Attached files
file | filename |
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EX-32.1 - EXHIBIT 32.1 - Pernix Sleep, Inc. | c16294exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - Pernix Sleep, Inc. | c16294exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - Pernix Sleep, Inc. | c16294exv31w2.htm |
EX-32.2 - EXHIBIT 32.2 - Pernix Sleep, Inc. | c16294exv32w2.htm |
Table of Contents
UNITED STATES 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 March 31, 2011
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: 000-51665
Somaxon Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of |
20-0161599 (I.R.S. Employer |
|
incorporation or organization) | Identification No.) | |
3570 Carmel Mountain Road, Suite 100, San Diego CA | 92130 | |
(Address of principal executive offices) | (Zip Code) |
(858) 876-6500
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
(Former name, former address and formal fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. 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. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). o Yes þ No
The number of outstanding shares of the registrants common stock, par value $0.0001 per
share, as of April 15, 2011 was 45,004,991.
SOMAXON PHARMACEUTICALS, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended March 31, 2011
TABLE OF CONTENTS
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. | Financial Statements |
CONDENSED BALANCE SHEETS
(Unaudited)
(In thousands, except par value)
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 25,360 | $ | 21,008 | ||||
Short-term investments |
17,935 | 33,809 | ||||||
Accounts receivable, net |
881 | 5,584 | ||||||
Inventory |
1,488 | 991 | ||||||
Other current assets |
1,932 | 1,882 | ||||||
Total current assets |
47,596 | 63,274 | ||||||
Property and equipment, net |
787 | 755 | ||||||
Intangibles, net |
1,216 | 1,102 | ||||||
Total assets |
$ | 49,599 | $ | 65,131 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 2,965 | $ | 1,709 | ||||
Accrued liabilities |
5,192 | 5,699 | ||||||
Deferred revenue |
3,016 | 3,459 | ||||||
Total current liabilities |
11,173 | 10,867 | ||||||
Commitments and contingencies (see Note 5) |
||||||||
Stockholders equity |
||||||||
Preferred stock, $0.0001 par value; 10,000
shares authorized, none issued and
outstanding |
| | ||||||
Common stock and additional paid-in capital;
$0.0001 par value; 100,000 shares
authorized; 45,005 and 45,004 shares
outstanding at March 31, 2011 and December
31, 2010, respectively |
272,313 | 271,117 | ||||||
Accumulated deficit |
(233,890 | ) | (216,852 | ) | ||||
Accumulated other comprehensive income (loss) |
3 | (1 | ) | |||||
Total stockholders equity |
38,426 | 54,264 | ||||||
Total liabilities and stockholders equity |
$ | 49,599 | $ | 65,131 | ||||
The Accompanying Notes are an Integral Part of these Unaudited Condensed Financial Statements
F-1
Table of Contents
SOMAXON PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three months ended March 31, | ||||||||
2011 | 2010 | |||||||
Gross product sales |
$ | 2,877 | $ | | ||||
Less: discounts and allowances |
(555 | ) | | |||||
Net product sales |
2,322 | | ||||||
Less: cost of sales |
(363 | ) | | |||||
Gross profit |
1,959 | | ||||||
Operating expenses |
||||||||
Selling, general and administrative |
$ | 18,593 | $ | 3,052 | ||||
Research and development |
419 | 1,113 | ||||||
Total operating expenses |
19,012 | 4,165 | ||||||
Loss from operations |
(17,053 | ) | (4,165 | ) | ||||
Interest and other income |
15 | 1 | ||||||
Interest and other expense |
| (1 | ) | |||||
Net loss |
$ | (17,038 | ) | $ | (4,165 | ) | ||
Basic and diluted net loss per share |
$ | (0.38 | ) | $ | (0.16 | ) | ||
Shares used to calculate net loss per share |
45,005 | 25,662 |
The Accompanying Notes are an Integral Part of these Unaudited Condensed Financial Statements
F-2
Table of Contents
SOMAXON PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities |
||||||||
Net loss |
$ | (17,038 | ) | $ | (4,165 | ) | ||
Adjustments to reconcile net loss to net cash used
in operating activities: |
||||||||
Share-based compensation expense |
1,195 | 2,180 | ||||||
Depreciation |
52 | 3 | ||||||
Amortization |
30 | | ||||||
Amortization of investment discount |
115 | | ||||||
Realized gain on sale of short-term investments |
1 | | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
4,703 | | ||||||
Inventory |
(497 | ) | | |||||
Other current and non-current assets |
(116 | ) | 160 | |||||
Accounts payable |
1,257 | 674 | ||||||
Accrued liabilities |
(507 | ) | 443 | |||||
Deferred revenue |
(443 | ) | | |||||
Net cash used in operating activities |
(11,248 | ) | (705 | ) | ||||
Cash flows from investing activities |
||||||||
Purchases of property and equipment |
(85 | ) | | |||||
Payments for technology rights |
| (1,000 | ) | |||||
Payments for intangible assets |
(143 | ) | | |||||
Purchases of marketable securities |
(2,401 | ) | | |||||
Sales and maturities of marketable securities |
18,228 | | ||||||
Net cash provided by (used in) investing activities |
15,599 | (1,000 | ) | |||||
Cash flows from financing activities |
||||||||
Issuance of common stock, net of costs |
| 52,745 | ||||||
Exercise of warrants |
| 491 | ||||||
Exercise of stock options |
1 | 1,865 | ||||||
Purchase of treasury stock |
| (44 | ) | |||||
Net cash provided by financing activities |
1 | 55,057 | ||||||
Increase in cash and cash equivalents |
4,352 | 53,352 | ||||||
Cash and cash equivalents at beginning of the period |
21,008 | 5,165 | ||||||
Cash and cash equivalents at end of the period |
$ | 25,360 | $ | 58,517 | ||||
The Accompanying Notes are an Integral Part of these Unaudited Condensed Financial Statements
F-3
Table of Contents
SOMAXON PHARMACEUTICALS, INC.
CONDENSED STATEMENT OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS
(Unaudited)
(In thousands, except per share amounts)
Common Stock and | Accumulated | |||||||||||||||||||
Additional Paid-in | Other | |||||||||||||||||||
Capital | Accumulated | Comprehensive | ||||||||||||||||||
Shares | Amount | Deficit | Income (Loss) | Total | ||||||||||||||||
Balance at December 31, 2010 |
45,004 | $ | 271,117 | $ | (216,852 | ) | $ | (1 | ) | $ | 54,264 | |||||||||
Net loss |
| | (17,038 | ) | | (17,038 | ) | |||||||||||||
Unrealized gains in short-term
investments |
| | | 4 | 4 | |||||||||||||||
Comprehensive loss |
| | | | (17,034 | ) | ||||||||||||||
Exercise of stock options |
1 | 1 | | | 1 | |||||||||||||||
Share-based compensation expense |
| 1,195 | | | 1,195 | |||||||||||||||
Balance at March 31, 2011 |
45,005 | $ | 272,313 | $ | (233,890 | ) | $ | 3 | $ | 38,426 | ||||||||||
The Accompanying Notes are an Integral Part of these Unaudited Condensed Financial Statements
F-4
Table of Contents
Note 1. Organization and Summary of Significant Accounting Policies
Business
Somaxon Pharmaceuticals, Inc. (Somaxon, the Company, we, us or our), is a specialty
pharmaceutical company focused on the in-licensing, development and commercialization of
proprietary branded products and late-stage product candidates to treat important medical
conditions where there is an unmet medical need and/or high-level of patient dissatisfaction,
currently in the central nervous system therapeutic area. In March 2010, the U.S. Food and Drug
Administration (FDA), approved our New Drug Application (NDA), for Silenor® 3 mg and
6 mg tablets for the treatment of insomnia characterized by difficulty with sleep maintenance.
Silenor was made commercially available by prescription in the United States in September 2010. We
operate in one reportable segment, which is the development and commercialization of pharmaceutical
products.
Basis of Presentation
The accompanying condensed balance sheet as of December 31, 2010, which has been derived from
our audited financial statements, and the unaudited interim condensed financial statements have
been prepared in accordance with U.S. generally accepted accounting principles and the rules and
regulations of the Securities and Exchange Commission (SEC) related to a quarterly report on Form
10-Q. Certain information and note disclosures normally included in annual financial statements
prepared in accordance with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to those rules and regulations, although we believe that the
disclosures made are adequate to make the information presented not misleading. The unaudited
interim condensed financial statements reflect all adjustments which, in the opinion of our
management, are necessary for a fair statement of the results for the periods presented. All such
adjustments are of a normal and recurring nature. These unaudited condensed financial statements
should be read in conjunction with the financial statements and the notes thereto included in our
Annual Report on Form 10-K for the year ended December 31, 2010. The operating results presented
in these unaudited condensed financial statements are not necessarily indicative of the results
that may be expected for any future periods.
Capital Resources
Since inception, our operations have been financed primarily through the sale of equity
securities and the proceeds from the exercise of warrants and stock options. We have incurred
losses from operations and negative cash flows since the inception of the Company, and we expect to
continue to incur substantial losses for the foreseeable future as we continue our commercial
activities for Silenor, commercialize any other products to which we obtain rights and potentially
pursue the development of other product candidates. As a result, we may need to obtain additional
funds to finance our operations in the future. Until we can generate significant cash from our
operations, we intend to obtain any additional funding we require through strategic relationships,
public or private equity or debt financings, our loan agreement, assigning receivables or royalty
rights, or other arrangements and we cannot assure such funding will be available on reasonable
terms, or at all.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
All highly liquid investments with maturities of three months or less at the time of purchase
are considered to be cash equivalents. Investments with maturities at the date of purchase greater
than three months are classified as marketable securities. At March 31, 2011, our cash and cash
equivalents consisted primarily of money market funds and available-for-sale securities that have
an original maturity date of three months or less. All of our cash equivalents have liquid markets
and high credit ratings.
F-5
Table of Contents
Marketable Securities
Our investments in marketable securities are classified as available-for-sale securities.
Available-for-sale securities are carried at fair market value, with unrealized gains and losses
reported as a component of stockholders equity in accumulated other comprehensive income/loss.
Interest and dividend income is recorded when earned and included in interest income. Premiums and
discounts on marketable securities are amortized and accreted, respectively, to maturity and
included in interest income. Marketable securities with a maturity date of less than one year as of
the balance sheet date are classified as short-term investments. Marketable securities with a
maturity of more than one year as of the balance sheet date are classified as long-term
investments. We assess the risk of impairment related to securities held in our investment
portfolio on a regular basis and noted no impairment during the three months ended March 31, 2011.
Concentration of Credit Risk, Significant Customers and Sources of Supply
Financial instruments that potentially subject us to concentrations of credit risk consist
primarily of cash and cash equivalents, short-term investments, and accounts receivable. We
maintain accounts in federally insured financial institutions in excess of federally insured
limits. We also maintain investments in money market funds and similar short-term investments that
are not federally insured. However, management believes we are not exposed to significant credit
risk due to the financial positions of the depository institutions in which these deposits are held
and of the money market funds and other entities in which these investments are made. Additionally,
we have established guidelines regarding the diversification of our investments and their
maturities that are designed to maintain safety and liquidity.
We sell our product primarily to established wholesale distributors in the pharmaceutical
industry. The following table sets forth customers who represented 10% or more of our product
sales for the three months ended March 31, 2011:
Three Months Ended | ||||
March 31, 2011 | ||||
Cardinal Health |
50 | % | ||
McKesson |
31 | % | ||
AmerisourceBergen |
10 | % |
The majority of our accounts receivable balance as of March 31, 2011 represents amounts due
from these three wholesale distributors. Credit is extended based on an evaluation of the
customers financial condition. Based upon the review of these factors, we did not record an
allowance for doubtful accounts at March 31, 2011.
We rely on third-party manufacturers for the production of Silenor and single source
third-party suppliers to manufacture key components of Silenor. If our third-party manufacturers
are unable to continue manufacturing Silenor, or if we lost our single source suppliers used in the
manufacturing process, we may not be able to meet market demand for our product.
Inventory
Our inventories are valued at the lower of weighted average cost or net realizable value. We
analyze our inventory levels quarterly and write down inventory that has become obsolete or has a
cost basis in excess of its expected net realizable value, as well as any inventory quantities in
excess of expected requirements. We did not record a reserve for potentially obsolete or excess
inventory as of March 31, 2011.
Intangible Assets
Our intangible assets consist of the costs incurred to in-license our product and technology
development costs relating to our websites. Prior to the FDA approval of our NDA for Silenor, we
had expensed all license fees and milestone payments for acquired development and commercialization
rights to operations as incurred since the underlying technology associated with these expenditures
related to our research and development efforts and had no alternative future use at the time.
Costs related to our intellectual property are capitalized once technological feasibility has been
established. Capitalized amounts are amortized on a straight line basis over the expected life of
the intellectual property. License fees began being amortized upon the first sale of Silenor to
our wholesaler in August 2010 and are being amortized over
approximately ten years. Costs incurred in the planning stage of a website are expensed, while
costs incurred in the development stage are capitalized and will be amortized over the expected
life of the product associated with the website once the asset is placed in service. Costs incurred
for other intangible assets to be used primarily on our website are capitalized and amortized over
the expected useful life, which we estimate to be two years. The carrying values of our intangible
assets are periodically reviewed to determine if the facts and circumstances suggest that a
potential impairment may have occurred. We had no impairment of our intangible assets for the three
months ended March 31, 2011.
F-6
Table of Contents
Revenue Recognition
We recognize product revenue from product sales when it is realized or realizable and earned.
Revenue is realized or realizable and earned when all of the following criteria are met: (1)
persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been
rendered; (3) our price to the buyer is fixed or determinable; and (4) collectability is reasonably
assured. Revenue from sales transactions where the buyer has the right to return the product is
recognized at the time of sale only if (1) our price to the buyer is substantially fixed or
determinable at the date of sale, (2) the buyer has paid us, or the buyer is obligated to pay us
and the obligation is not contingent on resale of the product, (3) the buyers obligation to us
would not be changed in the event of theft or physical destruction or damage of the product, (4)
the buyer acquiring the product for resale has economic substance apart from that provided by us,
(5) we do not have significant obligations for future performance to directly bring about resale of
the product by the buyer, and (6) the amount of future returns can be reasonably estimated.
We sell Silenor to wholesale pharmaceutical distributors. Our returned goods policy generally
permits our customers to return products up to six months before and up to twelve months after the
expiration date of the product. We authorize returns for expired or damaged products in accordance
with our returned goods policy and issue credit to our customers for expired or damaged returned
product. We do not exchange product from inventory for returned product. As of March 31, 2011,
the dollar amount of returns received in 2011 has been negligible.
We are unable to reliably estimate returns at this time. Therefore, we have determined that
shipment of product to wholesale distributors does not meet the criteria for revenue recognition at
the time of shipment. Until we are able to reliably estimate returns, we defer revenue recognition
until the right of return no longer exists, which is the earlier of Silenor being dispensed through
patient prescriptions or the expiration of the right of return. We estimate patient prescriptions
dispensed using an analysis of third-party information. For the three months ended March 31, 2011,
we recognized product revenue of $2.3 million, which was net of estimated product sales discounts
and allowances. At March 31, 2011, we had a deferred revenue balance of $3.0 million which was
also recorded net of estimated product sales discounts and allowances. We have also deferred the
related cost of product sales and recorded such amount as finished goods inventory held by others,
which was $0.2 million as of March 31, 2011.
Until we can reliably estimate product returns, we will continue to recognize revenue upon the
earlier to occur of prescription units dispensed or the expiration of the right of return. In
order to develop a methodology to reliably estimate product returns and provide a basis for
recognizing revenue on sales to customers at the time of product shipment, we are analyzing many
factors, including, without limitation, industry data regarding product return rates, and tracking the Silenor product return
history, taking into account product expiration dating at the time of shipment and levels of
inventory in the wholesale channel compared to prescription units
dispensed and the sell down of our launch inventory. We may use some or all of these factors in establishing a basis
for estimating future product returns on sales to customers at the time of product shipment. We believe that we will be in a position to reasonably estimate product returns during 2011.
Product Sales Discounts and Allowances
We record product sales discounts and allowances at the time of sale and report revenue net of
such amounts in the same period that product sales are recorded. In determining the amount of
product sales discounts and allowances, we must make significant judgments and estimates. If
actual results vary from our estimates, we may need to adjust these estimates, which could have an
effect on product revenue in the period of adjustment. Our product sales discounts and allowances
and the specific considerations we use in estimating these amounts include:
Prompt Pay Discounts. As an incentive for prompt payment, we offer a 2% cash discount to
customers. We expect that all customers will comply with the contractual terms to earn the
discount. We record the discount as an allowance against accounts receivable and a corresponding
reduction of revenue. At March 31, 2011 and December 31, 2010, the allowance for prompt pay
discounts was $17,000 and $114,000, respectively.
F-7
Table of Contents
Patient Discount Programs. We offer discount programs to patients of Silenor under which the
patient receives a discount on his or her prescription. We reimburse pharmacies for these
discounts through third-party vendors. We estimate the total amount that will be redeemed based on
the dollar amount of the discounts, the timing and quantity of distribution and historical
redemption rates. We accrue the discounts and recognize a corresponding reduction of revenue. At
March 31, 2011 and December 31, 2010, the accrual for patient discount programs was $170,000 and
$182,000, respectively.
Distribution Service Fees. We pay distribution services fees to each wholesaler for
distribution and inventory management services. We accrue for these fees based on contractually
defined terms with each wholesaler and recognize a corresponding reduction of revenue. At March
31, 2011 and December 31, 2010, the accrual for distribution service fees was $179,000 and
$276,000, respectively.
Chargebacks. We provide discounts to federal government qualified entities with whom we have
contracted. These federal entities purchase products from the wholesalers at a discounted price,
and the wholesalers then charge back to us the difference between the current retail price and the
contracted price the federal entity paid for the product. We accrue chargebacks based on contract
prices and sell-through sales data obtained from third party information. At March 31, 2011 and
December 31, 2010, the accrual for chargebacks was $6,000 and $9,000, respectively.
Rebates. We participate in certain rebate programs, which provide discounted prescriptions to
qualified insured patients. Under these rebate programs, we pay a rebate to the third-party
administrator of the program. We accrue rebates based on contract prices, estimated percentages of
product sold to qualified patients and estimated levels of inventory in the distribution channel.
At March 31, 2011 and December 31, 2010, the accrual for rebates was $55,000 and $6,000,
respectively.
Cost of Sales
Cost of sales includes the costs to manufacture, package, and ship Silenor, including
personnel costs associated with manufacturing oversight, as well as royalties and amortization of
capitalized license fees associated with our license agreement with ProCom One, Inc. (ProCom).
Share-Based Compensation Expense
Share-based compensation expense for employees and directors is recognized in the statement of
operations based on estimated amounts, including the grant date fair value, the probability of
achieving performance conditions and the expected service period for awards with conditional
vesting provisions. We estimate the grant date fair value for our stock option awards using the
Black-Scholes valuation model which requires the use of multiple subjective inputs including
estimated future volatility, expected forfeitures and the expected term of the stock option award.
Our stock did not have a readily available market prior to our initial public offering in December
2005, creating a relatively short history from which to obtain data to estimate the volatility of
our stock price. Consequently, we estimate expected future volatility based on a combination of
both comparable companies and our own stock price volatility to the extent such history is
available. The expected term for stock options is estimated using guidance provided by the SEC in
Staff Accounting Bulletin (SAB) No. 107 and SAB 110. This guidance provides a formula-driven
approach for determining the expected term. Share-based compensation is based on awards expected to
ultimately vest and has been reduced for estimated forfeitures. The estimated forfeiture rates may
differ from actual forfeiture rates which would affect the amount of expense recognized during the
period. Estimated forfeitures are adjusted to actual amounts as they become known.
We recognize the value of the portion of the awards that are ultimately expected to vest on a
straight-line basis over the awards requisite service period. The requisite service period is
generally the time over which our share-based awards vest. Some of our share-based awards vested
upon achieving certain performance conditions, generally pertaining to the commercial performance
of Silenor or the achievement of other strategic objectives. Share-based compensation expense for
awards with performance conditions is recognized over the period from the date the performance
condition is determined to be probable of occurring through the time the applicable condition is
met. If the performance condition is not considered probable of being achieved, no expense is
recognized until such time the meeting of the performance condition is considered probable.
F-8
Table of Contents
Income Taxes
Our income tax expense consists of current and deferred income tax expense or benefit. Current
income tax expense or benefit is the amount of income taxes expected to be payable or refundable
for the current year. A deferred income tax asset or liability is recognized for the future tax
consequences attributable to tax credits and loss carryforwards and to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets will not be
realized. As of December 31, 2010, we have established a valuation allowance to fully reserve our
net deferred tax assets. It is expected that the amount of unrecognized tax benefits may change
over the course of the year; however, because our deferred tax assets are fully reserved, we do not
expect the change to have a significant impact on our results of operations, cash flows or
financial position. Tax rate changes are reflected in income during the period such changes are
enacted. Changes in ownership may limit the amount of net operating loss carryforwards that can be
utilized in the future to offset taxable income.
Net Loss per Share
Basic earnings per share (EPS) excludes the effects of common stock equivalents. EPS is
calculated by dividing net income or loss applicable to common stockholders by the weighted average
number of common shares outstanding for the period, reduced by the weighted average number of
unvested common shares outstanding subject to repurchase. Diluted EPS is computed in the same
manner as basic EPS, but includes the effects of common stock equivalents to the extent they are
dilutive, using the treasury-stock method. For us, basic and dilutive net loss per share are
equivalent because we have incurred a net loss in all periods presented, causing any potentially
dilutive securities to be anti-dilutive.
Net loss per share was determined as follows (in thousands, except per share amounts):
Three months ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Numerator: |
||||||||
Net loss |
$ | (17,038 | ) | $ | (4,165 | ) | ||
Denominator: |
||||||||
Weighted average common shares outstanding |
45,005 | 25,749 | ||||||
Weighted average unvested common shares subject to repurchase |
| (87 | ) | |||||
Denominator |
45,005 | 25,662 | ||||||
Basic and diluted net loss per share |
$ | (0.38 | ) | $ | (0.16 | ) | ||
Weighted average anti-dilutive securities not included in
diluted net loss per share calculation: |
||||||||
Weighted average stock options outstanding |
3,764 | 3,432 | ||||||
Weighted average restricted stock units outstanding |
244 | 813 | ||||||
Weighted average warrants outstanding |
2,417 | 4,167 | ||||||
Weighted average unvested common shares subject to repurchase |
| 87 | ||||||
Total weighted average anti-dilutive securities not
included in diluted net loss per share |
6,425 | 8,499 | ||||||
Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2009-13 Revenue Recognition, which provides guidance on recognizing revenue in
arrangements with multiple deliverables. This standard impacts the determination of when the
individual deliverables included in a multiple element arrangement may be treated as a separate
unit of accounting. It also modifies the manner in which the consideration received from the
transaction is allocated to the multiple deliverables and no longer permits the use of the residual
method of allocating arrangement consideration. This accounting standard is effective for the first
year beginning on or after June 15, 2010, with early adoption permitted. The adoption of ASU
2009-13 did not have a material impact on our financial statements.
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In December 2010, the FASB issued ASU No. 2010-27 Other Expenses: Fees Paid to the Federal
Government by Pharmaceutical Manufacturers, which provides guidance concerning the recognition and
classification of the new annual fee payable by branded prescription drug manufacturers and
importers on branded prescription drugs which was mandated under the health care reform legislation
enacted in the United States in March 2010. Under this new authoritative guidance, the annual fee
should be estimated and recognized in full as a liability upon the first qualifying commercial sale
with a corresponding deferred cost that is amortized to operating expenses using a straight-line
method unless another method better allocates the fee over the calendar year in which it is
payable. This new guidance is effective for calendar years beginning on or after December 31, 2010,
when the fee initially becomes effective. The adoption of ASU 2010-27 did not have a material
impact on our financial statements.
Note 2. Fair Value of Financial Instruments
Cash and investment holdings, accounts receivable, accounts payable and accrued liabilities
are presented in the financial statements at their carrying amounts, which are reasonable estimates
of fair value due to their short maturities.
The fair value of financial assets and liabilities is measured under a framework that
establishes levels which are defined as follows: Level 1 fair value is determined from
observable, quoted prices in active markets for identical assets or liabilities. Level 2 fair
value is determined from quoted prices for similar items in active markets or quoted prices for
identical or similar items in markets that are not active. Level 3 fair value is determined using
the entitys own assumptions about the inputs that market participants would use in pricing an
asset or liability.
The fair value of our investment holdings at March 31, 2011 and December 31, 2010 is
summarized in the following tables (in thousands).
March 31, 2011 | ||||||||||||||||
Total Fair | Fair Value Determined Under: | |||||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Commercial paper |
$ | 19,340 | $ | | $ | 19,340 | $ | | ||||||||
U.S. government agency securities |
13,285 | | 13,285 | | ||||||||||||
Money market funds |
2 | 2 | | | ||||||||||||
Total |
$ | 32,627 | $ | 2 | $ | 32,625 | $ | | ||||||||
December 31, 2010 | ||||||||||||||||
Total Fair | Fair Value Determined Under: | |||||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Commercial paper |
$ | 18,415 | $ | | $ | 18,415 | $ | | ||||||||
U.S. government
agency securities |
30,628 | | 30,628 | | ||||||||||||
Total |
$ | 49,043 | $ | | $ | 49,043 | $ | | ||||||||
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Commercial paper and U.S. government agency securities are classified as part of either cash
and cash equivalents or short-term investments in the condensed consolidated balance sheets. The
carrying value of short-term investments consisted of the following as of March 31, 2011 and
December 31, 2010 (in thousands).
March 31, 2011 | ||||||||||||||||
Amortized | Unrealized | Unrealized | Fair Market | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Commercial paper |
$ | 19,340 | $ | | $ | | $ | 19,340 | ||||||||
U.S. government agency securities |
13,282 | 3 | | 13,285 | ||||||||||||
Total |
$ | 32,622 | $ | 3 | $ | | $ | 32,625 | ||||||||
December 31, 2010 | ||||||||||||||||
Amortized | Unrealized | Unrealized | Fair Market | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Commercial paper |
$ | 18,415 | $ | | $ | | $ | 18,415 | ||||||||
U.S. government agency securities |
30,629 | 2 | (3 | ) | 30,628 | |||||||||||
Total |
$ | 49,044 | $ | 2 | $ | (3 | ) | $ | 49,043 | |||||||
Available-for-sale marketable securities with maturities of three months or less from date of
purchase have been classified as cash equivalents, and amounted to $14.7 million and $15.2 million
as of March 31, 2011 and December 31, 2010, respectively.
Note 3. Composition of Certain Balance Sheet Items
Accounts Receivable
Accounts receivable, net consisted of the following (in thousands):
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Accounts receivable for product sales, gross |
$ | 898 | $ | 5,975 | ||||
Allowances for discounts |
(17 | ) | (391 | ) | ||||
Total accounts receivable |
$ | 881 | $ | 5,584 | ||||
Inventory
Inventory consisted of the following (in thousands):
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Work in process |
$ | 621 | $ | 207 | ||||
Finished goods inventory held by the Company |
627 | 515 | ||||||
Finished goods inventory held by others |
240 | 269 | ||||||
Total inventory |
$ | 1,488 | $ | 991 | ||||
Other Current Assets
Other current assets consisted of the following (in thousands):
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Deposits and other prepaid expenses |
$ | 806 | $ | 641 | ||||
Prepaid sales and marketing expenses |
994 | 529 | ||||||
Interest receivable |
132 | 206 | ||||||
Other current assets |
| 506 | ||||||
Total other current assets |
$ | 1,932 | $ | 1,882 | ||||
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Property and Equipment
Property and equipment consisted of the following (in thousands):
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Tooling |
$ | 832 | $ | 832 | ||||
Computer equipment |
354 | 354 | ||||||
Furniture and equipment |
66 | 66 | ||||||
Construction in progress |
84 | | ||||||
Property and equipment, at cost |
1,336 | 1,252 | ||||||
Less: accumulated depreciation |
(549 | ) | (497 | ) | ||||
Property and equipment, net |
$ | 787 | $ | 755 | ||||
Intangible Assets
Intangible assets consisted of the following (in thousands):
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
License fees |
$ | 1,000 | $ | 1,000 | ||||
Technology development costs relating to websites |
147 | 147 | ||||||
Other intangible assets |
143 | | ||||||
Less: accumulated amortization |
(74 | ) | (45 | ) | ||||
Total intangible assets, net |
$ | 1,216 | $ | 1,102 | ||||
Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Accrued fees and royalties |
$ | 1,625 | $ | 1,566 | ||||
Accrued liability to third party sales organization |
889 | 842 | ||||||
Accrued compensation and benefits |
759 | 1,329 | ||||||
Accrued product discounts and allowances |
410 | 473 | ||||||
Other accrued expenses |
1,509 | 1,196 | ||||||
Total accrued liabilities |
$ | 5,192 | $ | 5,699 | ||||
Note 4. License Agreements
In August 2003, we entered into an exclusive worldwide in-license agreement with ProCom to
develop and commercialize Silenor for the treatment of insomnia. This agreement was amended and
restated in September 2010. The term of the license extends until the last licensed patent
expires, which is expected to occur no earlier than 2020. The license agreement is terminable by us
at any time with 30 days notice if we believe that the use of the product poses an unacceptable
safety risk or if it fails to achieve a satisfactory level of efficacy. Either party may terminate
the agreement with 30 days notice if the other party commits a material breach of its obligations
and fails to remedy the breach within 90 days, or upon the filing of bankruptcy, reorganization,
liquidation, or receivership proceedings. Costs related to the licensed intellectual property made
after approval of the Silenor NDA by the FDA in March 2010 have been capitalized and included in
intangibles in our balance sheet as of December 31, 2010. Capitalized amounts are amortized on a
straight line basis over approximately ten years. Royalty payments due under the terms of the
agreement are recorded in accrued liabilities as of March 31, 2011. The royalty payments will be
recognized as an expense in cost of sales when the related shipments of product are recognized as
revenue.
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In October 2006, we entered into a supply agreement pertaining to a certain ingredient used in
the formulation for Silenor. In August 2008, this supply agreement was amended to provide us with
the exclusive right to use this ingredient in
combination with doxepin. Pursuant to the amendment, we are obligated to pay a royalty on
worldwide net sales of Silenor beginning as of the expiration of the statutory exclusivity period
for Silenor in each country in which Silenor is marketed. Such royalty is only payable if one or
more patents under the license agreement continue to be valid in each such country and a patent
relating to our formulation for Silenor has not issued in such country.
Note 5. Commitments and Contingencies
Commitments
Publicis Touchpoint Solutions, Inc. (Publicis). In July 2010, we entered into a
professional detailing services agreement with Publicis under which Publicis agreed to provide
sales support to promote Silenor in the U.S. through 110 full-time sales
representatives, together with management coordination personnel, all of whom will be employees of
Publicis. On February 7, 2011 we entered into an amended and restated agreement with Publicis under
which Publicis agreed to recruit and deploy for us an additional 35 sales representatives that will
exclusively promote Silenor, together with management coordination personnel. We recognize the
revenue from Silenor product sales generated by the promotional efforts of the sales organization.
Under the terms of the agreement, we were required to pay a one-time start up fee, and we are
required to pay a fixed monthly fee, which is subject to certain quarterly adjustments based on
actual staffing and spending levels. During the term of the agreement, a portion of Publicis
management fee will be subject to payment by us only to the extent that specified performance
targets are achieved. The performance targets relate to initial scale-up activities, turnover and
vacancy rates, call attainment and specified sales goals. In addition, we are obligated to
reimburse the sales organization for approved pass-through costs, which primarily include bonuses,
meeting and travel costs and certain administrative expenses. The agreement has an initial two-year
term, and may be extended by us by providing Publicis with written notification no later than 90
days prior to the expiration of the initial term, subject to agreement on compensation terms with
Publicis. Prior to the first anniversary of the deployment of Publicis sales representatives, we
have the right to terminate the services agreement upon 90 days written notice and payment to
Publicis of a termination fee in a specified amount. We have the right to terminate the services
agreement upon 90 days written notice after the one year anniversary of the deployment of Publicis
sales representatives without paying a termination fee. We may also terminate the services
agreement without paying a termination fee by hiring a specified number of sales representatives.
In addition, either party may terminate the services agreement upon an uncured material breach by
the other party, upon the bankruptcy or insolvency of the other party or if a change in law renders
the performance of a material obligation of the services agreement unlawful. If termination occurs
during the initial two-year term, we assume financial responsibility for the remaining lease
payments for the sales representatives vehicles which have a two-year lease term.
Procter & Gamble (P&G). In August 2010, we entered into a co-promotion agreement with P&G
under which P&G provides sales support to promote Silenor in the U.S. through its team of full-time
sales representatives. We recognize the revenue from Silenor product sales generated by the
promotional efforts of P&G. Under the terms of the agreement, we are required to pay P&G a fixed
fee and a royalty fee as a percentage of U.S. net sales, in each case on a quarterly basis during
the term of the agreement. The fees are recognized as a sales, general, and administrative expense
and are recorded in accrued liabilities as of March 31, 2011. The agreement also provides for
financial penalties in the event that either party fails to deliver specified minimum detailing
requirements under certain circumstances. Each party will be responsible for the costs of training,
maintaining and operating its own sales force, and we are responsible for all other costs
pertaining to the commercialization of Silenor. The term of the agreement is from August 2010
through December 2012, and we will pay P&G a reduced royalty fee based on U.S. net sales of Silenor
for one year after the expiration of the agreement or its earlier termination under certain
circumstances. Beginning as of June 30, 2012, the parties will discuss in good faith the
continuation of the collaboration upon mutually-agreed terms and conditions. We have the right to
terminate the agreement upon 90 days written notice if P&G fails to provide at least 75% of its
minimum detailing obligations. Beginning October 1, 2011, P&G may cure such shortfall for a
calendar quarter one time each calendar year during the calendar quarter immediately following such
shortfall. Either party may terminate the agreement upon 90 days written notice to the other party,
although no such termination may be effective prior to December 31, 2011. P&G may terminate the
agreement if Silenor is withdrawn from the market for longer than three months as the result of a
legal requirement or 30 days after the end of a calendar quarter in which the market share for
Silenor is less than 75% of the Silenor market share immediately prior to the loss of Silenors
market exclusivity in the U.S. In addition, either party may terminate the agreement upon a large
scale recall or withdrawal of Silenor from the U.S. resulting from a significant safety risk that
is not due to tampering, a remediable manufacturing problem or other defect that can be cured after
such risk is discovered. Either party may also terminate the agreement upon an uncured material
breach by the other party, upon the bankruptcy or insolvency of the other party or a force majeure
event that lasts for at least six months.
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Comerica Bank (Comerica). On February 7, 2011, we entered into a loan agreement with
Comerica, pursuant to which we may request advances in an aggregate outstanding amount not to
exceed $15.0 million. The revolving loan bears interest at a variable rate of interest, per annum,
at our option of either LIBOR plus 3.00% or Comericas prime rate plus 0.50%. Interest payments on
advances made under the loan agreement are due and payable in arrears on the first business day of
each month during the term of the loan agreement. Amounts borrowed under the loan agreement may be
repaid and re-borrowed at any time prior to February 7, 2013, subject to certain conditions. Once
we have two consecutive quarters of profitability, the amounts we borrow are limited to a
percentage of our accounts receivable. There is a non-refundable unused commitment fee equal to
0.25% 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, other
than in certain specified circumstances; create, incur, assume, guarantee or be liable with respect
to certain indebtedness; grant liens; pay dividends and make certain other restricted payments; and
make certain investments. In addition, under the loan agreement, we are required to maintain a cash
balance with Comerica in an amount of not less than $5.0 million and to maintain 50% of any other
cash balances with Comerica and any other cash or investments must be 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, once we have two consecutive quarters of profitability,
minimum EBITDA requirements. We have currently met all of our obligations under the loan agreement.
Other Commitments. We have contracted with various consultants, drug manufacturers,
wholesalers, and other vendors to assist in clinical trial work, data analysis, and
commercialization activities for Silenor. The contracts are terminable at any time, but obligate us
to reimburse the providers for any time or costs incurred through the date of termination. We have
employment agreements with certain of our current employees that provide for severance payments and
accelerated vesting for certain share-based awards if their employment is terminated under
specified circumstances.
Litigation
In November 2010, we received a notice from each of Actavis Elizabeth LLC and Mylan
Pharmaceuticals Inc. that each has filed with the FDA an Abbreviated New Drug Application (ANDA)
for a generic version of Silenor 3 mg and 6 mg tablets. The notices each included a paragraph IV
certification with respect to seven of the eight patents listed in the FDAs Approved Drug
Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book, for Silenor.
A paragraph IV certification is a certification by a generic applicant that in the opinion of that
applicant, the patent(s) listed in the Orange Book for a branded product are invalid,
unenforceable, and/or will not be infringed by the manufacture, use or sale of the generic product.
On December 15, 2010, we, together with ProCom, filed suit in the United States District Court
for the District of Delaware against each of Actavis Elizabeth LLC and Actavis Inc. (collectively,
Actavis), and Mylan Pharmaceuticals Inc. and Mylan, Inc., (collectively, Mylan). The lawsuit
alleges that Actavis and Mylan have each infringed U.S. Patent No. 6,211,229 by filing ANDAs
seeking approval from the FDA to market generic versions of Silenor 3 mg and 6 mg tablets prior to
the expiration of this patent. Pursuant to the provisions of the Hatch-Waxman Act, FDA final
approval of each of the Actavis and Mylan ANDAs can occur no earlier than May 3, 2013, unless there
is an earlier court decision that the 229 patent is not infringed and/or invalid or unless any
party to the action is found to have failed to cooperate reasonably to expedite the infringement
action. At this time, other patents included in the paragraph IV certifications of Actavis and
Mylan have not been asserted against either Mylan or Actavis.
On December 23, 2010, we received a notice from Par Pharmaceuticals, Inc. that it has filed
with the FDA an ANDA for a generic version of Silenor 3 mg and 6 mg tablets. This notice included a
paragraph IV certification with respect to seven of the eight patents listed in the Orange Book for
Silenor.
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On February 2, 2011, we together with Pro Com One, Inc., filed suit in the United States
District Court for the District of Delaware against Par Pharmaceutical, Inc. and Par Pharmaceutical
Companies, Inc. (collectively, Par). The lawsuit alleges that Par has infringed U.S. Patent No.
6,211,229 by filing an ANDA seeking approval from the FDA to market
generic versions of Silenor 3 mg and 6 mg tablets prior to the expiration of this patent.
Pursuant to the provisions of the Hatch-Waxman Act, FDA final approval of the Par ANDA can occur no
earlier than June 23, 2013, unless there is an earlier court decision that the 229 patent is not
infringed and/or invalid or unless any party to the action is found to have failed to cooperate
reasonably to expedite the infringement action. At this time, other patents included in Pars
paragraph IV certification have not been asserted against Par.
On March 29, 2011, we received a notice from Actavis Elizabeth LLC containing a paragraph IV
certification with respect to U.S. Patent No. 7,915,307, which was issued to us on March 29, 2011
and thereafter listed in the Orange Book. We are currently reviewing the details of the
notice.
We intend to vigorously enforce our intellectual property rights relating to Silenor, but
cannot predict the outcome of these matters.
Note 6. Share-based Compensation and Equity
Share-based Compensation Expense
Somaxon has restricted stock units (RSUs) and stock options outstanding under its equity
incentive award plans. Share-based expense for employees and directors is based on the grant-date
fair value of the award. The following table summarizes non-cash share-based compensation expense
(in thousands).
Three months ended | ||||||||
March 31, | ||||||||
Composition of share-based compensation: | 2011 | 2010 | ||||||
Included in selling, general and administrative expense |
$ | 1,049 | $ | 1,630 | ||||
Included in research and development expense |
146 | 550 | ||||||
Total share-based compensation expense |
$ | 1,195 | $ | 2,180 | ||||
Certain of our share-based awards will vest upon the achievement of performance conditions.
Compensation expense for share-based awards granted to employees and directors is recognized based
on the grant date fair value for the portion of the awards for which performance conditions are
considered probable of being achieved. Such expense is recorded over the period the performance
condition is expected to be performed. No expense is recognized for awards with performance
conditions that are considered improbable of being achieved. On March 18, 2010, the FDA notified
us that it approved our NDA for Silenor 3 mg and 6 mg tablets. FDA approval of the Silenor NDA
caused 105,000 shares of restricted stock to vest, 129,000 RSUs to vest, and 275,000 stock options
to vest. The Company recognized an aggregate of $1,384,000 of share-based compensation expense
during the first quarter of 2010 from the vesting of these awards.
Included in these tables for 2010 is the effect of a modification of the option agreements
with certain terminated employees as a result of an extension of the term of their post-employment
consulting agreements. We recognized $233,000 of share-based compensation expense during 2010 as a
result of this modification.
Note 7. Related Party Transaction
Somaxon has in-licensed certain intellectual property from ProCom (see Note 4, License
Agreements). In March 2010, we paid $1.0 million to ProCom pursuant to the terms of this
agreement. During 2011, we recognized in costs of sales $121,000 of ProCom royalty payments in
connection with this arrangement. At March 31, 2011, $104,000 is recorded in accrued liabilities
for ProCom royalty payments.
As part of the in-license agreement, ProCom has the right to designate one nominee for
election to our board of directors (Terrell Cobb, a principal of ProCom).
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The interim 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, 2010, 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, 2010. In addition to historical
information, this discussion and analysis contains forward-looking statements that involve risks,
uncertainties, and assumptions. Our actual results may differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including but not limited to those
set forth under the caption Risk Factors in our Annual Report on Form 10-K for the year ended
December 31, 2010 and the caption Risk Factors in this Quarterly Report on Form 10-Q for the
quarter ended March 31, 2011.
Overview
Background
We are a specialty pharmaceutical company focused on the in-licensing, development and
commercialization of proprietary branded products and late-stage product candidates to treat
important medical conditions where there is an unmet medical need and/or high-level of patient
dissatisfaction, currently in the central nervous system therapeutic area. In March 2010, the U.S.
Food and Drug Administration, or FDA, approved our New Drug Application, or NDA, for Silenor 3 mg
and 6 mg tablets for the treatment of insomnia characterized by difficulty with sleep maintenance.
Silenor was made commercially available by prescription in the United States in September 2010.
Our principal focus is on commercial activities relating to Silenor. We have increased our
headcount from 5 employees as of March 2010 to 44 employees as of April 15, 2011. We commercially
launched Silenor in September 2010 with 110 sales representatives provided to us on an exclusive
basis under our contract sales agreement with Publicis Touchpoint Solutions, Inc., or Publicis, and
an additional 105 sales representatives provided to us under our co-promotion agreement with
Procter and Gamble, or P&G. In February 2011, we engaged Publicis to provide us with an additional
35 sales representatives that were fully deployed as of early April 2011. As a result, Silenor is
supported by approximately 250 sales representatives, all of whom promote Silenor in the primary
detail position. We have also established the manufacturing and distribution channel for Silenor
through agreements with third-party suppliers and service providers, and we have established
reimbursement coverage for Silenor with numerous private and government payors.
Critical Accounting Policies and Estimates
Managements discussion and analysis of our financial condition and results of operations is
based on our condensed financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these condensed financial
statements requires us to make estimates and assumptions that affect the reported amounts of
assets, liabilities, expenses and related disclosures. Actual results could differ from those
estimates. We believe the following accounting policies to be critical to the judgments and
estimates used in the preparation of our condensed financial statements.
Revenue Recognition
We recognize revenue from product sales when it is realized or realizable and earned. Revenue
is realized or realizable and earned when all of the following criteria are met: (1) persuasive
evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3)
our price to the buyer is fixed or determinable; and (4) collectability is reasonably assured.
Revenue from sales transactions where the buyer has the right to return the product is recognized
at the time of sale only if (1) our price to the buyer is substantially fixed or determinable at
the date of sale, (2) the buyer has paid us, or the buyer is obligated to pay us and the obligation
is not contingent on resale of the product, (3) the buyers obligation to us would not be changed
in the event of theft or physical destruction or damage of the product, (4) the buyer acquiring the
product for resale has economic substance apart from that provided by us, (5) we do not have
significant
obligations for future performance to directly bring about resale of the product by the buyer,
and (6) the amount of future returns can be reasonably estimated.
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We sell Silenor to wholesale pharmaceutical distributors. Our returned goods policy generally
permits our customers to return products up to six months before and up to twelve months after the
expiration date of the product. We authorize returns for expired or damaged products in accordance
with our returned goods policy and issue credit to our customers for expired or damaged returned
product. We do not exchange product from inventory for returned product. As of March 31, 2011,
product returns have been negligible.
We are unable to reliably estimate returns at this time. Therefore, we have determined that
shipment of product to wholesale distributors does not meet the criteria for revenue recognition at
the time of shipment. Until we are able to reliably estimate returns, we will defer revenue
recognition until the right of return no longer exists, which is the earlier of Silenor being
dispensed through patient prescriptions or the expiration of the right of return. We estimate
patient prescriptions dispensed using an analysis of third-party information. For the three months
ended March 31, 2011, we recognized product revenue of $2.3 million, which was net of estimated
product sales discounts and allowances. At March 31, 2011, we had a deferred revenue balance of
$3.0 million which was also recorded net of estimated product sales discounts and allowances. We
have also deferred the related cost of product sales and recorded such amount as finished goods
inventory held by others, which was $0.2 million as of March 31, 2011.
Until we can reliably estimate product returns, we will continue to recognize revenue upon the
earlier to occur of prescription units dispensed or the expiration of the right of return. In
order to develop a methodology to reliably estimate returns and provide a basis for recognizing
revenue on sales to customers at the time of product shipment, we are analyzing many factors,
including, without limitation, industry data regarding product return rates, and tracking the Silenor product return history,
taking into account product expiration dating at the time of shipment and levels of inventory in
the wholesale channel compared to prescription units dispensed and the sell down of our launch inventory. We may use some or all of these factors in establishing a basis for
estimating future product returns on sales to customers at the time of product shipment. We believe that we will be in a position to reasonably estimate product returns during 2011.
Product Sales Discounts and Allowances
We record product sales discounts and allowances at the time of sale and report revenue net of
such amounts in the same period that product sales are recorded. In determining the amount of
product sales discounts and allowances, we must make significant judgments and estimates. If
actual results vary from our estimates, we may need to adjust these estimates, which could have an
effect on product revenue in the period of adjustment. Our product sales discounts and allowances
and the specific considerations we use in estimating these amounts include:
Prompt Pay Discounts. As an incentive for prompt payment, we offer a 2% cash discount to
customers. We expect that all customers will comply with the contractual terms to earn the
discount. We record the discount as an allowance against accounts receivable and a corresponding
reduction of revenue. At March 31, 2011 and December 31, 2010, the allowance for prompt pay
discounts was $17,000 and $114,000, respectively.
Patient Discount Programs. We offer discount programs to patients who are prescribed Silenor
under which the patient receives a discount on his or her prescription. We reimburse pharmacies
for this discount through a third-party vendor. We estimate the total amount that will be redeemed
based on the dollar amount of the discount, the timing and quantity of distribution and historical
redemption rates. We accrue the discount and recognize a corresponding reduction of revenue. At
March 31, 2011 and December 31, 2010, the accrual for patient discount programs was $170,000 and
$182,000, respectively.
Distribution Service Fees. We pay distribution service fees to each wholesaler for
distribution and inventory management services. We accrue for these fees based on contractually
defined terms with each wholesaler and recognize a corresponding reduction of revenue. At March
31, 2011 and December 31, 2010, the accrual for distribution service fees was $179,000 and
$276,000, respectively.
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Chargebacks. We provide discounts to federal government qualified entities with whom we have
contracted. These federal entities purchase products from the wholesalers at a discounted price,
and the wholesalers then charge back to us the
difference between the current retail price and the contracted price the federal entity paid
for the product. We accrue chargebacks based on contract prices and sell-through sales data
obtained from third-party information. At March 31, 2011 and December 31, 2010, the accrual for
chargebacks was $6,000 and $9,000, respectively.
Rebates. We participate in certain rebate programs, which provide discounted prescriptions to
qualified insured patients. Under these rebate programs, we pay a rebate to the third-party
administrator of the program. We accrue rebates based on contract prices, estimated percentages of
product sold to qualified patients and estimated levels of inventory in the distribution channel.
At March 31, 2011 and December 31, 2010, the accrual for rebates was $55,000 and $6,000,
respectively.
As we expand our managed care rebate programs and discount programs to offset patients out of
pocket costs, we expect product sales discounts and allowances to increase.
The following table summarizes the activity for the three months ended March 31, 2011
associated with product sales discounts and allowances, with amounts shown in thousands. From the
initial launch of Silenor through September 30, 2010, we offered additional discounts to wholesale
distributors for product purchased. At March 31, 2011 and December 31, 2010, the allowance for
product launch discounts was negligible and $277,000, respectively.
Total | ||||||||||||||||||||
Accrued | ||||||||||||||||||||
Sales | ||||||||||||||||||||
Prompt | Patient | Charge- | Discounts | |||||||||||||||||
Pay | Discount | Distribution | backs and | and | ||||||||||||||||
Discounts | Fees | Service Fees | Rebates | Allowances | ||||||||||||||||
Balance at January 1, 2011 |
$ | 114 | $ | 182 | $ | 276 | $ | 15 | $ | 587 | ||||||||||
Provision made for sales during period |
44 | 79 | 141 | 62 | 326 | |||||||||||||||
Payments |
(141 | ) | (91 | ) | (238 | ) | (16 | ) | (486 | ) | ||||||||||
Balance at March 31, 2011 |
$ | 17 | $ | 170 | $ | 179 | $ | 61 | $ | 427 | ||||||||||
Cost of Sales
Cost of sales includes the costs to manufacture, package, and ship Silenor, including
personnel costs associated with manufacturing oversight, as well as royalties and amortization of
capitalized license fees associated with our license agreement with ProCom.
Inventory
Our inventories are valued at the lower of weighted average cost or net realizable value. We
analyze our inventory levels quarterly and write down inventory that has become obsolete, or has a
cost basis in excess of its expected net realizable value, as well as any inventory quantities in
excess of expected requirements. Expired inventory is disposed of and the related costs are written
off.
Capitalized License Fees
License fees related to our intellectual property are capitalized once technological
feasibility has been established. Costs incurred to in-license our product candidates subsequent to
FDA approval of our NDA for Silenor have been capitalized and recorded as an intangible asset.
Capitalized amounts are amortized on a straight line basis over approximately ten years.
Determining when technological feasibility has been achieved, and determining the related
amortization period for capitalized intellectual property, requires the use of estimates and
subjective judgment.
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Share-based Compensation
Share-based compensation expense for employees and directors is recognized in the statement of
operations based on estimated amounts, including the grant date fair value, the probability of
achieving performance conditions and the expected service period for awards with conditional
vesting provisions. For stock options, we estimate the grant date fair
value using the Black-Scholes valuation model which requires the use of multiple subjective
inputs including an estimate of future volatility, expected forfeitures and the expected term of
the awards. Our stock did not have a readily available market prior to our initial public offering
in December 2005, creating a relatively short history from which to obtain data to estimate
volatility for our stock price. Consequently, we estimate our expected future volatility based on a
combination of both comparable companies and our own stock price volatility to the extent such
history is available. Our future volatility may differ from our estimated volatility at the grant
date. We estimate the expected term of our options using guidance provided by the Securities and
Exchange Commission, or SEC, in Staff Accounting Bulletin, or SAB, No. 107 and SAB No. 110. This
guidance provides a formula-driven approach for determining the expected term. Share-based
compensation recorded in our statement of operations is based on awards expected to ultimately vest
and has been reduced for estimated forfeitures. Our estimated forfeiture rates may differ from
actual forfeiture rates which would affect the amount of expense recognized during the period.
Estimated forfeitures are adjusted to actual amounts as they become known.
We recognize the value of the portion of the awards that are expected to vest on a
straight-line basis over the awards requisite service periods. The requisite service period is
generally the time over which our share-based awards vest. Some of our share-based awards vested
upon achieving certain performance conditions, generally pertaining to the commercial performance
of Silenor or the achievement of other strategic objectives. Share-based compensation expense for
awards with performance conditions is recognized over the period from the date the performance
condition are determined to be probable of occurring through the time the applicable condition is
met. If the performance condition is not considered probable of being achieved, then no expense is
recognized until such time the performance condition is considered probable of being met. At that
time, expense is recognized over the period during which the performance condition is likely to be
achieved. Determining the likelihood and timing of achieving performance conditions is a
subjective judgment made by management which may affect the amount and timing of expense related to
these share-based awards. Share-based compensation is adjusted to reflect the value of options
which ultimately vest as such amounts become known in future periods. As a result of these
subjective and forward-looking estimates, the actual value of our stock options realized upon
exercise could differ significantly from those amounts recorded in our financial statements.
Results of Operations
Comparisons of the Three Months Ended March 31, 2011 and 2010
Product Sales. Product sales represent sales of Silenor for which we have recognized revenue.
Net product sales for 2011 and 2010 are summarized in the following table (in thousands, except
percentages).
Three Months Ended | ||||||||||||||||
March 31, | Change | |||||||||||||||
2011 | 2010 | Dollar | Percent | |||||||||||||
Gross product sales |
$ | 2,877 | $ | | $ | 2,877 | N/A | |||||||||
Discounts and allowances |
(555 | ) | | (555 | ) | N/A | ||||||||||
Total net product sales |
$ | 2,322 | $ | | $ | 2,322 | N/A | |||||||||
We recognized net product sales of $2.3 million for the three months ended March 31, 2011 and
had no product sales for the comparable period in 2010 as sales of Silenor commenced in the third
quarter of 2010. Reductions from gross to net product sales, which include allowances for
discounts, patient discount programs, distribution service fees, chargebacks and rebates, totaled
$0.6 million for the three months ended March 31, 2011, compared to $0 in the same period in 2010.
As a percentage of gross sales, the reductions were 19.3% for the three months ended March 31,
2011.
Cost of Sales. Cost of sales includes the costs to manufacture, package, and ship Silenor,
including personnel costs associated with manufacturing oversight, as well as royalties and
amortization of capitalized license fees associated with our license agreement. Cost of sales for
2011 and 2010 are summarized in the following table (in thousands, except percentages).
Three Months Ended | ||||||||||||||||
March 31, | Change | |||||||||||||||
2011 | 2010 | Dollar | Percent | |||||||||||||
Cost of sales |
$ | 363 | $ | | $ | 363 | N/A | |||||||||
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We recognized cost of sales of $0.4 million for the three months ended March 31, 2011 relating
to product dispensed through prescriptions. We had no cost of sales for the comparable period in
2010 as sales of Silenor commenced in the third quarter of 2010. Gross profit was $2.0 million for
the three months ended March 31, 2011. Expressed as a percentage of net product sales, gross
margin was 84.4% for the three months ended March 31, 2011.
Selling, General and Administrative Expense. Our selling, general and administrative expenses
consist primarily of salaries, benefits, share-based compensation expense, advertising and market
research costs, insurance and facility costs, and professional fees related to our marketing,
administrative, finance, human resources, legal and internal systems support functions. Selling,
general and administrative expense for 2011 and 2010 are summarized in the following tables (in
thousands, except percentages).
Three Months Ended | ||||||||||||||||
March 31, | Change | |||||||||||||||
2011 | 2010 | Dollar | Percent | |||||||||||||
Sales and marketing |
$ | 13,519 | $ | 786 | $ | 12,733 | 1,620 | % | ||||||||
General and administrative |
5,074 | 2,266 | 2,808 | 124 | % | |||||||||||
Total selling, general and administrative expense |
$ | 18,593 | $ | 3,052 | $ | 15,541 | 509 | % | ||||||||
Selling and marketing expenses totaled $13.5 million and $0.8 million for the three months
ended March 31, 2011 and 2010, respectively. Of this, share-based compensation expense totaled
$0.3 million and $0.4 million for the three months ended March 31, 2011 and the comparable period
in 2010, respectively. The net increase of $12.7 million was due to the costs associated with the
commercial activities of Silenor. These costs included the costs of our sales representatives,
royalties paid to our co-promotion partner, personnel costs and other promotional spending and
consulting costs.
General and administrative expenses totaled $5.1 million and $2.3 million for the three months
ended March 31, 2011 and 2010, respectively. Of this, share-based compensation expense totaled
$0.8 million and $1.3 million for the three months ended March 31, 2011 and 2010, respectively.
The net increase of $2.8 million was primarily due to an increase in salary and benefits expense
resulting from an increase in overall headcount during the three months ended March 31, 2011
compared to the comparable period in 2010. This was offset by a decrease in share-based
compensation expense due to higher share-based compensation expense during the three months ended
March 31, 2010 as a result of vesting of performance-based equity awards upon FDA approval of the
NDA for Silenor.
Research and Development Expense. Our most significant research and development costs during
the three months ended March 31, 2011 were salaries, benefits and share-based compensation expense
related to our research and development personnel. Research and development expense for 2011 and
2010 are summarized in the following table (in thousands, except percentages).
Three Months Ended | ||||||||||||||||
March 31, | Change | |||||||||||||||
2011 | 2010 | Dollar | Percent | |||||||||||||
Personnel and other costs |
$ | 201 | $ | 472 | $ | (271 | ) | (57 | )% | |||||||
Silenor development work |
72 | 91 | (19 | ) | (21 | )% | ||||||||||
Share-based compensation expense |
146 | 550 | (404 | ) | (73 | )% | ||||||||||
Total research and development expense |
$ | 419 | $ | 1,113 | $ | (694 | ) | (62 | )% | |||||||
Research and development expense decreased $0.7 million for the three months ended March 31,
2011 compared to the same period in 2010 primarily due to lower share-based compensation expense.
Share-based compensation expense attributable to research and development personnel
decreased due to recognition of compensation costs associated with the vesting of
performance-based equity awards upon FDA approval of the NDA for Silenor in the first quarter of
2010.
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Liquidity and Capital Resources
We expect to continue to incur losses and have negative cash flows from operations in the
foreseeable future as we continue our commercial activities for Silenor, commercialize any other
products to which we obtain rights and potentially
pursue the development of other product candidates. As a result, we may need to obtain
additional funds to finance our operations in the future. Until we can generate significant cash
from our operations, we intend to obtain any additional funding we require through our loan
agreement, strategic relationships, public or private equity or debt financings, assigning
receivables or royalty rights, or other arrangements and we cannot assure such funding will be
available on reasonable terms, or at all.
As of March 31, 2011, we had $43.3 million in cash, cash equivalents and short-term
investments. We believe, based on our current operating plan, that our cash, cash equivalents and
short-term investments as of March 31, 2011 will be sufficient to fund our operations through at
least the first quarter of 2012. Actual financial results for the period of time through which our
financial resources will be adequate to support our operations could vary based upon many factors,
including but not limited to the rate of growth of Silenor sales, the actual cost of commercial
activities and any potential litigation expenses we may incur.
Our future capital uses and requirements depend on numerous forward-looking factors. These
factors include but are not limited to the following:
| our success in generating cash flows from the commercialization of Silenor, together with our co-promotion partner P&G; |
| the costs of establishing or contracting for commercial programs and resources; |
| the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; |
| the extent to which we acquire or in-license new products, technologies or businesses; |
| the rate of progress and cost of our non-clinical studies, clinical trials and other development activities; |
| the scope, prioritization and number of development programs we pursue; and |
| the effect of competing technological and market developments. |
We have invested a substantial portion of our available cash in marketable securities and
money market funds. The capital markets have recently been highly volatile and there has been a
lack of liquidity for certain financial instruments, especially those with exposure to
mortgage-backed securities and auction rate securities. All of our investments in marketable
securities and money market funds are highly rated, highly liquid securities with readily
determinable fair values. As of March 31, 2011, none of our securities are considered to be
impaired.
We have two effective shelf registration statements on Form S-3 filed with the SEC under which
we may offer from time to time up to an aggregate of approximately $67.1 million in any combination
of debt securities, common and preferred stock and warrants. These registration statements could
allow us to seek additional financing, subject to the SECs rules and regulations relating to
eligibility to use Form S-3.
Cash Flows
Net cash used in operating activities was $11.2 million for the three months ended March 31,
2011, compared to $0.7 million for the same period in 2010. The increase in net cash used in
operating activities was primarily due to an increase in our net loss in 2011 as compared to the
prior year.
Net cash provided by investing activities was $15.6 million for the three months ended March
31, 2011, compared to net cash used in investing activities of $1.0 million for the same period in
2010. Results for 2011 reflect net sales and maturities of marketable securities of $15.8 million
and payments for intangible assets of $0.1 million. Results for 2010 reflect a $1.0 million
milestone payment to ProCom under our license agreement which became due as a result of the
approval by the FDA of our NDA for Silenor.
Net cash provided by financing activities was negligible for the three months ended March 31,
2011, compared to net cash provided by financing activities of $55.1 million for the same period in
2010. Our 2010 results reflect cash proceeds of $52.7 million from our follow-on offering and
proceeds of $2.4 million from the exercise of warrants and stock options.
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Loan Agreement
On February 7, 2011, we entered into a loan agreement with Comerica, pursuant to which we may
request advances in an aggregate outstanding amount not to exceed $15.0 million. The revolving
loan bears interest at a variable rate of interest, per annum, at our option of either LIBOR plus
3.00% or Comericas prime rate plus 0.50%. Interest payments on advances made under the loan
agreement are due and payable in arrears on the first business day of each month during the term of
the loan agreement. Amounts borrowed under the loan agreement may be repaid and re-borrowed at any
time prior to February 7, 2013, subject to certain conditions. Once we have two consecutive
quarters of profitability, the amounts we borrow are limited to a percentage of our accounts
receivable. There is a non-refundable unused commitment fee equal to 0.25% 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. As of March 31, 2011, we do
not have any borrowings 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, other
than in certain specified circumstances; create, incur, assume, guarantee or be liable with respect
to certain indebtedness; grant liens; pay dividends and make certain other restricted payments; and
make certain investments. In addition, under the loan agreement, we are required to maintain a cash
balance with Comerica in an amount of not less than $5.0 million and to maintain 50% of any other
cash balances with Comerica and any other cash or investments must be 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, once we have two consecutive quarters of profitability,
minimum EBITDA requirements. We have currently met all of our obligations under the loan agreement.
Litigation
On November 3, 2010, we received a notice from each of Actavis Elizabeth LLC and Mylan
Pharmaceuticals Inc. that each had filed with the FDA an ANDA for a generic version of Silenor 3 mg
and 6 mg tablets. Each of the notices included a paragraph IV certification with respect to seven
of the eight patents listed in the Orange Book for Silenor.
On December 15, 2010, we, together with ProCom, filed suit in the United States District Court
for the District of Delaware against each of Actavis and Mylan. The lawsuit alleges that Actavis
and Mylan have each infringed U.S. Patent No. 6,211,229 by filing their ANDAs relating to Silenor
prior to the expiration of this patent. Pursuant to the provisions of the Hatch-Waxman Act, FDA
final approval of each of the Actavis and Mylan ANDAs can occur no earlier than May 3, 2013, unless
there is an earlier court decision that the 229 patent is not infringed and/or invalid or unless
any party to the action is found to have failed to cooperate reasonably to expedite the
infringement action. At this time, other patents included in the paragraph IV certifications of
Actavis and Mylan have not been asserted against either Mylan or Actavis.
On December 23, 2010, we received a notice from Par Pharmaceuticals, Inc. that it had filed
with the FDA an ANDA for a generic version of Silenor 3 mg and 6 mg tablets. This notice included a
paragraph IV certification with respect to seven of the eight patents listed in the Orange Book for
Silenor.
On February 2, 2011, we, together with ProCom, filed suit in the United States District Court
for the District of Delaware against Par. The lawsuit alleges that Par has infringed U.S. Patent
No. 6,211,229 by filing its ANDA relating to Silenor prior to the expiration of this patent.
Pursuant to the provisions of the Hatch-Waxman Act, FDA final approval of the Par ANDA can occur no
earlier than June 23, 2013, unless there is an earlier court decision that the 229 patent is not
infringed and/or invalid or unless any party to the action is found to have failed to cooperate
reasonably to expedite the infringement action. At this time, other patents included in Pars
paragraph IV notice have not been asserted against Par.
On March 29, 2011, we received a notice from Actavis Elizabeth LLC containing a paragraph IV
certification with respect to U.S. Patent No. 7,915,307, which was issued to us on March 29, 2011
and thereafter listed in the Orange Book. We are currently reviewing the details of the
notice.
We intend to vigorously enforce our intellectual property rights relating to Silenor, but we
cannot predict the outcome of
these matters.
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The prosecution of the lawsuits against Actavis, Mylan and Par will increase our cash
expenditures. Any adverse outcome in this litigation could result in one or more generic versions
of Silenor being launched before the expiration of the listed patents, which could adversely affect
our ability to successfully execute our business strategy to increase sales of Silenor and would
negatively impact our financial condition and results of operations, including causing a
significant decrease in our revenues and cash flows.
Contractual Obligations
A summary of our minimum contractual obligations related to our major outstanding contractual
commitments is included in our Annual Report on Form 10-K for the year ended December 31, 2010.
Off-Balance Sheet Arrangements
We do 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.
Recent Accounting Pronouncements
In October 2009, the FASB issued ASU No. 2009-13 Revenue Recognition, which provides
guidance on recognizing revenue in arrangements with multiple deliverables. This standard impacts
the determination of when the individual deliverables included in a multiple element arrangement
may be treated as a separate unit of accounting. It also modifies the manner in which the
consideration received from the transaction is allocated to the multiple deliverables and no longer
permits the use of the residual method of allocating arrangement consideration. This accounting
standard is effective for the first reporting period beginning on or after June 15, 2010, with
early adoption permitted. The adoption of ASU 2009-13 did not have a material impact on the
financial statements.
In December 2010, the FASB issued ASU No. 2010-27 Other Expenses: Fees Paid to the Federal
Government by Pharmaceutical Manufacturers, which provides guidance concerning the recognition and
classification of the new annual fee payable by branded prescription drug manufacturers and
importers on branded prescription drugs which was mandated under the health care reform legislation
enacted in the United States in March 2010. Under this new authoritative guidance, the annual fee
should be estimated and recognized in full as a liability upon the first qualifying commercial sale
with a corresponding deferred cost that is amortized to operating expenses using a straight-line
method unless another method better allocates the fee over the calendar year in which it is
payable. This new guidance is effective for calendar years beginning on or after December 31, 2010,
when the fee initially becomes effective. The adoption of ASU 2010-27 did not have a material
impact on our financial statements.
Caution on Forward-Looking Statements
Any statements in this report about our expectations, beliefs, plans, objectives, assumptions
or future events or performance are not historical facts and 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 successfully commercialize Silenor; the
market potential for insomnia treatments, and our ability to compete within that market, our
reliance on our co-promotion partner, P&G, and our contract sales force provider, Publicis, for
critical aspects of the commercial sales process for Silenor; the performance of P&G and Publicis
and their adherence to the terms of their contracts with us; the ability of our sales management
personnel to effectively manage the sales representatives employed by Publicis; our ability to
successfully enforce our intellectual property rights and defend our patents, including any
developments relating to the recent submission of ANDAs for generic versions of Silenor 3 mg and 6
mg tablets and related patent litigation; the scope, validity and duration of patent protection and
other intellectual property rights for Silenor; whether the approved label for Silenor is
sufficiently consistent with such patent protection to provide exclusivity for Silenor; the
possible introduction of generic competition of Silenor; our ability to ensure adequate and
continued supply of Silenor to
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successfully meet anticipated market demand; our ability to raise
sufficient capital to fund our operations, including patent infringement litigation, and the impact of any financing
activity on the level of our stock price; the impact of any inability to raise sufficient capital
to fund ongoing operations, including any patent infringement litigation; changes in healthcare
regulation and reimbursement policies; our ability to operate our business without infringing the
intellectual property rights of others; estimates of the potential markets for Silenor and our
ability to compete in these markets; inadequate therapeutic efficacy or unexpected adverse side
effects relating to Silenor that could result in recalls or product liability claims; other
difficulties or delays in development, testing, manufacturing and marketing of Silenor; the timing
and results of post-approval regulatory requirements for Silenor, and the FDAs agreement with our
interpretation of such results; and other risks detailed in this report under Part II Item 1A
Risk Factors below and previously disclosed in our Annual Report on Form 10-K.
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. This caution is made under the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Our cash and cash equivalents at March 31, 2011 consisted primarily of money market funds and
marketable securities. The primary objective of our investment activities is to preserve principal
while maximizing the income we receive from our investments without significantly increasing risk.
Historically, our primary exposure to market risk is interest rate sensitivity. This means that a
change in prevailing interest rates may cause the value of the investment to fluctuate. For
example, if we purchase a security that was issued with a fixed interest rate and the prevailing
interest rate later rises, the value of our investment will probably decline. Currently, our
holdings are in money market funds and marketable securities, and therefore this interest rate risk
is minimal. To minimize our interest rate risk going forward, we intend to continue to maintain
our portfolio of cash, cash equivalents and marketable securities in a variety of securities
consisting of money market funds and United States government debt securities, all with various
maturities. In general, money market funds are not subject to market risk because the interest
paid on such funds fluctuates with the prevailing interest rate. We also generally time the
maturities of our investments to correspond with our expected cash needs, allowing us to avoid
realizing any potential losses from having to sell securities prior to their maturities.
Our cash is invested in accordance with a policy approved by our board of directors which
specifies the categories, allocations, and ratings of securities we may consider for investment.
We do not believe our cash and cash equivalents and short-term investments have significant risk of
default or illiquidity. We made this determination based on discussions with our treasury managers
and a review of our holdings. While we believe our cash and cash equivalents and short-term
investments are well diversified and do not contain excessive risk, we cannot provide absolute
assurance that our investments will not be subject to future adverse changes in market value.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our reports made under the Securities Exchange Act of 1934, as amended,
or the Exchange Act, is recorded, processed, summarized and reported within the time periods
specified in the SECs 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 SEC 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 period 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 as of March 31, 2011.
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Changes in Internal Control Over Financial Reporting
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.
PART II OTHER INFORMATION
Item 1. | Legal Proceedings |
On March 29, 2011, we received a notice from Actavis Elizabeth LLC containing a paragraph IV
certification with respect to U.S. Patent No. 7,915,307, which was issued to us on March 29, 2011
and thereafter listed in the Orange Book. We are currently reviewing the details of the
notice.
Item 1A. | Risk Factors |
Investing in our common stock involves a high degree of risk. Our Annual Report on Form 10-K
for the year ended December 31, 2010 includes a detailed discussion of our risk factors under the
heading Part I, Item 1ARisk Factors. Set forth below are certain changes from the risk factors
previously disclosed in our Annual Report on Form 10-K. You should carefully consider the risk
factors discussed in our Annual Report on Form 10-K and in this report, as well as the other
information in this report, before deciding whether to invest in shares of our common stock. The
occurrence of any of the risks discussed in the Annual Report on Form 10-K or this report could
harm our business, financial condition, results of operations or growth prospects. In that case,
the trading price of our common stock could decline, and you may lose all or part of your
investment. Except with respect to our trademarks, the trademarks, trade names and service marks
appearing in this report are the property of their respective owners.
Risks Related to Our Business
We may require substantial additional funding and may be unable to raise capital when needed,
which could force us to delay, reduce or eliminate planned activities.
We began generating revenues from the commercialization of Silenor late in the third quarter
of 2010, and our operations to date have generated substantial needs for cash. We expect our
negative cash flows from operations to continue until we are able to generate significant cash
flows from the commercialization of Silenor.
In November 2010, we completed a public offering of 8,800,000 shares of our common stock at a
public offering for aggregate net proceeds of approximately $24.8 million, and at March 31, 2011 we
had cash, cash equivalents, and short-term investments totaling $43.3 million. We believe, based on
our current operating plan, that our cash, cash equivalents and short-term investments as of March
31, 2011 will be sufficient to fund our operations through at least the first quarter of 2012;
however, our financial resources may not be adequate through such period due to many factors,
including but not limited to the rate of growth of Silenor sales, the actual cost of commercial
activities and any potential litigation expenses we may incur.
We are responsible for the costs relating to the commercialization of Silenor. As a result,
commercial activities relating to Silenor are likely to result in the need for substantial
additional funds. Our future capital requirements will depend on, and could increase significantly
as a result of, many factors, including:
| our success in generating cash flows from the commercialization of Silenor, together with our co-promotion partner P&G; |
| the costs of establishing or contracting for commercial programs and resources; |
| the terms and timing of any future collaborative, licensing and other arrangements that we may establish; |
| the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; |
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| the extent to which we acquire or in-license new products, technologies or businesses; |
| the rate of progress and cost of our non-clinical studies, clinical trials and other development activities; |
| the scope, prioritization and number of development programs we pursue; and |
| the effect of competing technological and market developments. |
In February 2011, we entered into a loan agreement with Comerica Bank, or Comerica, pursuant
to which we may request advances in an aggregate outstanding amount not to exceed $15.0 million.
Amounts borrowed under the loan agreement may be repaid and re-borrowed at any time prior to
February 7, 2013. We have no amounts outstanding under the loan agreement. Our ability to borrow
under the loan agreement depends upon a number of conditions and restrictions, and we cannot be
certain that we will satisfy all borrowing conditions at a time when we desire to borrow such
amounts. For example, our ability to borrow at any given time is subject to the representations and
warranties we made to Comerica under the loan agreement being generally true and correct at such
time. Furthermore, we are subject to a number of affirmative and negative covenants, each of which
we must be in compliance with 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
amounts under the loan agreement, and may be required to repay any amounts previously borrowed.
In addition to the amounts available under our Comerica facility, we intend to obtain any
additional funding we may require through strategic relationships, public or private equity or debt
financings, assigning receivables or royalty rights, or other arrangements and cannot assure that
such funding will be available on reasonable terms, or at all.
If we are unsuccessful in raising additional required funds, we may be required to delay,
scale-back or eliminate plans or programs relating to our business, relinquish some or all rights
to Silenor, or renegotiate less favorable terms with respect to such rights than we would otherwise
choose. In addition, if we do not meet our payment obligations to third parties as they come due,
we may be subject to litigation claims. Even if we are successful in defending against these
claims, litigation could result in substantial costs and distract management, and may result in
unfavorable results that could further adversely impact our financial condition. If we raise
additional funds by issuing equity securities, substantial dilution to existing stockholders would
result. If we raise additional funds by incurring debt financing, the terms of the debt may involve
significant cash payment obligations as well as covenants and specific financial ratios that may
restrict our ability to operate our business.
We, our co-promotion partner, P&G, and our contract sales force provider, Publicis will need to retain qualified sales and marketing personnel and collaborate in
order to successfully commercialize Silenor.
In August 2010, we entered into a co-promotion agreement with P&G, under which its sales
representatives will provide a minimum number of primary details to certain healthcare
professionals and a minimum number of calls to pharmacists promoting Silenor. In addition, in July
2010, we retained Publicis to provide 110 sales
representatives to promote Silenor under the terms of a contract sales agreement. In February 2011
we engaged Publicis to provide an additional 35 sales representatives to promote Silenor that were
fully deployed as of early April 2011. These representatives are employees of Publicis but were
hired to our specifications and are managed by our team of Somaxon sales management personnel. As
a result, Silenor is now supported by 250 field sales representatives who promote Silenor in the
primary detail position. To the extent we, P&G and Publicis are not successful in retaining
qualified sales and marketing personnel, we may not be able to effectively market Silenor.
We and P&G each have the right to terminate the co-promotion agreement at any time following
December 31, 2011 by providing at least 90 days prior written notice, as well as other more limited
termination rights. While our agreement with P&G requires its field sales representatives to
promote our products in a minimum number of primary details to target physicians and a minimum
number of pharmacy calls, we cannot be sure that P&Gs efforts will be successful.
Our agreement with Publicis will cause us to incur significant costs, and we cannot be sure
that the efforts of the contract sales force, together with any efforts made by P&G to promote our
products, will generate sufficient awareness or demand for our products. If we determine that the
contract sales force is not successful and we decide to terminate our agreement with Publicis prior
to the one-year anniversary of the deployment of the contract sales force, we will incur
termination fees.
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Any revenues we receive from sales of Silenor will largely depend upon the efforts P&G and
Publicis, which in many instances will not be within our control. If we are unable to maintain our
co-promotion agreement with P&G, to maintain our contract sales agreement with Publicis or to
effectively establish alternative arrangements to market our products, our business could be
adversely affected. In addition, despite our arrangements with P&G and Publicis, we still may not
be able to cover all of the prescribing physicians for insomnia at the same level of reach and
frequency as our competitors, and we ultimately may need to further expand our selling efforts in
order to effectively compete.
Restrictions on or challenges to our patent rights relating to our products and limitations on or
challenges to our other intellectual property rights may limit our ability to prevent third
parties from competing against us.
Our success will depend on our ability to obtain and maintain patent protection for Silenor
and any other product candidate we develop or commercialize, preserve our trade secrets, prevent
third parties from infringing upon our proprietary rights and operate without infringing upon the
proprietary rights of others. The patent rights that we have in-licensed relating to Silenor are
limited in ways that may affect our ability to exclude third parties from competing against us. In
particular, we do not hold composition of matter patents covering the active pharmaceutical
ingredient, or API, of Silenor. Composition of matter patents on APIs are a particularly effective
form of intellectual property protection for pharmaceutical products as they apply without regard
to any method of use or other type of limitation. As a result, competitors who obtain the requisite
regulatory approval can offer products with the same active ingredients as our products so long as
the competitors do not infringe any method of use or formulation patents that we may hold.
The principal patent protection that covers, or that we expect will cover, Silenor consists of
method of use patents. This type of patent protects the product only when used or sold for the
specified method. However, this type of patent does not limit a competitor from making and
marketing a product that is identical to our product for an indication that is outside of the
patented method. Moreover, physicians may prescribe such a competitive identical product for
off-label indications that are covered by the applicable patents. Although such off-label
prescriptions may induce or contribute to the infringement of method of use patents, the practice
is common and such infringement is difficult to prevent or prosecute.
Because products with active ingredients identical to ours have been on the market for many
years, there can be no assurance that these other products were never used off-label or studied in
such a manner that such prior usage would not affect the validity of our method of use patents. Due
to some prior art that we identified, we initiated a reexamination of one of the patents we have
in-licensed covering Silenor, (specifically, U.S. Patent No. 5,502,047, Treatment for Insomnia)
which claims the treatment of chronic insomnia using doxepin in a daily dosage of 0.5 mg to 20 mg
and expires in March 2013. The reexamination proceedings terminated and the U.S. Patent and
Trademark Office, or USPTO, issued a reexamination certificate narrowing certain claims, so that
the broadest dosage ranges claimed by us are 0.5 mg to 20 mg for otherwise healthy patients with
chronic insomnia and for patients with chronic insomnia resulting from depression, and 0.5 mg to 4
mg for all other chronic insomnia patients. We also requested reissue of this same patent to
consider some additional prior art and to add intermediate dosage ranges below 10 mg. In two office
actions relating to this reissue request, the USPTO raised no prior art objections to 32 of the 34
claims we were seeking and raised a prior art objection to the other two, as well as some technical
objections. Each of the claims objected to by the USPTO related to dosages above 10 mg. After
further review of the prior art submitted, the USPTO withdrew all of its prior art objections. We
then determined that the proposed addition of the intermediate dosage ranges and the resolution of
the technical objections no longer warranted continuation of the reissue proceeding. As a result,
we elected not to continue that proceeding.
We also have multiple internally developed pending patent applications. No assurance can be
given that the USPTO or other applicable regulatory authorities will allow pending applications to
result in issued patents with the claims we are seeking, or at all.
Patent applications in the United States are confidential for a period of time until they are
published, and publication of discoveries in scientific or patent literature typically lags actual
discoveries by several months. As a result, we cannot be certain that the inventors of issued
patents to which we hold rights were the first to conceive of inventions covered by pending patent
applications or that the inventors were the first to file patent applications for such inventions.
In addition, third parties may challenge issued patents to which we hold rights and any
additional patents that we may obtain, which could result in the invalidation or unenforceability
of some or all of the relevant patent claims, or could attempt to develop products utilizing the
same APIs as our products that do not infringe the claims of our in-licensed patents or patents
that we may obtain.
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When a third party files an Abbreviated New Drug Application, or ANDA, for a product
containing doxepin for the treatment of insomnia at any time during which we have patents listed
for Silenor in the FDAs Orange Book publication, the applicant will be required to certify to the
FDA concerning the listed patents. Specifically, the applicant must certify that: (1) the required
patent information relating to the listed patent has not been filed in the NDA for the approved
product; (2) the listed patent has expired; (3) the listed patent has not expired, but will expire
on a particular date and approval is sought after patent expiration; or (4) the listed patent is
invalid or will not be infringed by the manufacture, use or sale of the new product. A
certification that the new product will not infringe the Orange Book-listed patents for Silenor or
that such patents are invalid is called a paragraph IV certification.
On November 3, 2010, we received a notice from each of Actavis Elizabeth LLC and Mylan
Pharmaceuticals Inc. that each had filed with the FDA an ANDA for a generic version of Silenor 3 mg
and 6 mg tablets. Each of the notices included a paragraph IV certification with respect to seven
of the eight patents listed in the Orange Book for Silenor.
On December 15, 2010, we, together with ProCom, filed suit in the United States District Court
for the District of Delaware against each of Actavis Elizabeth LLC and Actavis Inc., or
collectively, Actavis, and Mylan Pharmaceuticals Inc. and Mylan, Inc., or collectively, Mylan. The
lawsuit alleges that Actavis and Mylan have each infringed U.S. Patent No. 6,211,229 by filing
their ANDAs relating to Silenor prior to the expiration of this patent. Pursuant to the provisions
of the Hatch-Waxman Act, FDA final approval of each of the Actavis and Mylan ANDAs can occur no
earlier than May 3, 2013, unless there is an earlier court decision that the 229 patent is not
infringed and/or invalid or unless any party to the action is found to have failed to cooperate
reasonably to expedite the infringement action. At this time, the other patents included in the
paragraph IV certifications of Actavis and Mylan have not been asserted against either Mylan or
Actavis.
On December 23, 2010, we received a notice from Par Pharmaceutical, Inc. that it had filed
with the FDA an ANDA for a generic version of Silenor 3 mg and 6 mg tablets. This notice included a
paragraph IV certification with respect to seven of the eight patents listed in the Orange Book for
Silenor.
On February 2, 2011, we, together with ProCom, filed suit in the United States District Court
for the District of Delaware against Par Pharmaceutical, Inc. and Par Pharmaceutical Companies,
Inc., or collectively, Par. The lawsuit alleges that Par has infringed U.S. Patent No. 6,211,229 by
filing its ANDA relating to Silenor prior to the expiration of this patent. Pursuant to the
provisions of the Hatch-Waxman Act, FDA final approval of the Par ANDA can occur no earlier than
June 23, 2013, unless there is an earlier court decision that the 229 patent is not infringed
and/or invalid or unless any party to the action is found to have failed to cooperate reasonably to
expedite the infringement action. At this time, the other patents included in Pars paragraph IV
certification have not been asserted against Par.
On March 29, 2011, we received a notice from Actavis Elizabeth LLC containing a paragraph IV
certification with respect to U.S. Patent No. 7,915,307, which was issued to us on March 29, 2011
and thereafter listed in the Orange Book. We are currently reviewing the details of the
notice.
We intend to vigorously enforce our intellectual property rights relating to Silenor, but we
cannot predict the outcome of these matters. Any adverse outcome in this litigation could result
in one or more generic versions of Silenor being launched before the expiration of the listed
patents, which could adversely affect our ability to successfully execute our business strategy to
increase sales of Silenor and would negatively impact our financial condition and results of
operations, including causing a significant decrease in our revenues and cash flows.
Certain pharmaceutical companies patent settlement agreements with generic pharmaceutical
companies have been challenged by the U.S. Federal Trade Commission alleging a violation of Section
5(a) of the Federal Trade Commission Act, and any patent settlement agreement that we may enter
into with any generic pharmaceutical company may be subject to similar challenges, which will be
both expensive and time consuming and may render such settlement agreements unenforceable.
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We also rely upon unpatented trade secrets and improvements, unpatented know-how and
continuing technological innovation to develop and maintain our competitive position, which we seek
to protect, in part, by confidentiality agreements with our collaborators, employees and
consultants. We also have invention or patent assignment agreements
with our employees and certain consultants. There can be no assurance that inventions relevant
to us will not be developed by a person not bound by an invention assignment agreement with us.
There can be no assurance that binding agreements will not be breached, that we would have adequate
remedies for any breach, or that our trade secrets will not otherwise become known or be
independently discovered by our competitors.
Litigation or other proceedings to enforce or defend intellectual property rights is often
very complex in nature, expensive and time-consuming, may divert our managements attention from
our core business and may result in unfavorable results that could adversely impact our ability to
prevent third parties from competing with us.
We expect intense competition in the marketplace for Silenor and any other product to which we
acquire rights, and new products may emerge that provide different and/or better therapeutic
alternatives for the disorders that our products are intended to treat.
Silenor competes with well established drugs approved for the treatment of insomnia, including
the branded and generic versions of Sanofi-Synthélabo, Inc.s Ambien and Ambien CR, Pfizer Inc.s
Sonata, and Lunesta, marketed by Sunovion Pharmaceuticals Inc., a wholly-owned subsidiary of
Dainippon Sumitomo Pharma Co., Ltd., all of which are GABA-receptor agonists, and Takeda
Pharmaceuticals North America, Inc.s Rozerem, a melatonin receptor antagonist.
A number of companies are marketing reformulated versions of previously approved GABA-receptor
agonists. For example, Meda AB and Orexo AB launched Edluar, formerly known as Sublinox, a
sublingual tablet formulation of zopidem in the third quarter of 2009. ECR Pharmaceuticals
Company, Inc., a wholly owned subsidiary of Hi-Tech Pharmacal Co., Inc., launched NovaDel Pharma,
Inc.s ZolpiMist, an oral mist formulation of zolpidem, in the United States in February 2011.
In addition to the currently approved products for the treatment of insomnia, a number of new
products may enter the insomnia market over the next several years. Transcept Pharmaceuticals, Inc.
submitted an NDA for Intermezzo, a low-dose sublingual tablet formulation of zolpidem in 2008, and
in October 2009, Transcept announced that it received a complete response letter from the FDA
relating to such NDA. Transcept resubmitted its NDA for the product in January 2011. The FDA
assigned a Prescription Drug User Fee Act of 1992 action date of July 14, 2011 for completion of the
NDA review. Transcept and Purdue Pharmaceutical Products L.P. have entered into an exclusive
license and collaboration agreement to commercialize Intermezzo in the United States.
Alexza Pharmaceuticals, Inc. has announced positive results from a Phase 1 clinical trial of
an inhaled formulation of zaleplon, the API in Sonata. In July 2010, Alexza announced that it was
advancing this product candidate into Phase 2 clinical trials during the first half of 2011 for the
treatment of insomnia in patients who have difficulty falling asleep, including those patients who
awake in the middle of the night and have difficulty falling back asleep. Somnus Therapeutics,
Inc. has announced positive results from two Phase 1 clinical trials of a delayed-release
formulation of zaleplon and has initiated Phase 2 clinical trials of that product candidate.
Vanda Pharmaceuticals Inc. has completed two Phase 3 clinical trials of tasimelteon, a
melatonin receptor agonist. Tasimelteon received orphan drug designation status for non-24 hour
sleep/wake disorder in blind individuals with no light perception. Vanda has initiated a Phase 3
clinical trial for tasimelteon to treat this disorder. Vanda has announced that it plans to
conduct additional clinical trials and plans to file an NDA with the FDA by the first quarter of
2013.
Merck & Co., Inc. has MK-4305, an orexin antagonist, in Phase 3 clinical trials for the
treatment of insomnia and MK-6096 in Phase 2 clinical trials for the treatment of insomnia. Merck
has announced that it plans to file regulatory applications for MK-4305 in 2012.
Several other companies, including Sunovion Pharmaceuticals, are evaluating 5HT2 antagonists
as potential hypnotics, and Eli Lilly and Company is evaluating a potential hypnotic that is a dual
histamine/5HT2 antagonist. Additionally, several other companies are evaluating new formulations of
existing compounds and other compounds for the treatment of insomnia.
Furthermore, generic versions of Ambien, Ambien CR and Sonata have been launched and are
priced significantly lower than approved, branded insomnia products. Sales of all of these drugs
may reduce the available market for, and could put downward pressure on, the price we are able to
charge for Silenor, which could ultimately limit our ability to generate
significant revenues.
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Upon the expiration of, or successful challenge to, our patents covering Silenor, generic
competitors may introduce a generic version of Silenor at a lower price. Some generic
manufacturers have also demonstrated a willingness to launch generic versions of branded products
before the final resolution of related patent litigation (known as an at-risk launch). A launch
of a generic version of Silenor could have a material adverse effect on our business and we could
suffer a significant loss of sales and market share in a short period of time.
On November 3, 2010, we received a notice from each of Actavis Elizabeth LLC and Mylan
Pharmaceuticals Inc. that each had filed with the FDA an ANDA for a generic version of Silenor 3 mg
and 6 mg tablets. Each of the notices included a paragraph IV certification with respect to seven
of the eight patents listed in the Orange Book for Silenor.
On December 15, 2010, we, together with ProCom, filed suit in the United States District Court
for the District of Delaware against each of Actavis and Mylan. The lawsuit alleges that Actavis
and Mylan have each infringed U.S. Patent No. 6,211,229 by filing their ANDAs relating to Silenor
prior to the expiration of this patent. Pursuant to the provisions of the Hatch-Waxman Act, FDA
final approval of each of the Actavis and Mylan ANDAs can occur no earlier than May 3, 2013, unless
there is an earlier court decision that the 229 patent is not infringed and/or invalid or unless
any party to the action is found to have failed to cooperate reasonably to expedite the
infringement action. At this time, the other patents included in the paragraph IV certifications of
Actavis and Mylan have not been asserted against either Mylan or Actavis.
On December 23, 2010, we received a notice from Par Pharmaceutical, Inc. that it had filed
with the FDA an ANDA for a generic version of Silenor 3 mg and 6 mg tablets. This notice included a
paragraph IV certification with respect to seven of the eight patents listed in the Orange Book for
Silenor.
On February 2, 2011, we, together with ProCom, filed suit in the United States District Court
for the District of Delaware against Par. The lawsuit alleges that Par has infringed U.S. Patent
No. 6,211,229 by filing its ANDA relating to Silenor prior to the expiration of this patent.
Pursuant to the provisions of the Hatch-Waxman Act, FDA final approval of the Par ANDA can occur no
earlier than June 23, 2013, unless there is an earlier court decision that the 229 patent is not
infringed and/or invalid or unless any party to the action is found to have failed to cooperate
reasonably to expedite the infringement action. At this time, the other patents included in Pars
paragraph IV certification have not been asserted against Par.
On March 29, 2011, we received a notice from Actavis Elizabeth LLC containing a paragraph IV
certification with respect to U.S. Patent No. 7,915,307, which was issued to us on March 29, 2011
and thereafter listed in the Orange Book. We are currently reviewing the details of the
notice.
We intend to vigorously enforce our intellectual property rights relating to Silenor, but we
cannot predict the outcome of these matters. Any adverse outcome in this litigation could result
in one or more generic versions of Silenor being launched before the expiration of the listed
patents, which could adversely affect our ability to successfully execute our business strategy to
increase sales of Silenor and would negatively impact our financial condition and results of
operations, including causing a significant decrease in our revenues and cash flows.
The biotechnology and pharmaceutical industries are subject to rapid and intense technological
change. We face, and will continue to face, competition in the development and marketing of Silenor
or any other product candidate to which we acquire rights from academic institutions, government
agencies, research institutions and biotechnology and pharmaceutical companies. There can be no
assurance that developments by others, including the development of other drug technologies and
methods of preventing the incidence of disease, will not render Silenor or any other product
candidate that we develop obsolete or noncompetitive.
Compared to us, many of our potential competitors have substantially greater:
| capital resources; |
| manufacturing, distribution and sales and marketing resources and experience; |
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| research and development resources, including personnel and technology; |
| regulatory experience; |
| experience conducting non-clinical studies and clinical trials, and related resources; and |
| expertise in prosecution of intellectual property rights. |
As a result of these factors, our competitors may develop drugs that are more effective and
less costly than ours and may be more successful than we are in manufacturing, marketing and
selling their products. Our competitors may also obtain patent protection or other intellectual
property rights or seek to invalidate or otherwise challenge our intellectual property rights,
limiting our ability to successfully commercialize products.
In addition, manufacturing efficiency and selling and marketing capabilities are likely to be
significant competitive factors. We currently have no commercial manufacturing capability and more
limited sales and marketing infrastructure than many of our competitors and potential competitors.
Risks Related to Our Finances and Capital Requirements
We have never been profitable and we may not be able to generate revenues sufficient to achieve
profitability.
We only began generating revenues from the commercialization of Silenor late in the third quarter
of 2010, we have not been profitable since inception, and it is possible that we will not achieve
profitability. We incurred net losses of $17.0 million for the three months ended March 31, 2011,
and have accumulated losses totaling $233.9 million since inception. We expect to continue to
incur significant operating losses and capital expenditures. As a result, we will need to generate
significant revenues to achieve and maintain profitability. We cannot assure you that we will
achieve significant revenues, or that we will ever achieve profitability. Even if we do achieve
profitability, we cannot assure you that we will be able to sustain or increase profitability on a
quarterly or annual basis in the future. If revenues grow more slowly than we anticipate or if
operating expenses exceed our expectations or cannot be adjusted accordingly, our business, results
of operations and financial condition will be materially and adversely affected.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Not applicable.
Item 3. | Defaults Upon Senior Securities |
Not applicable.
Item 4. | (Removed and Reserved) |
Item 5. | Other Information |
Not applicable.
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Item 6. | Exhibits |
EXHIBIT INDEX
Exhibit | ||||
Number | Description | |||
3.1 | (1) | Amended and Restated Certificate of Incorporation of the Registrant |
||
3.2 | (2) | Amended and Restated Bylaws of the Registrant |
||
4.1 | (3) | Form of the Registrants Common Stock Certificate |
||
4.2 | (4) | Amended and Restated Investor Rights Agreement dated June 2, 2005 |
||
4.3 | (5) | Warrant dated May 21, 2008 issued to Silicon Valley Bank |
||
4.4 | (5) | Warrant dated May 21, 2008 issued to Oxford Finance Corporation |
||
4.5 | (5) | Warrant dated May 21, 2008 issued to Kingsbridge Capital Limited |
||
4.6 | (6) | Form of Warrant dated July 2, 2009 issued to certain Purchasers under the
Securities Purchase Agreement dated July 2, 2009 |
||
10.1 | (7) | Loan and Security Agreement, dated as of February 7, 2011, by and between Somaxon
Pharmaceuticals, Inc. and Comerica Bank. |
||
10.2 | (7) | LIBOR Addendum to Loan and Security Agreement, dated as of February 7, 2011, by
and between Somaxon Pharmaceuticals, Inc. and Comerica Bank. |
||
10.3 | (8)# | 2011 Incentive Plan |
||
10.4 | (9) | Supplement No. 1 to the Professional Detailing Services Agreement between Somaxon
Pharmaceuticals, Inc. and Publicis Touchpoint Solutions, Inc. dated February 7,
2011 |
||
31.1 | Certification of chief executive officer pursuant to Rule 13a-14 and Rule 15d-14
of the Securities Exchange Act of 1934, as amended |
|||
31.2 | Certification of chief financial officer pursuant to Rule 13a-14 and Rule 15d-14
of the Securities Exchange Act of 1934, as amended |
|||
32.1 | * | Certification of chief executive officer pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
||
32.2 | * | Certification of chief financial officer pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(1) | Filed with Amendment No. 3 to the Registrants Registration Statement on Form S-1 on November 30, 2005. | |
(2) | Filed with Registrants Current Report on Form 8-K on December 6, 2007 | |
(3) | Filed with Amendment No. 4 to the Registrants Registration Statement on Form S-1 on December 13, 2005. | |
(4) | Filed with the Registrants Registration Statement on Form S-1 on October 7, 2005. | |
(5) | Filed with Registrants Current Report on Form 8-K on May 22, 2008. | |
(6) | Filed with Registrants Current Report on Form 8-K on July 8, 2009. | |
(7) | Filed with Registrants Current Report on Form 8-K on February 8, 2011. | |
(8) | Filed with Registrants Current Report on Form 8-K on February 14, 2011. | |
(9) | Filed with Registrants Current Report on Form 8-K/A on February 11, 2011. | |
# | Indicates management contract or compensatory plan. | |
| Confidential treatment has been granted as to certain portions, which portions have been omitted and filed separately with the Securities and Exchange Commission. | |
* | These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not subject to the liability of that section. These certifications are not to be incorporated by reference into any filing of Somaxon Pharmaceuticals, 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.
SOMAXON PHARMACEUTICALS, INC. | ||||
Dated: May 4, 2011 |
||||
/s/ Richard W. Pascoe
|
||||
President and Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
Dated: May 4, 2011 |
||||
/s/ Tran B. Nguyen
|
||||
Senior Vice President and Chief Financial Officer | ||||
(Principal Financial Officer) |
18