RIBAPHARM INC - 10-Q Quarterly 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 ¨

	September 30, 2002			December 31, 2001
ASSETS
Current Assets:
Cash and cash equivalents	$	50,838		$	—
Receivable from Schering-Plough		87,428			16,228
Prepaid expenses and other current assets		594			—

Total current assets		138,860			16,228
Property, plant and equipment, net		10,010			10,406

	$	148,870		$	26,634

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Trade payables	$	747		$	1,069
Accrued liabilities		16,207			4,346
Accrued interest on 6½% subordinated notes dues 2008		6,305			—
Due to ICN Pharmaceuticals, Inc.		19,546			—

Total current liabilities		42,805			5,415
6½% subordinated notes due 2008		465,590			—
Due to ICN Pharmaceuticals, Inc.		35,000			—

Commitments and contingencies

Stockholders’ equity (deficit);
Preferred stock, $0.01 par value; 10,000 shares authorized; none issued and outstanding		—			—
Common stock, $.01 par value; 400,000 shares authorized; 150,000 shares issued and outstanding at September 30, 2002 and December 31, 2001		1,500			1,500
Advances due from ICN		—			(188,017	)
Receivable from ICN		(471,895	)		—
Retained earnings		75,870			207,736

Total stockholders’ equity (deficit)		(394,525	)		21,219

	$	148,870		$	26,634

	Three Months Ended September 30,					Nine Months Ended September 30,
	2002			2001		2002			2001
Revenues	$	63,395		$	21,474	$	186,396		$	89,002

Operating expenses:
Research and development		13,518			5,621		33,741			16,663
General and administrative		2,922			2,177		6,999			4,304

Total operating expenses		16,440			7,798		40,740			20,967

Income from operations		46,955			13,676		145,656			68,035
Interest expense		441			—		614			—
Interest income		(87	)		—		(99	)		—

Income before provision for income taxes		46,601			13,676		145,141			68,035
Provision for income taxes		17,709			5,535		55,154			25,853

Net income	$	28,892		$	8,141	$	89,987		$	42,182

Basic earnings per share	$	0.19		$	0.05	$	0.60		$	0.28

Shares used in basic earnings per share computation		150,000			150,000		150,000			150,000

Diluted earnings per share	$	0.19		$	0.05	$	0.60		$	0.28

Shares used in diluted earnings per share computation		150,000			150,000		150,005			150,000

	Nine Months Ended September 30,
	2002			2001
Cash flows from operating activities:
Net income	$	89,987		$	42,182
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		2,037			1,495
Schering-Plough receivable		—			(12,628	)
Change in royalty receivable transferred to ICN		—			13,202
Change in royalty receivable		(16,773	)		—
Change in trade payables and accrued liabilities		11,539			1,850
Change in prepaids and other current assets		(594	)		—

Net cash provided by operating activities		86,196			46,101

Cash flows from investing activities:
Capital expenditures		(1,641	)		(5,447	)

Net cash used in investing activities		(1,641	)		(5,447	)

Cash flows from financing activities:
Borrowings on line of credit from ICN		35,000			—
Cash payments to ICN, net		(68,717	)		(40,654	)

Net cash used in financing activities		(33,717	)		(40,654	)

Net increase in cash and cash equivalents		50,838			—
Cash and cash equivalents at beginning of period		—			—

Cash and cash equivalents at end of period	$	50,838		$	—

The condensed financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared on the basis of accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. The results of operations presented herein are not necessarily indicative of the results to be expected for a full year. The Company believes that all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of the interim periods presented are included and that the disclosures are adequate to make the information presented not misleading. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Registration Statement on Form S-1 (SEC File No. 333-39350) as amended, filed with the SEC on April 11, 2002.

Until April 17, 2002, Ribapharm Inc. (the “Company” or “Ribapharm”) was a wholly owned subsidiary of ICN Pharmaceuticals, Inc. (“ICN”). The Company seeks to discover, develop, acquire and commercialize innovative products for the treatment of significant unmet medical needs, principally in the antiviral and anticancer areas. The Company’s primary product, ribavirin, is an antiviral drug that was licensed to Schering-Plough Corporation (“Schering-Plough”) for the treatment of chronic hepatitis C (“HCV”) in combination with Schering-Plough’s interferon alfa-2b or pegylated interferon alfa-2b. Substantially all of the Company’s revenue is currently derived from this licensing agreement. The accompanying financial statements for the periods until April 17, 2002 are derived from the historical books and records of ICN and present the assets and liabilities, results of operations and cash flows applicable to the Company.

On April 10, 2002, Ribapharm effected a recapitalization of its Common Stock in the form of a 1,500,000 for 1.0 stock split. The Certificate of Incorporation provides for authorized capital stock of 410,000,000 shares, including 400,000,000 shares of common stock, $.01 par value per share (the “Common Stock”), and 10,000,000 shares of preferred stock, $.01 par value per share. No preferred stock is outstanding. The financial statements give effect to the recapitalization and stock split, applied retroactively to all periods presented.

In April 2002, ICN completed the sale, through an underwritten public offering, of 29,900,000 shares of Common Stock, (the “Offering”) representing 19.93% of the total outstanding Common Stock of 150,000,000 shares. In connection with the Offering, ICN received net cash proceeds of $278,070,000. The Company received no proceeds from the Offering. Upon consummation of the Offering, the advances due from ICN of $222,818,000 were transferred as a component of permanent equity. Ribapharm was not repaid any of the advances due from ICN upon completion of the Offering.

At the time of the Offering, ICN announced that, as part of its restructuring plan, it was committed to distributing its remaining interest in the Company’s Common Stock to ICN’s stockholders in a tax-free spin-off no later than six months after completion of the Offering. In June 2002, ICN announced that, in light of changed circumstances and market conditions, ICN’s newly-reconstituted Board of Directors is reviewing certain strategic decisions, including the decision to distribute its interest in the Company to ICN’s stockholders in a tax-free spin-off. ICN has announced that it continues to explore its options with regard to Ribapharm. In July 2002, ICN announced that the Internal Revenue Service issued to ICN a private letter ruling that ICN’s distribution of its interest in the Company to ICN’s stockholders will qualify as a tax-free spin-off.

The balance sheet as of December 31, 2001 was prepared using the historical basis of accounting and includes all of the assets and liabilities specifically identifiable to the Company. For periods prior to April 17, 2002, the statements of income include a corporate allocation of costs between the Company and ICN of shared services (including legal, finance, corporate development, information systems and corporate office expenses). These costs were allocated to the Company on a basis that is considered by management to reflect most fairly or reasonably the utilization of services provided to or the benefit obtained by the Company, such as the square footage, headcount, or actual utilization. For the periods subsequent to April 17, 2002, the income statements include a corporate allocation of costs between the Company and ICN in accordance with the terms of the management services and facilities agreement. It is not practicable to determine the costs specifically attributable to either ICN or Ribapharm with respect to the US Attorney investigation or the SEC litigation. (See Note 8). Additionally, allocation methods of these costs based upon revenue, net income, assets, equity or headcount are not reflective of the nature of the costs incurred. Therefore, ICN and Ribapharm used a joint responsibility approach in allocating these costs such that 50% of the costs, including any reserve for settlement, are allocated to each of ICN and Ribapharm. Management believes the methods used to allocate these amounts are reasonable.

Revenue Recognition: The Company earns royalties as a result of the sale of product rights and technology to third parties. Royalty revenue is earned at the time the products subject to the royalty are sold by the third party. Quarterly royalty payments from Schering-Plough are reduced by Schering-Plough’s cash payments for discounts, rebates and similar deductions. The Company records an estimate for the difference between the deductions earned by the third parties and the cash paid by Schering-Plough. The Company recognizes as revenue up-front nonrefundable fees associated with royalty and license agreements when all performance obligations under the agreements are completed. Milestone payments received, if any, related to scientific achievement are recognized as revenue when the milestone is accomplished by the third party.

Income Taxes: The Company’s operations are included in the consolidated ICN tax returns. Income tax provisions and benefits have been calculated on a separate return basis for federal income tax purposes and based upon ICN’s worldwide apportionment rate for the State of California. The apportionment rate was estimated to be 3% for the three and nine months ended September 30, 2002 and 5% and 3% for the three and nine months ended September 30, 2001, respectively. Deferred income taxes are calculated using the estimated future tax effects or differences between financial statement carrying amounts and the tax bases of assets and liabilities. The Company and ICN are parties to a tax sharing agreement.

Concentration of Credit Risk: Financial instruments that subject the Company to concentrations of credit risk consist principally of accounts receivable. The Company’s exposure to credit risk associated with nonpayment is affected principally by conditions or occurrences within its primary customer, Schering-Plough. The Company historically has not experienced losses relating to accounts receivable from its primary customer. See Note 5. All revenues for the three and nine months ended September 30, 2002 and the three months ended September 30, 2001 were derived from one customer. Substantially all revenues for the nine months ended September 30, 2001 were derived from Schering-Plough.

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

In July 2001, ICN completed an offering of $525,000,000 of 6½% convertible subordinated notes due 2008 (the “Notes”). In July and August 2002, ICN repurchased $59,410,000 principal amount of the Notes. The Notes, as they relate specifically to ICN’s obligation, are convertible into ICN’s common stock at a conversion rate of 29.1924 shares per $1,000 principal amount of Notes, subject to adjustment. Upon completion of the Offering, Ribapharm became jointly and severally liable for the principal and interest obligations under the Notes. Under an agreement between Ribapharm and ICN originally entered into on July 18, 2001, and amended and restated on April 8, 2002, ICN has agreed to make all interest and principal payments related to the Notes. However, Ribapharm is responsible for these payments to the extent ICN defaults under that agreement and does not make

these payments. In that event, the Company would have a claim against ICN for any payments ICN does not make. The Company can only amend this agreement, in a manner adverse to it, with the approval of holders of a majority of its outstanding shares of common stock, excluding shares held by ICN. In the event of a spin-off of Ribapharm, the Notes will be convertible into common stock of both the Company and ICN. The converting note holders would receive ICN’s common stock and the number of shares of Common Stock the note holders would have received had the Notes been converted immediately prior to the spin-off. If the spin-off had occurred as of September 30, 2002, and assuming 83,913,7

		Page Number
PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Condensed Balance Sheets—September 30, 2002 and December 31, 2001	3

	Condensed Statements of Income—Three and nine months ended September 30, 2002 and 2001	4

	Condensed Statements of Cash Flows—Nine months ended September 30, 2002 and 2001	5

	Management’s Statement Regarding Unaudited Financial Statements	6

	Notes to Condensed Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22

Item 4.	Controls and Procedures	22

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	23

Item 5.	Other Information	23

Item 6.	Exhibits and Reports on Form 8-K	23

SIGNATURES		24

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