months ended September 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 $65,000 for the nine months ended September 30,
2010 and $445,000 for the nine months ended September 30, 2009. We generated an estimated pre-tax
loss for the nine months ended September 30, 2010 as compared to estimated pre-tax income for the
nine months ended September 30, 2009.
Liquidity and Capital Resources
As of September 30, 2010, cash, cash equivalents and short-term investments were $65.1
million, compared to $93.9 million as of December 31, 2009, a decrease of $28.8 million. This net
decrease resulted from our net loss for the nine months ended September 30, 2010 which included the
$15.0 million upfront fee we paid to Pharming in connection with the license and supply agreements
we entered into in September 2010, adjusted for non-cash charges and changes in operating assets
and liabilities.
Net cash used in operating activities was $23.3 million for the nine months ended September
30, 2010 and net cash provided by operating activities $5.3 million for the nine months ended
September 30, 2009. The primary use of cash for the nine months ended September 30, 2010 resulted
from our net loss for the period, which included the $15.0 million upfront fee we paid to Pharming
in connection with the license and supply agreements we entered into in September 2010, adjusted
for non-cash charges, including $4.2 million in stock-based compensation and $1.5 million in
depreciation and amortization, and changes in operating assets and liabilities. Significant
working capital uses of cash for the nine months ended September 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, accrued rebates and other expenses accrued in 2009.
These working capital uses of cash for the nine months ended September 30, 2010 were offset in
part by decreases in inventories related to our reserves against on-hand inventories of our Zegerid
products, and decreases in accounts receivable resulting from our decision to cease promotion of
Zegerid and the launch of generic versions of prescription Zegerid Capsules. The primary source of
cash for the nine months ended September 30, 2009 resulted from our net income for the period
adjusted for non-cash charges, including $3.5 million in stock-based compensation and $1.6 million
in depreciation and amortization, and changes in operating assets and liabilities. Significant
working capital uses of cash for the nine months ended September 30, 2009 included decreases in
deferred revenue and increases in accounts receivable and prepaid expenses and other current
assets, offset in part by increases in the allowance for product returns and accounts payable and
accrued liabilities.
Net cash used in investing activities was $2.3 million for the nine months ended September 30,
2010 and net cash provided by investing activities was $850,000 for the nine months ended September
30, 2009. These activities included purchases and sales/maturities/redemptions of short-term
investments and purchases of property and equipment. For the nine months ended September 30, 2010,
net cash used in investing activities also included the $5.0 million upfront payment we made to S2
and VeroScience in connection with the acquisition of intangible assets and net cash payments of
$842,000 in connection with our acquisition of Covella.
Net cash provided by financing activities was $537,000 for the nine months ended September 30,
2010 and $447,000 for the nine months ended September 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.
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Contractual Obligations and Commitments
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 and Cycloset. We also are required to purchase commercial quantities of certain
active ingredients in our Zegerid and Cycloset products. At September 30, 2010, we had finished
goods and raw materials inventory purchase commitments of approximately $1.9 million.
License Agreement with University of Missouri
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.
Promotion Agreement with Depomed
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 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.
In October 2010, we entered into a letter agreement with Depomed for matters related to the
Glumetza 500 mg recall and resupply activities. Pursuant to the letter agreement, we and Depomed,
among other matters, agreed: (i) to work together on establishing a mutually agreeable resupply
plan for Glumetza 500 mg and to share responsibility for any potential 2,4,6-tribromoanisole, or
TBA-related recall and third party costs arising out of the resupply efforts in the future; (ii)
upon a mutual release of potential claims resulting from the recall and associated interruption to
supply; (iii) on the construction of provisions of the contract related to Glumetza 500 mg
inventory written off in connection with the recall, such that certain inventory write-offs are
excluded from the gross margin calculation; (iv) on reimbursement of our out-of-pocket recall costs
incurred to date (including marketing programs directly related to the resupply of Glumetza 500
mg); (v) on a reduction in our minimum sales force expense obligation for 2011 and 2012, and that a
minimum number of first position detail calls will be directed to certain targeted physicians in
each of those years; (vi) that, for purposes of determining whether 2010 Glumetza net product sales
trigger the $3.0 million milestone that is payable when annual net product sales exceed $50.0
million, 2010 will be considered the 13-month period ending January 31, 2011, and that a reduction
in our marketing expense obligation for 2011 and 2012 applicable if 2010 annual net product sales
are less than $50 million will apply even in the event 2010 annual net product sales (for the
12-month period ending December 31, 2010) exceed $50 million; and (vii) to an extension of the
period during which Depomed may elect to co-promote Glumetza to obstetricians and gynecologists
through July 21, 2013.
License Agreement with Cosmo
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 a $3.0 million
milestone payment that Cosmo is entitled to receive based on the results of the U.S. and European
Phase III clinical studies for budesonide MMX. The milestones may be paid in cash or through
issuance of additional shares of our common stock,
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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.
Distribution and License Agreement with S2 and VeroScience
Under the terms of our distribution and license agreement with S2 and VeroScience entered into
in September 2010, we are responsible for paying a product royalty to S2 and VeroScience of 35% of
the gross margin associated with net sales of Cycloset up to $100 million of cumulative total gross
margin, increasing to 40% thereafter. Gross margin is defined as net sales less cost of goods
sold. In the event net sales of Cycloset exceed $100 million in a calendar year, we will pay an
additional 3% of the gross margin to S2 and VeroScience on incremental net sales over $100 million.
License Agreement and Supply Agreement with Pharming
Under our license agreement with Pharming entered into in September 2010, we are required to
pay a $5.0 million milestone to Pharming upon FDA acceptance of a Biologic License Application, or
BLA, for Rhucin. We may also pay Pharming additional success-based clinical and commercial
milestones, including upon achievement of certain aggregate net sales levels of Rhucin. As
consideration for the licenses and rights granted under the license agreement, and as compensation
for the commercial supply of Rhucin by Pharming pursuant to the supply agreement, we will pay
Pharming a tiered supply price, based on a percentage of net sales of Rhucin, subject to reduction
in certain events.
Acquisition of Covella
In connection with our acquisition of Covella, under the terms of the Merger Agreement, we are
obligated to make clinical and regulatory milestone payments based on success in developing product
candidates in addition to a royalty on net sales of any commercial products resulting from the
SAN-300 technology.
Amended License with Biogen
Under our amended license agreement with Biogen, we are obligated to make clinical, regulatory
and sales milestone payments to Biogen based on success in developing and commercializing product
candidates and will pay a royalty on net sales of any products developed under the amended license.
The following summarizes our long-term contractual obligations as of September 30, 2010,
excluding potential clinical, regulatory and commercial milestones and royalty obligations under
our agreements which are described above:
Payments Due by Period | ||||||||||||||||||||
Less than | One to | Four to | ||||||||||||||||||
Contractual Obligations | Total | One Year | Three Years | Five Years | Thereafter | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Operating leases |
$ | 3,513 | $ | 407 | $ | 3,106 | $ | | $ | | ||||||||||
Long-term debt |
11,268 | 115 | 11,153 | |||||||||||||||||
Other long-term contractual obligations |
108 | | 108 | | | |||||||||||||||
Total |
$ | 14,889 | $ | 522 | $ | 14,367 | $ | | $ | | ||||||||||
The amount and timing of cash requirements will depend on our ability to generate revenues
from Glumetza, our currently promoted commercial prescription product, and Cycloset, which we plan
to launch in November 2010, including our ability to establish and maintain commercial supply for
Cycloset and resolve the ongoing supply interruption for Glumetza 500 mg, and the impact on our
business of the ongoing generic competition for our Zegerid prescriptions products. 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.
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In connection with our corporate restructuring announced in late June 2010, we recorded
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 sustain 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 have retained approximately 110 sales representatives to promote both Cycloset and
Glumetza, this reduced commercial presence may not be adequate to grow sales of these type 2
diabetes products, 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 and use of our
line of credit will be sufficient to fund our current operations through at least the end of 2011;
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 through at least the end of 2011, we
may pursue raising additional funds in connection with licensing or acquisition of new products or
the continued development of our product candidates. Sources of additional funds may include funds
generated through equity and/or debt financings or through strategic collaborations or licensing
agreements.
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 September 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. On August 27, 2010, we entered
into an amendment with Comerica that extends the maturity date of the revolving line from July 11,
2011 to July 11, 2013. Amounts borrowed under the loan agreement may be repaid and re-borrowed at
any time prior to July 11, 2013, and any outstanding principal drawn during the term of the loan
facility is due and payable on July 11, 2013. 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.
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We cannot be certain that our existing cash and marketable securities resources and use of our
line of credit 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.
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 September 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.
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: our
ability to generate revenues from Glumetza® (metformin hydrochloride extended release
tablets), our currently promoted commercial product, and Cycloset® (bromocriptine
mesylate) tablets, which we plan to launch in November 2010, including our ability to establish and
maintain commercial supply for Cycloset and resolve the ongoing supply interruption for Glumetza
500 mg; our ability to successfully advance the development of, obtain regulatory approval for and
ultimately commercialize, our development product candidates budesonide MMX®,
rifamycin SV MMX, Rhucin® (recombinant human C1 inhibitor) and our anti-VLA-1 antibody;
the impact on our business and financial condition of the ongoing generic competition for our
Zegerid® (omeprazole/sodium bicarbonate) prescription products; our ability to achieve
continued progress under our strategic
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alliances, including our over-the-counter license agreement with Schering-Plough HealthCare
Products, Inc., a subsidiary of Merck & Co., Inc., our license agreement with Glaxo Group Limited,
an affiliate of GlaxoSmithKline plc, and our license agreement with Norgine B.V., and the potential
for early termination of, or reduced payments under, these agreements; the impact on our business
of significant change in a short period of time, and the risk that we may not be successful in
integrating our new products and product candidates into our existing operations or in realizing
the planned results from our recent corporate restructuring or our recently expanded product
portfolio and pipeline; our ability to maintain patent protection for our products, including the
difficulty in predicting the timing and outcome of the Glumetza, Zegerid and Zegerid
OTC® patent litigation; 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 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 September 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
September 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.
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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.
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
Zegerid® and Zegerid OTC® 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) were invalid due to obviousness. These patents were
the subject of lawsuits we filed in 2007 in response to abbreviated new drug applications, or
ANDAs, filed by Par Pharmaceutical, Inc., or 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 September 2010, Schering-Plough HealthCare Products, Inc., a subsidiary of Merck & Co.,
Inc., or Schering-Plough, filed lawsuits in the U.S. District Court for the District of New Jersey
against each of Par and Perrigo Research and Development Company, or Perrigo, for infringement of
the patents listed in the Orange Book for Zegerid OTC (U.S. Patent Nos. 6,489,346; 6,645,988;
6,699,885; and 7,399,772). We and the University of Missouri, licensors of the listed patents, are
joined in the lawsuits as co-plaintiffs. Par and Perrigo had filed ANDAs with the FDA regarding
each companys intent to market a generic version of Zegerid OTC prior to the expiration of the
listed patents. The parties in each of these lawsuits have agreed to stay the court proceedings
until the earlier of the outcome of the pending appeal related to the Zegerid prescription product
litigation or receipt of tentative regulatory approval for the proposed generic Zegerid OTC
products. We are not able to predict the timing or outcome of these lawsuits.
Any adverse outcome in the litigation described above would adversely impact our Zegerid and
Zegerid OTC business, including the amount of, or our ability to receive, milestone payments and
royalties under our agreement with Schering-Plough. For example, 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.
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 these litigation matters are 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.
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 following patents listed in
the Orange Book for Glumetza: U.S. Patent Nos. 6,340,475; 6,635,280; and 6,488,962. 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 asserted 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 asserted 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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Fleet 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.
In July 2010, a global settlement was entered in related multi-district litigation involving
Fleet. Plaintiffs counsel has most recently indicated that the plaintiffs in our cases were
opting in to the global settlement. Despite the decision to opt in to the global settlement,
the plaintiffs continue to prosecute their cases, including through the filing of responses to the
pending motions to dismiss.
In October 2010, we filed motions to enforce the settlement agreement, asserting that as part
of the global settlement, all of plaintiffs claims are extinguished as against Fleet and all of
Fleets indemnitees, including Santarus. Plaintiffs have filed their responses, asserting that the
global settlement does not release us for alleged independent acts and willful misconduct.
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.
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:
| our ability to generate revenues from Glumetza® (metformin hydrochloride extended release tablets), our currently promoted commercial product, and Cycloset® (bromocriptine mesylate) tablets, which we plan to launch in November 2010, both of which are targeted at type 2 diabetes, including our ability to establish and maintain commercial supply for Cycloset and resolve the ongoing supply interruption for Glumetza 500 mg; | ||
| our ability to successfully advance the development of, obtain regulatory approval for and ultimately commercialize, our development product candidates: budesonide MMX®, rifamycin SV MMX, Rhucin® (recombinant human C1 inhibitor) and SAN-300, our anti-VLA-1 antibody; | ||
| the impact on our business and financial condition of the ongoing generic competition for our Zegerid® (omeprazole/sodium bicarbonate) prescription products; |
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| 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., a subsidiary of Merck & Co., Inc., or Schering-Plough, 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 | ||
| the impact on our business of significant change in a short period of time, and the risk that we may not be successful in integrating our new products and product candidates into our existing operations or in realizing the planned results from our recent corporate restructuring or our recently expanded product portfolio and pipeline. |
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
We are dependent upon our ability to generate revenues from Glumetza, our currently promoted
commercial product, and Cycloset, which we plan to launch in November 2010, and we cannot be
certain that we will be successful.
The commercial success of Cycloset and Glumetza will depend on several factors, including:
| our ability to successfully launch Cycloset and generate and increase market demand for, and sales of, Cycloset and Glumetza through the promotional efforts of our field sales representatives; | ||
| the performance of third-party manufacturers and our ability to maintain commercial manufacturing arrangements necessary to meet commercial demand for the products; | ||
| the impact of the Glumetza 500 mg recall, voluntarily undertaken by our partner, Depomed Inc., or Depomed, in June 2010, and the related ongoing supply interruption of this dosage strength, as further described below; | ||
| our ability to accurately forecast manufacturing requirements and manage inventory levels for Cycloset during the launch period and in light of the products limited expiry dating; | ||
| the ability to maintain patent coverage for Cycloset and Glumetza, including whether a favorable outcome is obtained in the pending patent infringement lawsuit relating to Glumetza; | ||
| our ability to effectively market Cycloset and Glumetza in accordance with the requirements of the U.S. Food and Drug Administration, or FDA; | ||
| the occurrence of adverse side effects or inadequate therapeutic efficacy of the products, and any resulting product liability claims or additional product recalls; and | ||
| 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. |
In addition, in June 2010 we announced a corporate restructuring, including a substantial
workforce reduction in our commercial organization. Our reduced commercial presence may not be
adequate to support the launch of Cycloset and to promote both Cycloset and Glumetza.
We will promote the Cycloset products under a distribution and license agreement that we
entered into with S2 Therapeutics, Inc., or S2, and VeroScience, LLC, or VeroScience, and we
promote the Glumetza products under a promotion agreement that we entered into with Depomed, Inc.,
or Depomed. Our ability to successfully commercialize the Cycloset and Glumetza products is also
subject to risks associated with these agreements, including the potential for
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termination of the agreements and our reliance on VeroScience and Depomed to maintain
regulatory responsibility and patent protection for the products.
We cannot be certain that our marketing of the Cycloset and Glumetza products will result in
increased demand for, and sales of, those products. If we fail to successfully commercialize these
products, we may be unable to generate sufficient revenues to grow our business, and our business,
financial condition and results of operations would be adversely affected.
We cannot be certain about the extent to which our commercialization efforts will continue to be
negatively impacted by the recent recall of Glumetza 500 mg and the related ongoing supply
interruption.
In June 2010, Depomed temporarily suspended product shipments of Glumetza 500 mg to its
customers in connection with Depomeds voluntary, wholesaler-level recall of 52 lots of Glumetza
500 mg due to the presence of trace amounts of a chemical called 2,4,6-tribromoanisole, or TBA, in
bottles containing the 500 mg formulation of Glumetza.
Depomed has disclosed that its investigation into the Glumetza 500 mg supply chain is ongoing.
Based on the results of its investigation to date, Depomed has determined that additional actions
are required prior to resuming shipments of Glumetza 500 mg to customers. Depomed currently expects
to resume Glumetza 500 mg product shipments in December 2010 or early 2011.
However, if corrective actions taken in connection with Depomeds investigation into the
matter are not effective, we expect to experience a further period of supply disruption. If
Depomed determines not to establish resupply at the manufacturing facility currently utilized for
Glumetza 500 mg, Depomed may move all or part of the Glumetza 500 mg manufacturing operations to an
alternate site, which would likely result in a further extended delay before the product would be
available for commercial sale.
The 1000 mg formulation of Glumetza is not subject to the recall and is currently being sold
to customers. As previously disclosed by Depomed, Valeant Pharmaceuticals International, Inc.
(formerly Biovail), or Valeant, the sole supplier for the 1000 mg formulation of Glumetza, has
moved its Glumetza 1000 mg manufacturing operation to a Valeant site in Canada. Depomed received
approval from the FDA to begin manufacturing at that site in late October 2010.
The supply disruption for Glumetza 500 mg described above has adversely impacted Santarus
Glumetza promotion revenues in the second and third quarters of 2010 and is expected to adversely
affect Santarus Glumetza promotion revenues in the fourth quarter of 2010 and potentially beyond.
We have agreed to work together with Depomed on establishing the resupply plan for Glumetza
500 mg and to share responsibility for any potential TBA-related recall and third party costs
arising out of the resupply efforts in the future. If we and Depomed are unable to agree on a
resupply plan, the resupply of Glumetza 500 mg may be delayed.
Although we are coordinating with Depomed on the resupply efforts, we have limited control
over the recall and resupply activities, including with respect to Depomeds interaction with the
FDA, its contract manufacturer and the Glumetza wholesalers. In addition, other pharmaceutical
companies have encountered complex TBA-related supply issues and the issues may be difficult to
remediate. 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. Even if supply of Glumetza
500 mg is reestablished, many of the patients who were previously prescribed Glumetza may be taking
other prescription metformin products, and we may not be able to ever regain the lost share of the
business. We and Depomed may also suffer damage to our reputations and face product liability
claims.
Our development-stage product candidates will require significant development activities and
ultimately may not be approved by the 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 will not be permitted to market budesonide MMX, rifamycin SV MMX, Rhucin and our anti-VLA-1
antibody or any other development product candidates for which we may acquire rights in the U.S.
until we complete all necessary development activities and obtain regulatory approval from the FDA.
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To market a new drug in the U.S., we must submit to the FDA and obtain FDA approval of a
new drug application, or NDA, or a biologics license application, or BLA. An NDA or BLA must be
supported by extensive clinical and preclinical data, as well as extensive information regarding
chemistry, manufacturing and controls, or CMC, to demonstrate the safety and effectiveness of the
applicable product candidate. The FDAs regulatory review of NDAs and BLAs is becoming increasingly
focused on product safety attributes, and even if approved, product candidates may not be approved
for all indications requested and such approval may be subject to limitations on the indicated uses
for which the drug may be marketed, restricted distribution methods or other limitations.
Failure can occur at any stage of clinical testing. The clinical study process may fail to
demonstrate that our products are safe for humans or effective for their intended uses. Our
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. 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.
Regulatory approval of an NDA or a BLA is difficult, time-consuming and expensive to obtain.
The number and types of preclinical studies and clinical trials that will be required for NDA or
BLA approval varies depending on the product candidate, the disease or the condition that the
product candidate is designed to target and the regulations applicable to any particular product
candidate. Despite the time and expense associated with preclinical and clinical studies, failure
can occur at any stage, and we could encounter problems that cause us to repeat or perform
additional preclinical studies, CMC studies or clinical trials. The FDA and similar foreign
authorities could delay, limit or deny approval of a product candidate for many reasons, including
because they:
| may not deem a product candidate to be adequately safe and effective; | ||
| may not find the data from preclinical studies, CMC studies and clinical trials to be sufficient to support a claim of safety and efficacy; | ||
| may interpret data from preclinical studies, CMC studies and clinical trials significantly differently than we do; | ||
| may not approve the manufacturing processes or facilities utilized for our product candidates; | ||
| may conclude that we have not sufficiently demonstrated long-term stability of the formulation for which we are seeking marketing approval; | ||
| may change approval policies (including with respect to our product candidates class of drugs) or adopt new regulations; or | ||
| may not accept a submission due to, among other reasons, the content or formatting of the submission. |
Even if we believe that data collected from our preclinical studies, CMC studies and clinical
trials of our product candidates are promising and that our information and procedures regarding
CMC are sufficient, our data may not be sufficient to support marketing approval by the FDA or any
other U.S. or foreign regulatory authority, or regulatory interpretation of these data and
procedures may be unfavorable. In addition, before the FDA approves one of our product candidates,
the FDA may choose to conduct an inspection of one or more clinical or manufacturing sites. These
inspections may be conducted by the FDA both at U.S. 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 overseas sites and consequently delay FDA approval of our product candidates.
Our product development costs will increase and our product revenues will be delayed if we
experience delays or setbacks for any reason. In addition, such failures could cause us to abandon
a product candidate entirely. If we fail to take any current or future product candidate 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.
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To market any drugs outside of the U.S., we and current or future collaborators must comply
with numerous and varying regulatory requirements of other countries. Approval procedures vary
among countries and can involve additional product testing and additional administrative review
periods, including obtaining reimbursement approval in select markets. Regulatory approval in one
country does not ensure regulatory approval in another, but a failure or delay in obtaining
regulatory approval in one country may negatively impact the regulatory process in others.
In addition to the general development and regulatory risks described above, each of our
development product candidates is subject to the following additional risks:
Budesonide MMX
Budesonide MMX is being studied for the treatment of ulcerative colitis in a phase III
clinical program pursuant to our strategic collaboration with Cosmo Technologies Limited, or Cosmo.
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, one in the U.S. and India and the other in Europe, both of which are intended to support
U.S. regulatory approval. Additionally, 123 patients from the phase III induction studies were
enrolled 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. The extended
use study is expected to be completed in the second quarter of 2011.
We recently announced results from the U.S. and European phase III clinical studies. Although
the top-line results in both studies showed that budesonide MMX 9 mg taken once daily met the
primary endpoint of superiority to placebo in achieving clinical remission as measured by the
ulcerative colitis disease activity index score after eight weeks of treatment, we cannot be sure
that the FDA will concur with our clinical interpretation of the results, our statistical analysis
plan or the conduct of the studies. It is also possible that the extension study, which is
evaluating budesonide MMX 6 mg, will not be completed in a timely or successful manner or will not
provide adequate data to support approval of budesonide MMX 9 mg.
In addition, as a result of the study design, there may be a higher degree of uncertainty
regarding the potential outcome and FDAs analysis of the phase III clinical studies. The phase II
clinical study for the budesonide MMX product candidate was a pilot study and involved a different
design than the phase III clinical studies. Moreover, each of the two phase III clinical studies
was statistically powered at 80 percent, and the goal of the primary statistical analysis was to
evaluate the incidence of clinical remission after eight weeks using a two-sided p-value of 0.025
to assess whether a treatment difference in clinical remission was achieved between each of
budesonide MMX 9 mg and 6 mg versus placebo.
Assuming successful and timely completion of the extension study, we plan to submit an NDA for
budesonide MMX to the FDA in the second half of 2011. However, we cannot be certain that these
ongoing and planned clinical development programs will be successful or proceed in a timely manner.
In addition, the FDA may ultimately conclude that we have not demonstrated sufficient safety or
efficacy to support an NDA filing for this product candidate.
Rifamycin
In June 2010, we initiated a phase III clinical study evaluating rifamycin SV MMX in patients
with travelers diarrhea pursuant to our strategic collaboration with Cosmo, and we anticipate that
we will have top-line results from this study in the second half of 2011. Following timely and
successful completion of the first study, we plan to initiate a second phase III clinical study in
travelers diarrhea. It is anticipated that a 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.
Our ongoing phase III clinical study is being conducted in Mexico and Guatemala, and to date,
enrollment has been slower than anticipated due to a variety of circumstances, including a decrease
in tourism and student travel in these countries. Dr. Falk initiated its phase III clinical study
in October 2010. We cannot be certain that we and Dr. Falk will be able to complete our respective
planned studies in a timely and successful manner.
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Rhucin
We have licensed rights to develop and commercialize Rhucin pursuant to license and supply
agreements with Pharming Group NV, or Pharming. Pharming has conducted two randomized,
placebo-controlled, double-blind studies and four open-label studies with Rhucin for the treatment
of acute hereditary angioedema, or HAE, attacks. Both placebo-controlled clinical studies showed
statistically significant and clinically relevant improvement in time to beginning of relief of
symptoms at Rhucin dosage strengths of 50 U/kg and 100 U/kg compared to placebo.
Pharming plans to submit a BLA for Rhucin to the FDA in December 2010 or January 2011 and
believes that it has sufficient data to commence the FDA review process. At the same time, based on
prior discussions with the FDA, Pharming is planning to initiate an additional placebo-controlled,
double-blind clinical study with approximately 50 patients to provide additional data in support of
the 50 U/kg dose (with approximately 30 patients being exposed to the Rhucin 50 U/kg dose). Data
from the placebo-controlled study will also be used to provide prospective validation of the visual
analog scale used in measuring the clinical effects of Rhucin. An open-label extension of the
clinical study will be conducted to confirm the efficacy, safety and lack of immunogenicity of
Rhucin at 50 U/kg for the repeated treatment of acute HAE attacks.
We cannot be certain that Pharming will initiate and complete the additional planned HAE
clinical study in a timely or successful manner. We also cannot be certain that Pharming will
prepare and submit the BLA to the FDA in a timely manner. Even if Pharming submits the BLA as
planned, the FDA may refuse to accept the BLA for filing until the planned additional study is
completed or for other reasons. Alternatively, the FDA may accept the BLA for filing but provide
Pharming with a complete response letter requesting, among other things, additional clinical data.
In addition, Rhucin utilizes Pharmings transgenic technology platform for the production of
recombinant human proteins, and to date there has been only one other prescription product approved
by the FDA that utilizes transgenic technology. As a result, the Rhucin development product is
subject to risks related to the novelty of its technology platform as well as other general
development risks.
SAN-300 Anti-VLA-1 Antibody
We have acquired the exclusive worldwide rights to a humanized anti-VLA-1 antibody development
program, through the acquisition of Covella Pharmaceuticals, Inc., or Covella, and a related
license agreement with Biogen Idec MA Inc., or Biogen. SAN-300, our anti-VLA-1 antibody, is an
inhibitor of the integrin VLA-1 and has shown activity in multiple preclinical models of
inflammatory and autoimmune diseases. We believe that SAN-300 may have potential application as a
drug candidate in multiple inflammatory and autoimmune diseases, including rheumatoid arthritis,
inflammatory bowel disease, psoriasis and organ transplantation. We expect to begin a
dose-escalation Phase I clinical study in the first half of 2011, which study we expect would then
be completed in the first half of 2012.
Although the anti-VLA-1 antibody has shown activity in pre-clinical models, it is at a very
early stage of development, and has not yet been tested in any human clinical trials. In addition,
although Biogen has manufactured clinical trial material, we will need to successfully complete
stability and other testing activities prior to using the material in any clinical studies, and any
failure of the stability and testing activities would likely result in significant delays. As a
result, we cannot be certain that the initial clinical testing and any necessary additional
pre-clinical testing will be timely or successful, and there are many significant risks for this
early stage development program.
Our reliance on our strategic partners, 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, rifamycin SV MMX
and Rhucin product candidates will be supported in part by clinical studies being conducted by our
strategic partners in connection with CROs or other third parties. 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
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studies in a timely and satisfactory manner and in compliance with applicable U.S. and foreign
regulations, including the FDAs regulations relating to good clinical practices, 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 CROs or other third parties 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.
Due to Pars decision to launch its generic product, we expect future sales of our Zegerid brand
and authorized generic prescription products to be significantly less than historical sales, which
will continue to negatively impact our overall financial results.
In April 2010, the U.S. District Court for the District of Delaware ruled that certain patents
covering our Zegerid prescription products were invalid due to obviousness. These patents were the
subject of lawsuits we filed in 2007 in response to abbreviated new drug applications, or ANDAs,
filed by Par Pharmaceutical, Inc., or 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 late June 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.
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. Under our distribution and supply agreement, Prasco pays us a specified invoice supply
price and 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 another generic product, we would expect Prascos authorized generics
market share to be less than the previous market share for our Zegerid prescription products.
The launch of generic Zegerid Capsules prescription products has and will continue to
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 typically make generic alternatives 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 branded product.
Sales of our Zegerid brand and authorized generic products may also be negatively impacted by
general commercial risks, including risks relating to manufacturing and the occurrence of adverse
side effects or inadequate therapeutic efficacy and any resulting product liability claims or
product recalls. 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.
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, and we cannot
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be certain that we will receive any additional milestone payments or sales-based royalties
from these alliances. 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.
We cannot be certain that these strategic partners will continue to devote significant
resources to the sale or development of products under the agreements. 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.
See also Risks Related to Our Intellectual Property for a description of the Zegerid and
Zegerid OTC patent litigation and the potential impact on our strategic alliances.
Our business has undergone significant change in a short period of time, and we may not be
successful in integrating our new products and development product candidates into our existing
operations or in realizing the planned results from our recent corporate restructuring and recently
expanded product portfolio and pipeline.
In late June 2010, as a result of Pars decision to launch its generic version of our Zegerid
Capsules prescription product, we ceased promotion of our Zegerid prescription products and
announced a corporate restructuring, including a substantial workforce reduction. Shortly
thereafter, in September 2010, we completed several product related transactions, including:
| a distribution and license arrangement with S2 and VeroScience granting us exclusive rights to manufacture and commercialize Cycloset tablets, an approved product, in the U.S.; | ||
| an exclusive license and supply arrangement with Pharming, granting us the right to commercialize Rhucin, a late-stage development product, in North America; and | ||
| an acquisition of Covella, in which we obtained the exclusive worldwide rights to SAN-300, an early-stage development product. |
We will need to overcome significant challenges in order to realize any benefits or synergies from
these recent transactions. These challenges include the timely, efficient and successful execution
of a number of tasks, including the following:
| integrating Cycloset into our existing operations and successfully launching and commercializing Cycloset; | ||
| integrating our new development product candidates and successfully managing the development and regulatory approval processes; | ||
| coordinating with our strategic partners and licensors concerning the development, manufacturing, regulatory and intellectual property protection strategies for these new products and development product candidates; and | ||
| managing compliance with the in-license, acquisition, distribution, supply and other agreements associated with each of these transactions. |
In addition, we rely on our strategic partners and licensors for many aspects of our
development and commercialization activities, and we are subject to risks related to their
financial stability and solvency.
We may not succeed in addressing these risks or any other problems encountered in connection
with these recent transactions. These changes will require us to expend substantial resources on
the promotion of a new product and the management of development programs for additional product
candidates. Even if we successfully integrate these new programs into our operations, we will be
subject to the continuing risk of early termination of a number of license and similar agreements,
as well as the other risks described herein. We may be unable to generate sufficient revenues from
our commercial-stage products or our existing collaborations, and may be unsuccessful in raising
additional capital to continue to advance our development-stage products. The occurrence of any of
these risks could have a material adverse effect on our business, results of operations and
prospects.
In addition, other companies who have shifted focus to new products and additional development
programs have been the target of unsolicited public proposals from activist stockholders. The
public proposals can result in significant uncertainty for current and potential licensors,
suppliers and other business partners, and can cause these business partners
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to change or terminate their business relationships with the targeted company. Companies
targeted by these unsolicited proposals from activist stockholders may not be able to attract and
retain key personnel as a result of the related uncertainty. Moreover, the review and consideration
of an unsolicited proposal can be a significant distraction for management and employees, and may
require the expenditure of significant time, costs and other resources.
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 in the markets in which our commercial
products compete and development product candidates 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 with significantly greater expertise.
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. 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 organization.
If we are unable to compete successfully, our business, financial condition and results of
operations will be materially adversely affected.
Our Glumetza prescription products currently compete and our Cycloset prescription product will
compete with many other drug products.
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 use its
extended-release metformin technology in combination with sitagliptin, the active ingredient in
Mercks Januvia® product, and with canagliflozin, a sodium-glucose transporter-2, or
SGLT2, compound being developed by Janssen. 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.
The Cycloset prescription product will compete with many other products, including:
| dipeptidyl peptidase IV inhibitors, or DPP-4, products (such as Januvia® and Onglyza); | ||
| glucagon-like peptide 1, or GLP-1, receptor agonist products (such as Byetta® and Victoza®); | ||
| thiazolidinedione, or TZD, products (such as Avandia® and Actos®); | ||
| sulfonylureas products (such as Amaryl® and Glynase®); and | ||
| branded and generic metformin products. |
In addition, various companies are developing new products that may compete with the Cycloset
product in the future. For example, SGLT2 and new DPP-4 inhibitor products in development could
compete with Cycloset in treating type 2 diabetes patients in the future. In addition, companies
could develop combination products that include bromocriptine mesylate as one of the active
ingredients for the treatment of type 2 diabetes.
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
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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.
In addition, if approved, our development-stage products will compete with many other drug and
biologic products that are already entrenched in the marketplace, as well as face competition from
other product candidates currently under development.
We depend on a limited number of wholesaler customers for retail distribution of our prescription
products, and if we lose any of our significant wholesaler customers, our business could be harmed.
Our wholesaler customers for our commercial 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 28%, 23% and 17%, respectively, of our revenues for the nine months ended
September 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.
We do not currently have any manufacturing facilities and instead rely on third-party manufacturers
and our strategic partners for supply.
We rely on third-party manufacturers and our strategic partners 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 and strategic partners, including
with respect to regulatory compliance and quality assurance matters. Any delay or interruption of
supply related to a failure to comply with regulatory or other requirements would limit our ability
to sell 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.
In connection with the license of rights to Cycloset, we assumed a manufacturing services
agreement with Patheon, Inc., or Patheon, and, accordingly, we rely on a Patheon facility located
in Ohio as the sole third-party manufacturer for Cycloset.
For the Glumetza products, we rely on Depomed to oversee product manufacturing and supply. In
turn, Depomed relies on a Patheon facility located in Puerto Rico to manufacture Glumetza 500 mg
and a Valeant facility located in Canada to manufacture Glumetza 1000 mg.
For our Zegerid Capsules prescription product, we currently rely on Norwich Pharmaceuticals,
Inc., located in New York, as the sole third-party manufacturer of the brand and related authorized
generic product. In addition, we rely on a Patheon facility located in Canada for the supply of
Zegerid Powder for Oral Suspension.
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For our budesonide MMX and rifamycin SV MMX development product candidates, we rely on Cosmo,
located in Italy, to manufacture and supply all of our drug product requirements.
For our Rhucin development product candidate, we rely on Pharming to oversee product
manufacturing and supply. In turn, Pharming utilizes certain of its own facilities as well as
third-party manufacturing facilities for supply, all of which are located in Europe.
For our SAN-300 development product candidate, we plan to utilize clinical trial material
previously manufactured by Biogen Idec. In the future, Biogen Idec has a right of first offer to
supply our product requirements.
We and our strategic partners also rely in many cases on sole source suppliers for active
ingredients and other product materials and components. Any significant problem that our strategic
partners or the third-party manufacturers or suppliers experience could result in a delay or
interruption in the supply until the problem is cured or until we or our partners locate an
alternative source of supply. In addition, because these sole source manufacturers and suppliers in
many cases 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
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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.
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. 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 in 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 for
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 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
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civil penalties. Because of the breadth of these laws and the 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 a
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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For additional information regarding pending legal matters, please refer to Part II, Item 1,
Legal Proceedings.
If we are unable to retain key personnel, our business will suffer.
We are a small company and, as of September 30, 2010, had 207 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 announced a corporate
restructuring, including a significant workforce reduction in our commercial organization and other
selected operations. This corporate restructuring may result in attrition beyond our intended
reduction in workforce.
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.
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 continuing to seek 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 may not have sufficient 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.
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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.
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.
We have licensed the primary patent rights for each of our products and development product
candidates. Although we consult with our strategic partners and licensors concerning our licensed
patent rights, those partners remain primarily responsible for prosecution activities. We cannot
control the amount or timing of resources that our strategic partners and licensors devote to these
activities. 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 or that the
issued patents will be properly maintained. In addition, we are subject to the risk that one or
more of our licenses could be terminated and any loss of our license rights would negatively impact
our ability to develop, manufacture and commercialize our products and development product
candidates.
Cycloset
We have exclusive rights to manufacture and commercialize Cycloset in the U.S. under our
distribution and license agreement with S2 and VeroScience. Currently, there are five issued U.S.
patents that we believe provide coverage for Cycloset (U.S. Patent Nos. 5,468,755; 5,679,685;
5,716,957; 5,756,513; and 5,866,584), with expiration dates in 2012, 2014 and 2015.
Glumetza 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 four issued U.S. patents that we believe provide
coverage for the Glumetza 500 mg dose product (U.S. Patent Nos. 6,340,475; 6,635,280; 6,488,962;
and 6,723,340), with expiration dates in 2016, 2020 and 2021. There are two issued U.S. patents
that we believe provide coverage for the Glumetza 1000 mg dose product (U.S. Patent Nos. 6,488,962
and 7,780,987), with expiration dates in 2020 and 2025.
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 following patents listed in
the Orange Book for Glumetza: U.S. Patent Nos. 6,340,475; 6,635,280; and 6,488,962. The lawsuit
was filed in response to an ANDA and Paragraph IV certification filed with the
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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 asserted 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 asserted 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 we believe provide coverage for the budesonide MMX development product
candidate (U.S. Patent Nos. 7,431,943 and 7,410,651), each of which expires in 2020. There is one
issued U.S. patent that we believe provides coverage for the rifamycin SV MMX development product
candidate (U.S. Patent No. 7,431,943), which expires in June 2020.
Rhucin
We have exclusive rights to develop and commercialize the Rhucin development product candidate
in the U.S., Canada and Mexico under our license and supply agreements with Pharming. Currently,
there are two issued U.S. patents that we believe provide coverage for the Rhucin development
product candidate (U.S. Patent Nos. 7,067,713 and 7,544,853), which expire in 2022 and 2024.
Anti-VLA-1 Antibody
We acquired worldwide rights to develop and commercialize the anti-VLA-1 antibody development
product candidate in connection with our acquisition of Covella. Currently, there are three issued
U.S. patents that we believe provide coverage for the anti-VLA-1 development product candidate
(U.S. Patent Nos. 7,358,054; 7,462,353; and 6,955,810), which expire in 2020 and 2022.
Zegerid, 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. Five of these patents were asserted in our patent
litigation against Par and 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. In
addition to the issued U.S. patent coverage described above, several international patents have
been issued.
Zegerid and Zegerid OTC® 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) were invalid due to obviousness. These patents were
the subject of lawsuits we filed in 2007 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.
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In September 2010, Schering-Plough filed lawsuits in the U.S. District Court for the District
of New Jersey against each of Par and Perrigo Research and Development Company, or Perrigo, for
infringement of the patents listed in the Orange Book for Zegerid OTC (U.S. Patent Nos. 6,489,346;
6,645,988; 6,699,885; and 7,399,772). We and the University of Missouri, licensors of the listed
patents, are joined in the lawsuits as co-plaintiffs. Par and Perrigo had filed ANDAs with the FDA
regarding each companys intent to market a generic version of Zegerid OTC prior to the expiration
of the listed patents. The parties in each of these lawsuits have agreed to stay the court
proceedings until the earlier of the outcome of the pending appeal related to the Zegerid
prescription product litigation or receipt of tentative regulatory approval for the proposed
generic Zegerid OTC products. We are not able to predict the timing or outcome of these lawsuits.
Any adverse outcome in the litigation described above would adversely impact our Zegerid and
Zegerid OTC business, including the amount of, or our ability to receive, milestone payments and
royalties under our agreement with Schering-Plough. For example, 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.
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 these litigation matters are 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.
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
The trademarks and trademark applications we own and license are important to our success and
competitive position. 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. Any
third party patent infringement
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litigation may result in a loss of rights and would be time-consuming and costly. In
addition, we may be required to negotiate licenses with one or more third parties with terms that
may or may not be favorable to us.
Risks Related to Our Financial Results and Need for Financing
We may incur operating losses in the future and may not be able to return to profitability.
The extent of our future operating losses and our ability to return to 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 nine months ended September 30, 2010, we recognized $99.5 million in total revenues, and, as of
September 30, 2010, we had an accumulated deficit of $306.8 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 recorded
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 sustain 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, the marketing of the Cycloset products and the development of
our budesonide MMX, rifamycin SV MMX, Rhucin and SAN-300 product candidates and any other products
or development product candidates that we acquire or in-license.
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. The level of our revenues and results of operations
at any given time will be based primarily on the following factors:
| commercial success of the Cycloset and Glumetza prescription products, including our ability to resolve the ongoing supply interruption for Glumetza 500 mg; | ||
| results of clinical studies and other development programs, including the ongoing and planned clinical programs for the budesonide MMX, rifamycin SV MMX, Rhucin and SAN-300 product candidates; | ||
| potential to receive revenue from Zegerid brand and authorized generic 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 the pending patent infringement lawsuits relating to our Glumetza prescription product and Zegerid OTC; | ||
| 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 our development product candidates and any future products we develop or in-license; | ||
| interruption in the manufacturing or distribution of our products; | ||
| timing of new product offerings, acquisitions, licenses or other significant events by us, our strategic partners or our competitors; and | ||
| legislative changes, including healthcare reform, affecting the products we may offer or those of our competitors. |
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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 and use of our
line of credit will be sufficient to fund our current operations through at least the end of 2011;
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 through at least the end of 2011, we
may pursue raising additional funds in connection with licensing or acquisition of new products or
the continued development of our product candidates. Sources of additional funds may include funds
generated through equity and/or debt financing or through strategic collaborations or licensing
agreements.
Our existing universal shelf registration statement, which was declared effective in December
2008, 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 addition, our ability to borrow additional amounts under our loan agreement with Comerica
Bank, or Comerica, 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 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.
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; | ||
| 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; 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. |
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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. 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. Our subsidiary must
also guarantee our obligations under the loan agreement, and we are required to pledge the stock of
our subsidiary to the lender to secure our obligations under 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 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
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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 October 29, 2010, the closing trading price for our common stock was $3.13.
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:
| announcements concerning our commercial progress and activities, including sales and revenue trends for the Cycloset and Glumetza products we promote and the status of the resupply efforts and patent litigation relating to Glumetza; | ||
| announcements concerning our product development programs, results of our clinical studies or status of our regulatory submissions; | ||
| the status of the generic versions of our Zegerid prescription products offered by Par and Prasco, and any additional generic products that may be offered in the future, as well as developments in the pending appeal relating to our Zegerid prescription products and the pending litigation concerning Zegerid OTC; | ||
| 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; | ||
| 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; |
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| changes in, or our failure to meet or exceed, investors and securities analysts expectations; | ||
| 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; | ||
| 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 believe that our current cash, cash equivalents and short-term investments and use
of our line of credit will be sufficient to fund our current operations through at least the end of
2011, we may pursue raising additional funds in connection with licensing or acquisition of new
products or the continued development of our product candidates. 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 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.
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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 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
As previously disclosed in our Current Report on Form 8-K filed on September 13, 2010, we
acquired Covella Pharmaceuticals, Inc., or Covella, pursuant to the terms of a merger agreement.
In partial consideration of the acquisition, on September 10, 2010, we issued 181,342 shares of our
common stock to the Covella stockholders and agreed to issue additional shares of common stock upon
the achievement of certain clinical milestones.
In connection with the merger agreement, we entered into an amendment to license agreement
with Biogen Idec MA Inc., or Biogen, amending an existing license agreement dated January 22, 2009
between Covella and Biogen. In partial consideration of the license grant from Biogen under the
amended license agreement, on September 10, 2010, we issued 55,970 shares of our common stock to
Biogen and agreed to issue additional shares of common stock upon the achievement of certain
clinical milestones.
The terms of the Covella acquisition and the Biogen license are described in more detail in
Note 14 to the financial statements included with this report. In connection with the issuance of
shares of our common stock to the Covella stockholders and Biogen, we relied on the exemption from
registration contained in Section 4(2) of the Securities Act as a transaction by an issuer not
involving a public offering. Each of the Covella stockholders and Biogen represented to us that
they were accredited investors within the meaning of Rule 501 of Regulation D under the Securities
Act and that they were acquiring the securities for investment only and not with a view to or for
sale in connection with any distribution thereof.
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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 | |
2.1+
|
Agreement and Plan of Merger, dated September 10, 2010, among us, SAN Acquisition Corp., Covella Pharmaceuticals, Inc. and Lawrence C. Fritz, as the Stockholder Representative | |
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 | |
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 |
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Exhibit | ||
Number | Description | |
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(9)
|
First Amendment to Amended and Restated Loan and Security Agreement, dated August 27, 2010, between us and Comerica Bank | |
10.2
|
Amendment No. 2 to OTC License Agreement, dated August 6, 2010, between us and Schering-Plough Healthcare Products, Inc. | |
10.3+
|
Distribution and License Agreement, dated September 3, 2010, among us, VeroScience, LLC and S2 Therapeutics, Inc. | |
10.4+
|
Manufacturing Services Agreement, dated May 26, 2010, between Patheon Pharmaceuticals Inc. and S2 Therapeutics, Inc. | |
10.5
|
Assignment and Assumption Agreement, dated September 3, 2010, between us and S2 Therapeutics, Inc. | |
10.6+
|
License Agreement, dated September 10, 2010, among us, Pharming Group N.V., on behalf of itself and each of its affiliates, including Pharming Intellectual Property B.V. and Pharming Technologies B.V. | |
10.7+
|
Supply Agreement, dated September 10, 2010, among us, Pharming Group N.V., on behalf of itself and each of its affiliates, including Pharming Intellectual Property B.V. and Pharming Technologies B.V. | |
10.8+
|
License Agreement, dated January 22, 2009, between Covella Pharmaceuticals, Inc. and Biogen Idec MA Inc. | |
10.9+
|
Amendment to License Agreement, dated September 10, 2010, among us, Covella Pharmaceuticals, Inc. and Biogen Idec MA Inc. | |
10.10#
|
Employment Agreement, dated September 10, 2010, between us and Mark Totoritis | |
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. |
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(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. | |
(9) | Incorporated by reference to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 30, 2010. | |
* | 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 Exchange Commission. | |
# | Indicates management contract or compensatory plan. | |
| 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: November 8, 2010
/s/ Debra P. Crawford | ||||
Debra P. Crawford, | ||||
Senior Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) |
60