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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 1-35144

 

 

Sagent Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		98-0536317
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

1901 N. Roselle Road, Suite 700 Schaumburg, Illinois		60195
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (847) 908-1600

 

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant 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  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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		¨		Accelerated filer		x
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		Smaller reporting company		¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

At April 30, 2014, there were 31,865,070 shares of the registrant’s common stock outstanding.

 

 

 

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Sagent Pharmaceuticals, Inc.

Table of Contents

 

				Page No.
PART I – FINANCIAL INFORMATION
Item 1.		Financial Statements
		Condensed Consolidated Balance Sheets at March 31, 2014 and December 31, 2013			3
		Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2014 and 2013			4
		Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March  31, 2014 and 2013			5
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013			6
		Notes to Condensed Consolidated Financial Statements			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			23
Item 4.		Controls and Procedures			24
PART II – OTHER INFORMATION					25
Item 1.		Legal Proceedings			25
Item 1A.		Risk Factors			25
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			25
Item 3.		Defaults Upon Senior Securities			25
Item 4.		Mine Safety Disclosures			25
Item 5.		Other Information			26
Item 6.		Exhibits			26
		Signature			27

In this report, “Sagent,” “we,” “us,” “our” and the “Company” refers to Sagent Pharmaceuticals, Inc. and subsidiaries, and “Common Stock” refers to Sagent’s common stock, $0.01 par value per share.

 

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Sagent Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share amounts)

 

		March 31, 2014				December 31, 2013
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	25,738			$	42,332
Short-term investments			113,931				113,810
Accounts receivable, net of chargebacks and other deductions			33,204				23,033
Inventories, net			44,179				46,481
Due from related party			3,385				3,644
Prepaid expenses and other current assets			6,615				6,491
Total current assets			227,052				235,791
Property, plant, and equipment, net			56,693				57,684
Investment in joint ventures			2,344				2,063
Goodwill			6,038				6,038
Intangible assets, net			9,005				8,326
Other assets			282				306
Total assets		$	301,414			$	310,208
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	21,835			$	24,010
Due to related party			3,790				3,129
Accrued profit sharing			8,448				8,740
Accrued liabilities			11,345				13,931
Current portion of deferred purchase consideration			3,420				3,381
Current portion of long-term debt			—				10,333
Total current liabilities			48,838				63,524
Long term liabilities:
Long-term portion of deferred purchase consideration			8,425				8,329
Other long-term liabilities			2,080				2,329
Total liabilities			59,343				74,182
Stockholders’ equity:
Common stock—$0.01 par value, 100,000,000 authorized, and 31,863,440 and 31,789,348 outstanding at March 31, 2014 and December 31, 2013, respectively			319				318
Additional paid-in capital			350,624				349,278
Accumulated other comprehensive income			66				487
Accumulated deficit			(108,938	)			(114,057	)
Total stockholders’ equity			242,071				236,026
Total liabilities and stockholders’ equity		$	301,414			$	310,208

See accompanying notes to condensed consolidated financial statements.

 

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Sagent Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

(Unaudited)

 

		Three months ended March 31,
		2014				2013
Net revenue		$	70,869			$	60,211
Cost of sales			50,485				41,753
Gross profit			20,384				18,458
Operating expenses:
Product development			4,020				4,261
Selling, general and administrative			10,013				8,867
Equity in net (income) loss of joint ventures			(281	)			443
Total operating expenses			13,752				13,571
Termination fee			—				5,000
Income from operations			6,632				9,887
Interest income and other			(86	)			16
Interest expense			(213	)			(65	)
Income before income taxes			6,333				9,838
Provision for income taxes			1,214				—
Net income		$	5,119			$	9,838
Net income per common share:
Basic		$	0.16			$	0.35
Diluted		$	0.16			$	0.34
Weighted-average of shares used to compute net income per common share:
Basic			31,814				28,135
Diluted			32,614				28,746

See accompanying notes to condensed consolidated financial statements.

 

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Sagent Pharmaceuticals, Inc.

Condensed Consolidated Statements of Comprehensive Income

(in thousands)

(Unaudited)

 

		Three months ended March 31,
		2014				2013
Net income		$	5,119			$	9,838
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments			(436	)			31
Unrealized gains (losses) on available for sale securities			15				(59	)
Total other comprehensive income (loss), net of tax			(421	)			(28	)
Comprehensive income		$	4,698			$	9,810

See accompanying notes to condensed consolidated financial statements

 

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Sagent Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

		Three months ended March 31,
		2014				2013
Cash flows from operating activities
Net income		$	5,119			$	9,838
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization			1,750				1,274
Stock-based compensation			1,196				2,077
Equity in net (income) loss of joint ventures			(281	)			443
Dividends from unconsolidated joint ventures			—				926
Changes in operating assets and liabilities:
Accounts receivable, net			(10,172	)			(4,233	)
Inventories, net			2,272				(2,667	)
Prepaid expenses and other current assets			(129	)			(247	)
Due from related party			259				(3,292	)
Accounts payable and other accrued liabilities			(4,409	)			2,780
Net cash (used in) provided by operating activities			(4,395	)			6,899
Cash flows from investing activities
Capital expenditures			(556	)			(92	)
Investments in unconsolidated joint ventures			—				(11	)
Purchases of investments			(21,784	)			(99,648	)
Sale of investments			21,250				93,200
Purchase of product rights			(989	)			(100	)
Net cash used in investing activities			(2,079	)			(6,651	)
Cash flows from financing activities
Repayment of long-term debt			(10,324	)			—
Proceeds from issuance of common stock, net of issuance costs			149				183
Net cash (used in) provided by financing activities			(10,175	)			183
Effect of exchange rate movements in cash			55				—
Net (decrease) increase in cash and cash equivalents			(16,594	)			431
Cash and cash equivalents, at beginning of period			42,332				27,687
Cash and cash equivalents, at end of period		$	25,738			$	28,118

See accompanying notes to condensed consolidated financial statements

 

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Sagent Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except for share and per share information)

(Unaudited)

Note 1. Basis of presentation:

Our interim condensed consolidated financial statements are unaudited. We prepared the condensed consolidated financial statements following rules for interim reporting as prescribed by the U.S. Securities and Exchange Commission (“SEC”). As permitted under those rules, we have condensed or omitted a number of footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). It is management’s opinion that these financial statements include all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation of our financial position, operating results and cash flows. Operating results for any interim period are not necessarily indicative of future or annual results.

The condensed consolidated financial statements include Sagent as well as our wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. We account for our investment in Sagent Agila LLC (formerly Sagent Strides LLC) using the equity method of accounting, as our interest in the entity provides for joint financial and operational control.

In June 2013, we acquired the remaining 50% interest in Kanghong Sagent (Chengdu) Pharmaceutical Co., Ltd. (“KSCP”), which we subsequently renamed Sagent (China) Pharmaceuticals Co., Ltd. (“SCP”), from our former joint venture partner. Accordingly, commencing as of June 30, 2013, our condensed consolidated financial statements include SCP as a wholly-owned subsidiary. Prior to the acquisition, we accounted for our investment in KSCP using the equity method of accounting, as our interest in the entity provided for joint financial and operational control.

Certain amounts previously included in accounts payable have been reclassified to accrued liabilities to conform to the current period presentation.

You should read these statements in conjunction with our consolidated financial statements and related notes for the year ended December 31, 2013, included in our most recent Annual Report on Form 10-K filed with the SEC on March 7, 2014.

Note 2. Acquisitions:

Remaining equity interest of SCP

On June 4, 2013, we acquired Chengdu Kanghong Pharmaceuticals (Group) Co. Ltd (“CKT”) 50% equity interest in KSCP for $25,000, payable in installments through September 2015. We acquired net tangible assets consisting primarily of cash of $2,704, inventory of $2,396, prepaid assets of $196, and property, plant and equipment of $56,654, net of assumed liabilities, primarily long term bank loans of $19,095 and accrued compensation and other liabilities of $8,954. We recorded goodwill of $6,038 due to the synergies achieved by having control over the products and manufacturing at the SCP facility.

Product rights acquisitions

On December 12, 2013, we acquired two products, Mesna and Acetylcysteine, owned by Sagent Agila in an agreement with Mylan Inc. The total fair value of consideration transferred was $3,400, consisting of $3,200 of cash and $200 of contingent consideration.

 

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The following unaudited pro forma financial information reflects the consolidated results of operations of Sagent as if these acquisitions had taken place on January 1, 2013. The pro forma information includes acquisition and integration expenses. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transactions been effected on the assumed date.

 

Condensed consolidated statement of operations information		Three months ended March 31, 2013
Net revenues		$	60,211
Net income			13,628
Diluted income per common share		$	0.47

Note 3. Investments:

Our investments at March 31, 2014 were comprised of the following:

 

		Cost basis				Unrealized gains				Unrealized losses				Recorded basis				Cash and cash equivalents				Short term investments
Assets
Cash		$	14,156			$	—			$	—			$	14,156			$	14,156			$	—
Money market funds			11,582				—				—				11,582				11,582				—
Commercial paper			17,097				—				(2	)			17,095				—				17,095
Corporate bonds and notes			96,828				57				(49	)			96,836				—				96,836
		$	139,663			$	57			$	(51	)		$	139,669			$	25,738			$	113,931

Investments with continuous unrealized losses for less than twelve months and their related fair values at March 31, 2014 were as follows:

 

		Fair value				Unrealized losses
Commercial paper		$	9,395			$	(2	)
Corporate bonds and notes			39,824				(49	)
		$	49,219			$	(51	)

Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Because we do not currently intend to sell these investments, and it is not more likely than not that we will be required to sell our investments before recovery of their amortized cost basis, which may be maturity, we do not consider these investments to be other-than-temporarily impaired at March 31, 2014.

The original cost and estimated current fair value of our fixed-income securities at March 31, 2014 are set forth below.

 

		Cost basis				Estimated fair value
Due in one year or less		$	62,948			$	62,966
Due between one and five years			50,977				50,965
		$	113,925			$	113,931

Note 4. Inventories:

Inventories at March 31, 2014 and December 31, 2013 were as follows:

 

		March 31, 2014												December 31, 2013
		Approved				Pending regulatory approval				Inventory				Approved				Pending regulatory approval				Inventory
Finished goods		$	41,849			$	—			$	41,849			$	44,510			$	1,437			$	45,947
Raw materials			3,907				2,264				6,171				5,614				19				5,633
Inventory reserve			(3,841	)			—				(3,841	)			(3,662	)			(1,437	)			(5,099	)
		$	41,915			$	2,264			$	44,179			$	46,462			$	19			$	46,481

 

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Note 5. Property, plant and equipment

Property, plant and equipment at March 31, 2014 and December 31, 2013 were as follows:

 

		March 31, 2014				December 31, 2013
Land and land improvements		$	2,215			$	2,235
Buildings and improvements			19,520				19,696
Machinery, equipment, furniture and fixtures			38,077				38,000
Construction in process			619				460
			60,431				60,391
Less accumulated depreciation			(3,738	)			(2,707	)
		$	56,693			$	57,684

Depreciation expense was $1,041 and $64 for the three months ending March 31, 2014 and 2013, respectively.

Note 6. Goodwill and Intangible assets, net:

Goodwill at March 31, 2014 and December 31, 2013 was $6,038 and there were no goodwill impairment losses for the three months ended March 31, 2014 and 2013, respectively.

Intangible assets at March 31, 2014 and December 31, 2013 were as follows:

 

		March 31, 2014												December 31, 2013
		Gross carrying amount				Accumulated amortization				Intangible assets, net				Gross carrying amount				Accumulated amortization				Intangible assets, net
Product licensing rights		$	5,992			$	(2,312	)		$	3,680			$	5,941			$	(2,087	)		$	3,854
Product development rights			4,105				—				4,105				3,252				—				3,252
Total definite-lived intangible assets		$	10,097			$	(2,312	)		$	7,785			$	9,193			$	(2,087	)		$	7,106
In-process research and development (IPR&D)		$	1,220			$	—			$	1,220			$	1,220			$	—			$	1,220
Total intangible assets		$	11,317			$	(2,312	)		$	9,005			$	10,413			$	(2,087	)		$	8,326

Movements in intangible assets were due to the following:

 

		Product licensing rights				Product development rights				IPR&D
December 31, 2013		$	3,854			$	3,252			$	1,220
Purchase of product rights			51				938				—
Amortization of product rights			(225	)			(85	)			—
March 31, 2014		$	3,680			$	4,105			$	1,220

The weighted-average period prior to the next extension or renewal for the 21 products comprising our product licensing rights intangible asset was 70 months at March 31, 2014.

 

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We currently estimate amortization expense over each of the next five years as follows:

 

For the year ending:		Amortization expense
March 31, 2015		$	4,611
March 31, 2016			786
March 31, 2017			491
March 31, 2018			481
March 31, 2019			437

Note 7. Investment in Sagent Agila:

Changes in our investment in Sagent Agila during the three months ended March 31, 2014 were as follows:

 

Investment in Sagent Agila at January 1, 2014		$	2,063
Equity in net income of Sagent Agila			281
Investment in Sagent Agila at March 31, 2014		$	2,344

Condensed statement of operations information of Sagent Agila is presented below.

 

		Three months ended March 31,
Condensed statement of operations information		2014				2013
Net revenues		$	1,330			$	5,629
Gross profit			600				1,444
Net income			562				1,083

Note 8. Debt:

SCP credit facilities

In connection with the acquisition of the remaining 50% equity interest in SCP in June 2013, we assumed two loan contracts with the Agricultural Bank of China Ltd. in the amount of RMB 37,000 ($6,014) and RMB 83,000 ($13,491) originally entered into in June 2011 and August 2010, respectively, (the “ABC Loans”) each with a five year term. Amounts outstanding under the ABC Loans bore an interest rate equal to the benchmark lending interest rate published by the People’s Bank of China, subject to adjustment every three months. As the interest rate resets on a quarterly basis, the fair value of our long-term debt approximated its carrying value. On January 2, 2014, we repaid in full the then-outstanding balance of the ABC Loans, totaling RMB 63,000 ($10,333). Upon prepayment of the ABC Loans, the loan contracts were terminated. No early termination fees were incurred as part of the prepayment of the ABC Loans.

Note 9. Accrued liabilities:

Accrued liabilities at March 31, 2014 and December 31, 2013 were as follows:

 

		March 31, 2014				December 31, 2013
Payroll and employee benefits		$	3,440			$	6,224
Sales and marketing			5,448				5,305
Taxes payable			811				895
Other accrued liabilities			1,646				1,507
		$	11,345			$	13,931

 

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Note 10. Fair value measurements:

Assets measured at fair value on a recurring basis as of March 31, 2014 consisted of the following:

 

		Total fair value				Quoted prices in active markets for identical assets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable inputs (Level 3)
Assets
Money market funds		$	11,582			$	11,582			$	—			$	—
Corporate bonds and notes			96,836				—				96,836				—
Commercial paper			17,095				—				17,095				—
Short-term investments		$	113,931			$	—			$	113,931			$	—
Total assets		$	125,513			$	11,582			$	113,931			$	—
Liabilities
Contingent purchase consideration		$	200			$	—			$	—			$	200

The fair value of our Level 2 investments is based on a combination of quoted market prices of similar securities and matrix pricing provided by third-party pricing services utilizing securities of similar quality and maturity. The fair value of our Level 3 contingent consideration is based upon a probability weighting approach that considered the possible outcomes based on assumptions related to the timing and probability of the product approval date.

Assets measured at fair value on a recurring basis as of December 31, 2013 consisted of the following:

 

		Total fair value				Quoted prices in active markets for identical assets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable inputs (Level 3)
Assets
Money market funds		$	11,592			$	11,592			$	—			$	—
Corporate bonds and notes			92,516				—				92,516				—
Commercial paper			21,294				—				21,294				—
Short-term investments		$	113,810			$	—			$	113,810			$	—
Total assets		$	125,402			$	11,592			$	113,810			$	—
Liabilities
Contingent purchase consideration		$	200			$	—			$	—			$	200

There were no transfers of assets between Level 1, Level 2 or Level 3 during the periods presented.

Changes in the fair value of our contingent purchase consideration measured using significant unobservable inputs (Level 3), during the three months ending March 31, 2014 were as follows:

 

Balance at January 1, 2014		$	200
Issuance of contingent purchase consideration			—
Change in fair value of contingent purchase consideration			—
Payment of contingent purchase consideration			—
Balance at March 31, 2014		$	200

 

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Note 11. Accumulated other comprehensive income:

Accumulated other comprehensive income at March 31, 2014 and December 31, 2013 is comprised of the following:

 

		March 31, 2014				December 31, 2013
Currency translation adjustment, net of tax		$	60			$	496
Unrealized gains (losses) on available for sale securities, net of tax			6				(9	)
Total accumulated other comprehensive income		$	66			$	487

There were no amounts reclassified from accumulated other comprehensive income during the three months ended March 31, 2014.

Note 12. Earnings per share:

Basic earnings per share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Because of their anti-dilutive effect, 1,196,646 and 735,843 common share equivalents, comprised of restricted stock and unexercised stock options, have been excluded from the calculation of diluted earnings per share for the periods ended March 31, 2014 and 2013, respectively.

The table below presents the computation of basic and diluted earnings per share for the three months ended March 31, 2014 and 2013:

 

		Three months ended March 31,
		2014				2013
Basic and dilutive numerator:
Net income, as reported		$	5,119			$	9,838
Denominator:
Weighted-average common shares outstanding - basic (in thousands)			31,814				28,135
Net effect of dilutive securities:
Stock options and restricted stock			800				611
Weighted-average common shares outstanding - diluted (in thousands)			32,614				28,746
Net income per common share (basic)		$	0.16			$	0.35
Net income per common share (diluted)		$	0.16			$	0.34

Note 13. Stock-based compensation:

We granted 251,058 stock options, 18,600 restricted stock units and 47,714 restricted stock awards during the three months ended March 31, 2014. We granted 370,024 stock options, 12,156 restricted stock units and 41,702 restricted stock awards during the three months ended March 31, 2013. There were 54,570 and 25,043 stock options exercised during the three months ended March 31, 2014 and 2013, respectively, with an aggregate intrinsic value of $957 and $236, respectively.

 

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Note 14. Net revenue by product:

Net revenue by therapeutic class is as follows:

 

		Three months ended March 31,
Therapeutic class:		2014				2013
Anti-infective		$	27,148			$	22,179
Critical care			21,585				19,088
Oncology			22,136				18,944
		$	70,869			$	60,211

Note 15. Related party transactions:

As of March 31, 2014 and December 31, 2013, respectively, we had a receivable of $3,385 and $3,644 from Sagent Agila LLC, which is expected to offset future profit-sharing payments. As of March 31, 2014 and December 31, 2013, respectively, we had a payable of $3,790 and $3,129 to Sagent Agila LLC, principally for the acquisition of inventory and amounts due under profit-sharing arrangements.

Note 16. Income Taxes:

Valuation Allowance

We periodically assess whether it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets. We establish valuation allowances if it is not likely we will realize our deferred income tax assets. In making this determination, we consider all available positive and negative evidence and make certain assumptions. We consider, among other things, our deferred tax liabilities, the overall business environment, our historical financial results, our industry’s historically cyclical financial results and potential current and future tax planning strategies.

We recorded a full valuation allowance in 2007 due to our cumulative loss position at that time. At March 31, 2014, we had approximately a $17,000 valuation allowance established against our domestic deferred income tax assets, which represents a full valuation allowance against our net domestic deferred income tax assets.

During the first quarter of 2014, we moved from a cumulative loss position over the previous three years to a cumulative income position for the first time since we established the full valuation allowance. While this is positive information, we have concluded as of March 31, 2014 that the valuation allowance was still needed on our net deferred tax assets based upon the weight of the factors described above, especially considering our history that included six consecutive years of losses. We continue to evaluate our cumulative income position and income trend as well as our future projections of sustained profitability. We evaluate whether this profitability trend constitutes sufficient positive evidence to support a reversal of our valuation allowance (in full or in part). If this profitability trend continues for the remainder of 2014 and this level of profitability is projected in the future, we anticipate that we may reverse substantially all of our domestic valuation allowance as early as the end of 2014.

2014 tax provision

Our provision for income taxes for the three months ended March 31, 2014 was $1,214. Of our total provision for income taxes, $885 represents the alternative minimum tax (“AMT”) payable in the United States for 2014 and income taxes payable in certain states where we do not have available loss carryforwards. As we have recorded a full valuation allowance against our deferred tax assets, our AMT payable is recorded as tax expense. The remaining provision for income taxes, $329, relates to the correction of state tax expense that was not recorded during the year ended December 31, 2013.

Note 17. Actavis contract termination:

In March 2013, we agreed with Actavis, LLC (“Actavis”), a contract manufacturer of the Company, to terminate our development, manufacturing and supply agreement, effective December 31, 2014. As consideration for the termination of the agreement, we received a greater percentage of the net profit from sales of products during the remaining term of the agreement and a one-time, non-refundable payment of $5,000, which is not subject to future performance. This payment is included in Termination fee in our Condensed Consolidated Statement of Operations for the three months ended March 31, 2013.

 

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Note 18. Commitments and contingencies:

Litigation

From time to time, we are subject to claims and litigation arising in the ordinary course of business. These claims may include assertions that our products infringe existing patents and claims that the use of our products has caused personal injuries. We intend to vigorously defend any such litigation that may arise under all defenses that would be available to us.

Zoledronic Acid (Generic versions of Zometa^® and Reclast^®). On February 20, 2013, Novartis Pharmaceuticals Corporation (“Novartis”) sued the Company and several other defendants in the United States District Court for the District of New Jersey (Novartis Pharmaceuticals Corporation v. Actavis, LLC, et. al., Case No. 13-cv-1028), alleging, among other things, that sales of the Company’s (i) zoledronic acid premix bag (4mg/100ml), made by ACS Dobfar Info S.A. (“Info”), also a defendant, a generic version of Novartis’ Zometa^® ready to use bottle, would infringe U.S. Patent No. 7,932,241 (the “241 Patent”) and U.S. Patent No. 8,324,189 (the “189 Patent”) and (ii) zoledronic acid premix bag (5mg/100ml), also made by Info, a generic version of Novartis’ Reclast^® ready to use bottle, would infringe U.S. Patent No. 8,052,987 and the 241 Patent, and (iii) zoledronic acid vial (4mg/5ml), made by Actavis LLC, also a defendant, a generic version of Novartis’ Zometa^® vial, would infringe the 189 Patent. On March 1, 2013, the District Court denied Novartis’ request for a temporary restraining order and a preliminary injunction against the Company and the other defendants, including Actavis and Info.

On March 6, 2013, the Company, began selling Actavis’ zoledronic acid vial, the generic version of Zometa^® and as of August 27, 2013 and October 1, 2013, the Company began selling zoledronic acid premix bags in 4mg/100ml and5mg/100ml presentations, respectively. The Company believes it has substantial meritorious defenses to the case, and the Company has sold and will continue to sell these products. While an estimate of the potential loss resulting from an adverse final determination that one of the patents in suit is valid and infringed cannot currently be made as specific monetary damages have not been asserted, an adverse final determination could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.

At this time, there are no other proceedings of which we are aware that are considered likely to have a material adverse effect on the consolidated financial position or results of operations.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our condensed consolidated financial statements included elsewhere in this report and with our audited financial statements and the notes found in our most recent Annual Report on Form 10-K filed with the SEC on March 7, 2014. Unless otherwise noted, all dollar amounts are in thousands.

Disclosure Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “could have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies, our product pipeline and anticipated product approvals or the expected outcome or impact of pending or threatened litigation are forward-looking statements. In addition, this report contains forward-looking statements regarding the adequacy of our current cash balances to fund our ongoing operations; our utilization of our net operating loss carryforwards; our ability to realize the expected benefits from our acquisition of and investment in our China subsidiary; and the additional investments required to be made in our China subsidiary to achieve its manufacturing potential.

The forward-looking statements contained in this Quarterly Report on Form 10-Q are subject to a number of risks and uncertainties, and the cautionary statements set forth below, as well as elsewhere in this Quarterly Report on Form 10-Q, and those contained in Item 1A under the heading “Risk Factors” in our most recent Annual Report on Form 10-K filed with the SEC on March 7, 2014, identify important factors that could cause actual results to differ materially from those indicated by our forward-looking statements. Such factors, include, but are not limited to:

 

•

we rely on our business partners for the manufacture of substantially all of our products, and if our business partners fail to supply us with high-quality active pharmaceutical ingredient (“API”) or finished products in the quantities we require on a timely basis, sales of our products could be delayed or prevented, our revenues and margins could decline, which could have a material adverse effect on our business, financial condition and results of operations;

 

•

if we or any of our business partners are unable to comply with the quality and regulatory standards applicable to pharmaceutical drug manufacturers, or if approvals of pending applications are delayed as a result of quality or regulatory compliance concerns or merely backlogs at the US Food and Drug Administration (“FDA”), we may be unable to meet the demand for our products, may lose potential revenues and our business, financial condition and results of operations could be materially adversely affected;

 

•

changes in the regulations, enforcement procedures or regulatory policies established by the FDA and other regulatory agencies are expected to increase the costs and time of development of our products and could delay or prevent sales of our products and our revenues could decline and our business, financial condition and results of operations could be materially adversely affected;

 

•

four of our products, heparin, levofloxacin in premix bag and zoledronic acid in both vials and premix bag, represent a significant portion of our net revenues. Each of these products are supplied to us by a single vendor, and both heparin and zoledronic acid vials, and levofloxacin in premix bag and zoledronic acid in premix bag, are manufactured by a single supplier. If the volume or pricing of any of these products declines, or we are unable to satisfy market demand for any of these products, such event could have a material adverse effect on our business, financial position and results of operations;

 

•

we participate in highly competitive markets, dominated by a few large competitors, and if we are unable to compete successfully, our revenues could decline and our business, financial condition and results of operations could be materially adversely affected;

 

•

if we are unable to maintain our group purchasing organizations and distributor relationships, our revenues could decline and our results of operations could be negatively impacted;

 

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•

we rely on a limited number of pharmaceutical wholesalers to distribute our products;

 

•

we depend to a significant degree upon our key personnel, the loss of whom could adversely affect our operations;

 

•

we may be exposed to product liability claims that could cause us to incur significant costs or cease selling some of our products;

 

•

our products may infringe the intellectual property rights of third parties, and we may incur substantial liabilities and may be unable to commercialize products in a profitable manner or at all;

 

•

our business could suffer if reimbursement by government-sponsored or private sector insurance programs for our current or future products is reduced or modified;

 

•

we are subject to risks associated with managing our international network of collaborations, which include business partners and other suppliers of components, API and finished products throughout the world;

 

•

we may never realize the expected benefits from our manufacturing facility in China and it will require substantial capital resources to reach its manufacturing potential and be profitable; and

 

•

we are likely to incur substantial costs associated with both implementation and maintenance of our new enterprise resource planning software and other related applications, and unforeseen problems may arise with the implementation. If the new systems do not perform as originally planned, our business, financial position and results of operations could be adversely affected.

 

•

we may seek to engage in strategic transactions, including the acquisition of products or businesses, that could have a variety of negative consequences, and we may not realize the intended benefits of such transactions.

We derive many of our forward-looking statements from our work in preparing, reviewing and evaluating our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, it is impossible for us to anticipate or accurately calculate the impact of all factors that could affect our actual results. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties.

We cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this report are made only as of the date hereof. We undertake no obligation and do not intend to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

Introduction

We are a specialty pharmaceutical company focused on developing, manufacturing, sourcing and marketing injectable pharmaceutical products, which we sell primarily in the United States of America through our highly experienced sales and marketing team. Initially founded in 2006 as Sagent Holding Co., a Cayman Islands company, we reincorporated as Sagent Pharmaceuticals, Inc., a Delaware corporation, in connection with our initial public offering, on April 26, 2011.

With a primary focus on generic injectable pharmaceuticals, which provide customers a lower-cost alternative to branded products when applicable patents have expired or been declared invalid, or when the products are determined not to infringe the patents of others, we offer our customers a broad range of products across anti-infective, oncolytic and critical care indications in a variety of presentations, including single- and multi-dose vials and ready-to-use pre-filled syringes and premix bags. We generally seek to develop injectable products where the form or packaging of the product can be enhanced to improve delivery, product safety or end-user convenience. Our management team includes industry veterans who have served critical functions at other injectable pharmaceutical companies and key customer groups and have long-standing relationships with customers, regulatory agencies, and suppliers. We have rapidly established a growing and diverse product portfolio and product pipeline as a result of our innovative business model. Our model combines an extensive network of international development, sourcing and manufacturing collaborations with our proven and experienced U.S.-based regulatory, quality assurance, business development, project management, and sales and marketing teams.

 

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Non-GAAP Financial Measures

We report our financial results in accordance with accounting principles generally accepted in the United States (“GAAP”).

Adjusted Gross Profit

We use the non-GAAP financial measure “Adjusted Gross Profit” and corresponding ratios. We define Adjusted Gross Profit as gross profit plus our share of the gross profit earned through our Sagent Agila joint venture which is included in the Equity in net (income) loss of joint ventures line on the consolidated statements of operations. We believe that Adjusted Gross Profit is relevant and useful supplemental information for our investors. Our management believes that the presentation of this non-GAAP financial measure, when considered together with our GAAP financial measures and the reconciliation to the most directly comparable GAAP financial measure, provides a more complete understanding of the factors and trends affecting Sagent than could be obtained absent these disclosures. Management uses Adjusted Gross Profit and corresponding ratios to make operating and strategic decisions and evaluate our performance. We have disclosed this non-GAAP financial measure so that our investors have the same financial data that management uses with the intention of assisting you in making comparisons to our historical operating results and analyzing our underlying performance. Our management believes that Adjusted Gross Profit provides a useful supplemental tool to consistently evaluate the profitability of our products that have profit sharing arrangements. The limitation of this measure is that it includes an item that does not have an impact on gross profit reported in accordance with GAAP. The best way that this limitation can be addressed is by using Adjusted Gross Profit in combination with our GAAP reported gross profit. Because Adjusted Gross Profit calculations may vary among other companies, the Adjusted Gross Profit figures presented below may not be comparable to similarly titled measures used by other companies. Our use of Adjusted Gross Profit is not meant to and should not be considered in isolation or as a substitute for, or superior to, any GAAP financial measure. You should carefully evaluate the following tables reconciling Adjusted Gross Profit to our GAAP reported gross profit for the periods presented (dollars in thousands).

 

		Three months ended March 31,																% of net revenue, three months ended March 31,
		2014				2013				$ Change				% Change				2014				2013				% Change
Adjusted Gross Profit		$	20,684			$	19,180			$	1,504				8	%			29.2	%			31.9	%			-2.7	%
Sagent portion of gross profit earned by Sagent Agila joint venture			300				722				(422	)			-58	%			0.4	%			1.2	%			-0.8	%
Gross Profit		$	20,384			$	18,458			$	1,926				10	%			28.8	%			30.7	%			-1.9	%

EBITDA and Adjusted EBITDA

We use the non-GAAP financial measures “EBITDA” and “Adjusted EBITDA” and corresponding growth ratios. We define EBITDA as net income less interest expense, net of interest income, provision for income taxes, depreciation and amortization. We define Adjusted EBITDA as net income less interest expense, net of interest income, provision for income taxes, depreciation and amortization, stock-based compensation expense and the equity in net loss of our former KSCP joint venture. We believe that EBITDA and Adjusted EBITDA are relevant and useful supplemental information for our investors. Our management believes that the presentation of these non-GAAP financial measures, when considered together with our GAAP financial measures and the reconciliation to the most directly comparable GAAP financial measures, provides a more complete understanding of the factors and trends affecting Sagent than could be obtained absent these disclosures. Management uses EBITDA, Adjusted EBITDA and corresponding ratios to make operating and strategic decisions and evaluate our performance. We have disclosed these non-GAAP financial measures so that our investors have the same financial data that management uses with the intention of assisting you in making comparisons to our historical operating results and analyzing our underlying performance. Our management believes that EBITDA and Adjusted EBITDA are useful supplemental tools to evaluate the underlying operating performance of the company on an ongoing basis. The limitation of these measures is that they exclude items that have an impact on net income. The best way that these limitations can be addressed is by using EBITDA and Adjusted EBITDA in combination with our GAAP reported net income. Because EBITDA and Adjusted EBITDA calculations may vary among other companies, the EBITDA and Adjusted EBITDA figures presented below may not be comparable to similarly titled measures used by

 

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other companies. Our use of EBITDA and Adjusted EBITDA is not meant to and should not be considered in isolation or as a substitute for, or superior to, any GAAP financial measure. You should carefully evaluate the following tables reconciling EBITDA and Adjusted EBITDA to our GAAP reported net income for the periods presented (dollars in thousands).

 

		Three months ended March 31,
		2014				2013				$ Change				% Change
Adjusted EBITDA		$	9,554			$	14,201			$	(4,647	)			-33	%
Stock-based compensation expense			1,196				2,077				(881	)			-42	%
Equity in net loss of KSCP joint venture1			—				984				(984	)			n/m
EBITDA		$	8,358			$	11,140			$	(2,782	)			-25	%
Depreciation and amortization expense2			1,726				1,253				473				38	%
Interest expense, net			299				49				250				510	%
Provision for income taxes			1,214				—				1,214				n/m
Net income		$	5,119			$	9,838			$	(4,719	)			-48	%

 

1	In June 2013, we acquired the remaining 50% interest in KSCP from our former joint venture partner. Accordingly, SCP is included in our Condensed Consolidated Statements of Operations as a wholly-owned subsidiary for the three months ended March 31, 2014.

2

Amortization expense excludes $24 and $21 of amortization in the three months ended March 31, 2014 and 2013, respectively, related to deferred financing fees, which is included within interest expense and other in our Condensed Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013.

Discussion and Analysis

Consolidated results of operations

The following compares our consolidated results of operations for the three months ended March 31, 2014 with those of the three months ended March 31, 2013:

 

		Three months ended March 31,
		2014				2013				$ change				% change
Net revenue		$	70,869			$	60,211			$	10,658				18	%
Cost of sales			50,485				41,753				8,732				21	%
Gross profit			20,384				18,458				1,926				10	%
Gross profit as % of net revenue			28.8	%			30.7	%
Operating expenses:
Product development			4,020				4,261				(241	)			-6	%
Selling, general and administrative			10,013				8,867				1,146				13	%
Equity in net (income) loss of joint ventures			(281	)			443				(724	)			n/m
Total operating expenses			13,752				13,571				181				1	%
Termination fee			—				5,000				(5,000	)			n/m
Income from operations			6,632				9,887				(3,255	)			-33	%
Interest income and other			(86	)			16				(102	)			n/m
Interest expense			(213	)			(65	)			(148	)			228	%
Income before income taxes			6,333				9,838				(3,505	)			-36	%
Provision for income taxes			1,214				—				1,214				n/m
Net income		$	5,119			$	9,838			$	(4,719	)			-48	%
Net income per common share:
Basic		$	0.16			$	0.35			$	(0.19	)			-54	%
Diluted		$	0.16			$	0.34			$	(0.18	)			-53	%

 

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Net revenue: Net revenue for the three months ended March 31, 2014 totaled $70.9 million, an increase of $10.7 million, or 18%, as compared to $60.2 million for the three months ended March 31, 2013. The launch of 23 new codes or presentations of ten products since March 31, 2013 contributed $9.7 million of the net revenue increase in the first quarter of 2014. Net revenue for products launched prior to March 31, 2013 increased $1.0 million, or 2%, to $61.2 million in the first quarter of 2014 due to increased demand due to market shortages, partially offset by price declines in zoledronic acid vials, which we launched at market formation in March 2013.

Cost of sales: Cost of goods sold for the three months ended March 31, 2014 totaled $50.5 million, an increase of $8.7 million, or 21%, as compared to $41.8 million for the three months ended March 31, 2013. Gross profit as a percentage of net revenues was 28.8% for the three months ended March 31, 2014 compared to 30.7% for the three months ended March 31, 2013. The decrease in gross profit is primarily due to the impact of $1.5 million of unabsorbed manufacturing costs at our SCP facility. Adjusted Gross Profit as a percentage of net revenue was 29.2% for the three months ended March 31, 2014, and 31.9% for the three months ended March 31, 2013. The decrease in Adjusted Gross Profit is also impacted by the product mix from the Sagent Agila joint venture.

Product development: Product development expense for the three months ended March 31, 2014 totaled $4.0 million, a decrease of $0.2 million, or 6%, as compared to $4.3 million for the three months ended March 31, 2013.

As of March 31, 2014, our new product pipeline included 38 products represented by 64 ANDAs which we had filed, or licensed rights to, that were under review by the FDA and three products represented by ten ANDAs that have been recently approved and were pending commercial launch. We also had an additional 28 products represented by 42 ANDAs under initial development at March 31, 2014.

Selling, general and administrative: Selling, general and administrative expenses for the three months ended March 31, 2014, totaled $10.0 million, an increase of $1.1 million, or 13%, as compared to $8.9 million for the three months ended March 31, 2013. The increase in selling, general and administrative expense was primarily due to $0.9 million of costs associated with our SCP facility. Selling, general and administrative expense as a percentage of net revenue was 14% and 15% for the three months ended March 31, 2014 and 2013, respectively.

Equity in net (income) loss of joint ventures: Equity in net income of joint ventures for the three months ended March 31, 2014 totaled $0.3 million, an increase of $0.7 million as compared to a loss of $0.4 million for the three months ended March 31, 2013. Included in this amount are the following (in thousands of dollars).

 

		Three Months Ended March 31,
		2014				2013
Sagent Agila LLC – Earnings directly related to the sale of product		$	(300	)		$	(722	)
Sagent Agila LLC – Product development costs			19				181
KSCP – net loss			—				984
Equity in net (income) loss of joint ventures		$	(281	)		$	443

In June 2013, we acquired the remaining 50% interest in KSCP, which we subsequently renamed Sagent (China) Pharmaceuticals Co. Ltd., and, commencing as of September 30, 2013, our condensed consolidated financial statements include SCP as a wholly-owned subsidiary.

Termination fee: Termination fee for 2013 represents the $5.0 million one-time termination fee received in connection with the amendment of the company’s Manufacturing and Supply Agreement with Actavis.

Interest expense: Interest expense for the three months ended March 31, 2014 totaled $0.2 million, an increase of $0.1 million, or 228%, as compared to $0.1 million for the three months ended March 31, 2013.

Provision for income taxes:

We periodically assess whether it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets. We establish valuation allowances if it is not likely we will realize our deferred income tax assets. In making this determination, we consider all available positive and negative evidence and make certain assumptions. We consider, among other things, our deferred tax liabilities, the overall business environment, our historical financial results, our industry’s historically cyclical financial results and potential current and future tax planning strategies.

 

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We recorded a full valuation allowance in 2007 due to our cumulative loss position at that time. At March 31, 2014, we had approximately $17 million of valuation allowances established against our domestic deferred income tax assets, which represents a full valuation allowance against our net domestic deferred income tax assets.

During the first quarter of 2014, we moved from a cumulative loss position over the previous three years to a cumulative income position for the first time since we established the full valuation allowance. While this is positive information, we have concluded as of March 31, 2014 that the valuation allowance was still needed on our net deferred tax assets based upon the weight of the factors described above, especially considering our history that included six consecutive years of losses. We continue to evaluate our cumulative income position and income trend as well as our future projections of sustained profitability. We evaluate whether this profitability trend constitutes sufficient positive evidence to support a reversal of our valuation allowance (in full or in part). If this profitability trend continues for the remainder of 2014 and this level of profitability is projected in the future, we anticipate that we may reverse substantially all of our domestic valuation allowance as early as the end of 2014.

Our provision for income taxes for the three months ended March 31, 2014 was $1,214. Of our total provision for income taxes, $885 represents the alternative minimum tax (“AMT”) payable in the United States for 2014 and income taxes payable in certain states where we do not have available loss carryforwards. As we have recorded a full valuation allowance against our deferred tax assets, our AMT payable is recorded as tax expense. The remaining provision for income taxes, $329, relates to the correction of state tax expense that was not recorded during the year ended December 31, 2013.

Net income and diluted net earnings per common share: The net income for the three months ended March 31, 2014 of $5.1 million decreased by $4.7 million, or 48%, from the $9.8 million net income for the three months ended March 31, 2013. Diluted net earnings per common share decreased by $0.18, or 53%. The decrease in diluted net earnings per common share is due to the following factors:

 

Diluted EPS for the three months ended March 31, 2013		$	0.34
Decrease in operations			(0.14	)
Increase in common shares outstanding			(0.04	)
Diluted EPS for the three months ended March 31, 2014		$	0.16

Liquidity and Capital Resources

Funding Requirements

Our future capital requirements will depend on a number of factors, including the continued commercial success of our existing products, launching the 74 products that are represented by our 37 ANDAs that have been recently approved and are pending commercial launch or are pending approval by the FDA as of March 31, 2014, successfully identifying and sourcing other new product opportunities, manufacturing products at our wholly-owned Chinese manufacturing facility, and business development activity.

Based on our existing business plan, we expect that cash, cash equivalents and short-term investments of approximately $139.7 million as of March 31, 2014, together with borrowings available under our SVB revolving loan facility, including the continued development of our product pipeline, the further payments required in respect of the SCP Acquisition and potential capital expansion at our Chinese facility, for at least the next 12 months. However, we may require additional funds in the event that we change our business plan, pursue additional strategic transactions, including the acquisition of businesses or products, or encounter unexpected developments, including unforeseen competitive conditions within our product markets, changes in the general economic climate, changes in the regulatory environment, the loss of or negative developments affecting key relationships with suppliers, group purchasing organizations or end-user customers or other unexpected developments that may have a material effect on the cash flows or results of operations of our business.

To the extent our capital resources are insufficient to meet our future capital requirements, we will need to finance our future cash needs through public or private equity offerings or debt financings, which may not be available to us on terms we consider acceptable or at all. Our ability to raise additional funding, if necessary, is subject to a variety of factors that we cannot predict with certainty, including our future results of operations, our

 

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relative levels of debt and equity, the volatility and overall condition of the capital markets and the market prices of our securities. Debt financing, if available, may only be available to us on less favorable terms than our existing SVB revolving credit facility, including higher interest rates or greater exposure to interest rate risk. In addition, the terms of any financing may adversely affect the holdings or rights of our stockholders.

If additional funding is not available, we may be required to terminate, significantly modify or delay the development or commercialization of new products and may not be able to achieve the manufacturing potential of our SCP facility. We may elect to raise additional funds even before we need them if we believe that the conditions for raising capital are favorable.

Cash Flows

Overview

On March 31, 2014, cash and cash equivalents on hand totaled $25.7 million. Short-term investments, generally investment grade commercial paper or corporate debt securities with a remaining term of two years or less, totaled $113.9 million. Working capital totaled $178.2 million and our current ratio (current assets to current liabilities) was approximately 4.6 to 1.0.

Sources and Uses of Cash

Operating activities: Net cash used in operating activities was $4.4 million for the three months ended March 31, 2014, compared with net cash provided by operating activities of $6.9 million during the three months ended March 31, 2013. The decrease in cash provided by operations was primarily due to the $4.6 million decrease in Adjusted EBITDA and the increase in accounts receivable in the three months ended March 31, 2014.

Investing activities: Net cash used in investing activities was $2.1 million for the three months ended March 31, 2014, primarily related to the acquisition of product rights and capital expenditures. Net cash provided by investing activities of $6.7 million during the three months ended March 31, 2013 primarily related to the net change in our short-term investments.

Financing activities: Net cash used in financing activities was $10.2 million for the three months ended March 31, 2014, primarily related to repayment in full of the then outstanding balance of our ABC Loans. Net cash provided by financing activities for the three months ended March 31, 2013 was $0.2 million, primarily related to the proceeds from stock option exercises.

Credit Facilities

Until February 2012, we maintained two active credit facilities; a Senior Secured Revolving Credit Facility and a Term Loan Credit Facility, and in February 2012, we repaid all of our outstanding borrowings and terminated both facilities. We replaced these facilities with a new asset based revolving loan facility with Silicon Valley Bank (“SVB”). At the time we acquired the remaining 50% interest in our SCP subsidiary in June 2013, SCP had two loan facilities with the Agricultural Bank of China (“ABC”) that existed prior to the SCP Acquisition. In September 2013, we entered into a Second Loan Modification agreement with SVB. Refer below for a description of our facilities with SVB and ABC.

Asset Based Revolving Loan Facility

On February 13, 2012, we entered into a Loan and Security Agreement with Silicon Valley Bank (the “SVB Agreement”). The SVB Agreement provides for a $40.0 million asset based revolving loan facility, with availability determined by a borrowing base consisting of eligible accounts receivable and inventory and subject to certain conditions precedent specified in the SVB Agreement. The SVB Agreement matures on February 13, 2016, at which time all outstanding amounts will become due and payable. Borrowings under the SVB Agreement may be used for general corporate purposes, including funding working capital. Amounts drawn bear an interest rate equal to, at our option, either a Eurodollar rate plus 2.50% per annum or an alternative base rate plus 1.50% per annum. We also pay a commitment fee on undrawn amounts equal to 0.30% per annum. During the continuance of an event of default, at Silicon Valley Bank’s option, all obligations will bear interest at a rate per annum equal to 5.00% per annum above the otherwise applicable rate.

Loans under the SVB Agreement are secured by substantially all of our and our principal domestic operating subsidiary’s assets, other than our equity interests in our joint ventures and certain other limited exceptions.

 

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The SVB Agreement contains various customary affirmative and negative covenants. The negative covenants restrict our ability to, among other things, incur additional indebtedness, create or permit to exist liens, make certain investments, dividends and other payments in respect of capital stock, sell assets or otherwise dispose of our property, change our lines of business, or enter into a merger or acquisition, in each case, subject to thresholds and exceptions as set forth in the SVB Agreement. The financial covenants in the SVB Agreement are limited to maintenance of a minimum adjusted quick ratio and a minimum free cash flow. The SVB Agreement also contains customary events of default, including non-payment of principal, interest and other fees after stated grace periods, violations of covenants, material inaccuracy of representations and warranties, certain bankruptcy and liquidation events, certain material judgments and attachment events, cross-default to other debt in excess of a specified amount and material agreements, failure to maintain certain material governmental approvals, and actual or asserted invalidity of subordination terms, guarantees and collateral, in each case, subject to grace periods, thresholds and exceptions as set forth in the SVB Agreement.

In September 2013, we entered into the Second Loan Modification Agreement (the “Second Modification Agreement”) to the SVB Agreement. The Second Modification Agreement makes certain amendments to the SVB Agreement, including: modifying the calculation methodology of the borrowing base that is used to determine the Company’s borrowing availability, while maximum availability remains $40.0 million; eliminating the covenant to maintain a specified level of free cash flow in quarters where the Company maintains eligible cash balances of $30.0 million or greater and modifying the covenant for the Adjusted Quick Ratio to be tested at the end of each month; and providing additional flexibility for the Company to make certain investments. The Second Modification Agreement did not amend the term of the SVB Agreement, the maximum availability under the SVB Agreement, or the interest rate applicable to amounts drawn under the SVB Agreement, which remain unchanged.

As of March 31, 2014, there were no borrowings outstanding under our Silicon Valley Bank revolving loan facility, and we were in compliance with all covenants under this loan agreement.

Chinese loan facilities

SCP had outstanding debt obligations with ABC at the time of the SCP Acquisition. SCP originally entered into two loan contracts with ABC for RMB 83.0 million ($13.5 million) and RMB 37.0 million ($6.0 million) in August 2010 and June 2011, respectively (the “ABC Loans”). In November 2013, we repaid RMB 55.0 million ($9.0 million) of the then outstanding balance. In January 2014, we repaid in full all outstanding amounts (RMB 63.0 million, $10.3 million) under the ABC Loans, and the loan contracts were terminated.

Aggregate Contractual Obligations

As of March 31, 2014, there were no material changes to the contractual obligations information provided in Item 7 entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K, filed with the SEC on March 7, 2014.

Off-Balance Sheet Arrangements

As of March 31, 2014, we were not party to any off-balance sheet arrangements, nor have we created any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. With the exception of operating leases, we do not have any off-balance sheet arrangements or relationships with entities that are not consolidated into or disclosed on our financial statements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources. In addition, we do not engage in trading activities involving non-exchange traded contracts.

Critical Accounting Policies

We prepare our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates and assumptions. We have identified the following critical accounting policies:

 

•

Revenue recognition;

 

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•

Inventories;

 

•

Income taxes;

 

•

Stock-based compensation;

 

•

Valuation and impairment of marketable securities;

 

•

Product development; and

 

•

Intangible assets.

For a discussion of critical accounting policies affecting us, see the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” and under Note 1 to our consolidated financial statements for the year ended December 31, 2013 included in our Annual Report on Form 10-K filed with the SEC on March 7, 2014.

There have been no other material changes to the Company’s critical accounting policies and estimates since December 31, 2013.

New Accounting Guidance

There are currently no new accounting pronouncements that will impact the Company.

Contingencies

See Note 18. Commitments and Contingencies, and Part II, Item 1. Legal Proceedings for a discussion of contingencies.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Our market risks relate primarily to changes in interest rates and currency rate fluctuations between the Chinese Renminbi and US dollar.

Our SVB revolving loan facility bears floating interest rates that are tied to LIBOR and an alternate base rate, and therefore, our statements of operations and our cash flows will be exposed to changes in interest rates. As we had no borrowings outstanding at March 31, 2014, there is no impact related to potential changes in the LIBOR rate on our interest expense at March 31, 2014. We historically have not engaged in hedging activities related to our interest rate or foreign exchange risks.

At March 31, 2014, we had cash and cash equivalents and short-term investments of $25.7 million and $113.9 million, respectively. Our cash and cash equivalents are held primarily in cash and money market funds, and our short-term investments are held primarily in corporate debt securities and commercial paper. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates.

We generally record sales in U.S. dollars and pay our expenses in the local currency of the legal entity that incurs the expense, either U.S. dollars or Chinese Renminbi. Substantially all of our business partners that supply us with API, product development services and finished product manufacturing are located in a number of foreign jurisdictions, and we believe those business partners generally incur their respective operating expenses in local currencies. As a result, both we and our business partners may be exposed to currency rate fluctuations and experience an effective increase in operating expenses in the event local currencies appreciate against the U.S. dollar. In this event, the cost of manufacturing product from our SCP facility may increase or such business partners may elect to stop providing us with these services or attempt to pass these increased costs back to us through increased prices for product development services, API sourcing or finished products that they supply to us. Historically we have not used derivatives to protect against adverse movements in currency rates.

We do not have any foreign currency or any other material derivative financial instruments.

 

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Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures (a) were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting.

Management, together with our Chief Executive Officer and our Chief Financial Officer, evaluated the changes in our internal control over financial reporting during the quarter ended March 31, 2014. We determined that there were no changes in our internal control over financial reporting during the quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we are subject to claims and litigation arising in the ordinary course of business. These claims may include assertions that our products infringe existing patents and claims that the use of our products has caused personal injuries. We intend to vigorously defend any such litigation that may arise under all defenses that would be available to us.

Zoledronic Acid (Generic versions of Zometa^® and Reclast^®). On February 20, 2013, Novartis Pharmaceuticals Corporation (“Novartis”) sued the Company and several other defendants in the United States District Court for the District of New Jersey (Novartis Pharmaceuticals Corporation v. Actavis, LLC, et. al., Case No. 13-cv-1028), alleging, among other things, that sales of the Company’s (i) zoledronic acid premix bag (4mg/100ml), made by ACS Dobfar Info S.A. (“Info”), also a defendant, a generic version of Novartis’ Zometa^® ready to use bottle, would infringe U.S. Patent No. 7,932,241 (the “241 Patent”) and U.S. Patent No. 8,324,189 (the “189 Patent”) and (ii) zoledronic acid premix bag (5mg/100ml), also made by Info, a generic version of Novartis’ Reclast^® ready to use bottle, would infringe U.S. Patent No. 8,052,987 and the 241 Patent, and (iii) zoledronic acid vial (4mg/5ml), made by Actavis LLC, also a defendant, a generic version of Novartis’ Zometa^® vial, would infringe the 189 Patent. On March 1, 2013, the District Court denied Novartis’ request for a temporary restraining order and a preliminary injunction against the Company and the other defendants, including Actavis and Info.

On March 6, 2013, the Company, began selling Actavis’ zoledronic acid vial, the generic version of Zometa^® and as of August 27, 2013 and October 1, 2013, the Company began selling zoledronic acid premix bags in 4mg/100ml and 5mg/100ml presentations, respectively. The Company believes it has substantial meritorious defenses to the case, and the Company has sold and will continue to sell these products. While an estimate of the potential loss resulting from an adverse final determination that one of the patents in suit is valid and infringed cannot currently be made as specific monetary damages have not been asserted, an adverse final determination could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.

At this time, there are no other proceedings of which we are aware that are considered likely to have a material adverse effect on the consolidated financial position or results of operations.

Item 1A. Risk Factors.

There were no material changes during the three months ended March 31, 2014 to the risk factors previously disclosed under Item 1A entitled “Risk Factors” in our most recent Annual Report on Form 10-K filed with the SEC on March 7, 2014.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities during the Quarter ended March 31, 2014

There are currently no share repurchase programs authorized by our Board of Directors. We did not repurchase any shares of our common stock during the quarter ended March 31, 2014.

Recent Sales of Unregistered Securities

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

 

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Item 5. Other Information

None.

Item 6. Exhibits.

 

Exhibit Number		Description
3.1		Certificate of Incorporation of Sagent Pharmaceuticals, Inc. (Incorporated by reference to Exhibit 3.3 in the Company’s Registration Statement on Form S-1, as amended (File Nos. 333-170979 and 333-173597)).
3.2		Bylaws of Sagent Pharmaceuticals, Inc. (Incorporated by reference to Exhibit 3.4 in the Company’s Registration Statement on Form S-1, as amended (File Nos. 333-170979 and 333-173597)).
31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended
31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended
32.1*		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.1		The following materials from Sagent’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 are formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013, (ii) the Condensed Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013, (iii) the Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2014 and 2013, (iv) the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013, (v) Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text and (vi) document and entity information.

 

*	Filed herewith

 

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Signature

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.

 

		SAGENT PHARMACEUTICALS INC.
		/s/ Jonathon M. Singer
		Jonathon M. Singer
		Executive Vice President and Chief Financial Officer
		May 6, 2014

 

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