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EX-32 - EX-32 - SANTARUS INC | a54216exv32.htm |
EX-10.1 - EX-10.1 - SANTARUS INC | a54216exv10w1.htm |
EX-10.2 - EX-10.2 - SANTARUS INC | a54216exv10w2.htm |
EX-31.2 - EX-31.2 - SANTARUS INC | a54216exv31w2.htm |
EX-31.1 - EX-31.1 - SANTARUS INC | a54216exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-50651
SANTARUS, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
33-0734433 (I.R.S. Employer Identification No.) |
|
3721 Valley Centre Drive, Suite 400, San Diego, CA (Address of principal executive offices) |
92130 (Zip Code) |
(858) 314-5700
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). o Yes þ No
The number of outstanding shares of the registrants common stock, par value $0.0001 per
share, as of October 30, 2009 was 58,075,151.
SANTARUS, INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009
TABLE OF CONTENTS
i
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Santarus,
Inc.
Condensed Balance Sheets
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 56,465 | $ | 49,886 | ||||
Short-term investments |
5,382 | 2,151 | ||||||
Accounts receivable, net |
17,480 | 13,366 | ||||||
Inventories, net |
5,100 | 5,230 | ||||||
Prepaid expenses and other current assets |
5,188 | 3,826 | ||||||
Total current assets |
89,615 | 74,459 | ||||||
Long-term restricted cash |
1,400 | 1,400 | ||||||
Long-term investments |
| 4,250 | ||||||
Property and equipment, net |
893 | 988 | ||||||
Intangible assets, net |
10,125 | 11,250 | ||||||
Other assets |
7 | 137 | ||||||
Total assets |
$ | 102,040 | $ | 92,484 | ||||
Liabilities and stockholders equity |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued liabilities |
$ | 55,095 | $ | 53,109 | ||||
Allowance for product returns |
12,248 | 10,251 | ||||||
Current portion of deferred revenue |
1,216 | 7,365 | ||||||
Total current liabilities |
68,559 | 70,725 | ||||||
Deferred revenue, less current portion |
2,604 | 2,436 | ||||||
Long-term debt |
10,000 | 10,000 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $0.0001 par value; 10,000,000 shares authorized at
September 30, 2009 and December 31, 2008; no shares issued and
outstanding at September 30, 2009 and December 31, 2008 |
| | ||||||
Common stock, $0.0001 par value; 100,000,000 shares authorized at
September 30, 2009 and December 31, 2008; 58,072,735 and 57,799,588
shares issued and outstanding at September 30, 2009 and December 31,
2008, respectively |
6 | 6 | ||||||
Additional paid-in capital |
335,773 | 331,831 | ||||||
Accumulated other comprehensive income |
| 2 | ||||||
Accumulated deficit |
(314,902 | ) | (322,516 | ) | ||||
Total stockholders equity |
20,877 | 9,323 | ||||||
Total liabilities and stockholders equity |
$ | 102,040 | $ | 92,484 | ||||
See accompanying notes.
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Santarus,
Inc.
Condensed Statements of Operations
(in thousands, except share and per share amounts)
(unaudited)
(in thousands, except share and per share amounts)
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues: |
||||||||||||||||
Product sales, net |
$ | 31,488 | $ | 28,106 | $ | 87,032 | $ | 71,475 | ||||||||
Promotion revenue |
6,749 | 1,377 | 16,929 | 4,758 | ||||||||||||
License and royalty revenue |
1,216 | 2,726 | 6,149 | 16,447 | ||||||||||||
Total revenues |
39,453 | 32,209 | 110,110 | 92,680 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Cost of product sales |
2,009 | 1,924 | 5,993 | 5,320 | ||||||||||||
License fees and royalties |
2,017 | 3,619 | 5,695 | 9,717 | ||||||||||||
Research and development |
3,441 | 2,274 | 9,814 | 6,221 | ||||||||||||
Selling, general and administrative |
26,331 | 28,521 | 80,383 | 80,788 | ||||||||||||
Total costs and expenses |
33,798 | 36,338 | 101,885 | 102,046 | ||||||||||||
Income (loss) from operations |
5,655 | (4,129 | ) | 8,225 | (9,366 | ) | ||||||||||
Other income (expense): |
||||||||||||||||
Interest income |
25 | 177 | 179 | 1,000 | ||||||||||||
Interest expense |
(117 | ) | | (345 | ) | | ||||||||||
Total other income (expense) |
(92 | ) | 177 | (166 | ) | 1,000 | ||||||||||
Income (loss) before income taxes |
5,563 | (3,952 | ) | 8,059 | (8,366 | ) | ||||||||||
Income tax expense |
223 | | 445 | | ||||||||||||
Net income (loss) |
$ | 5,340 | $ | (3,952 | ) | $ | 7,614 | $ | (8,366 | ) | ||||||
Net income (loss) per share: |
||||||||||||||||
Basic |
$ | 0.09 | $ | (0.08 | ) | $ | 0.13 | $ | (0.16 | ) | ||||||
Diluted |
$ | 0.09 | $ | (0.08 | ) | $ | 0.13 | $ | (0.16 | ) | ||||||
Weighted average shares outstanding used to calculate
net income (loss) per share: |
||||||||||||||||
Basic |
58,052,418 | 51,528,133 | 57,932,135 | 51,410,762 | ||||||||||||
Diluted |
60,109,860 | 51,528,133 | 59,018,999 | 51,410,762 |
See accompanying notes.
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Table of Contents
Santarus,
Inc.
Condensed Statements of Cash Flows
(in thousands)
(unaudited)
(in thousands)
(unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Operating activities |
||||||||
Net income (loss) |
$ | 7,614 | $ | (8,366 | ) | |||
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
1,563 | 834 | ||||||
Unrealized gain on trading securities, net |
(46 | ) | | |||||
Stock-based compensation |
3,494 | 3,205 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable, net |
(4,113 | ) | (2,780 | ) | ||||
Inventories, net |
130 | 248 | ||||||
Prepaid expenses and other current assets |
(1,362 | ) | (1,201 | ) | ||||
Other assets |
| 61 | ||||||
Accounts payable and accrued liabilities |
1,986 | 5,005 | ||||||
Allowance for product returns |
1,997 | 3,502 | ||||||
Deferred revenue |
(5,981 | ) | (14,197 | ) | ||||
Net cash provided by (used in) operating activities |
5,282 | (13,689 | ) | |||||
Investing activities |
||||||||
Purchases of short-term investments |
(7,825 | ) | (2,944 | ) | ||||
Maturities of short-term investments |
8,618 | 2,929 | ||||||
Redemption of long-term investments |
250 | | ||||||
Purchases of property and equipment |
(193 | ) | (688 | ) | ||||
Acquisition of intangible assets |
| (12,000 | ) | |||||
Net cash provided by (used in) investing activities |
850 | (12,703 | ) | |||||
Financing activities |
||||||||
Exercise of stock options |
116 | 6 | ||||||
Issuance of common stock, net |
331 | 426 | ||||||
Net cash provided by financing activities |
447 | 432 | ||||||
Increase (decrease) in cash and cash equivalents |
6,579 | (25,960 | ) | |||||
Cash and cash equivalents at beginning of the period |
49,886 | 58,382 | ||||||
Cash and cash equivalents at end of the period |
$ | 56,465 | $ | 32,422 | ||||
See accompanying notes.
3
Table of Contents
Santarus, Inc.
Notes to Condensed Financial Statements
(unaudited)
(unaudited)
1. Organization and Business
Santarus, Inc. (Santarus or the Company) is a specialty biopharmaceutical company focused
on acquiring, developing and commercializing proprietary products that address the needs of
patients treated by gastroenterologists and other physicians. Santarus was incorporated on
December 6, 1996 as a California corporation and did not commence significant business activities
until late 1998. On July 9, 2002, the Company reincorporated in the State of Delaware.
2. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance
with U.S. generally accepted accounting principles (GAAP) related to the preparation of interim
financial statements and the rules and regulations of the U.S. Securities and Exchange Commission
related to a quarterly report on Form 10-Q. Accordingly, they do not include all of the
information and disclosures required by GAAP for complete financial statements. The balance sheet
at December 31, 2008 has been derived from the audited financial statements at that date but does
not include all information and disclosures required by GAAP for complete financial statements.
The interim financial statements reflect all adjustments which, in the opinion of management, are
necessary for a fair presentation of the financial condition and results of operations for the
periods presented. Except as otherwise disclosed, all such adjustments are of a normal recurring
nature. Further, in connection with the preparation of the unaudited condensed financial
statements in accordance with the Financial Accounting Standards Boards (FASBs) recently issued
authoritative guidance on subsequent events, the Company evaluated subsequent events after the
balance sheet date of September 30, 2009 through November 4, 2009, the date of this report.
Operating results for the three and nine months ended September 30, 2009 are not necessarily
indicative of the results that may be expected for any future periods. For further information,
please see the financial statements and related disclosures included in the Companys annual report
on Form 10-K for the year ended December 31, 2008.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities as well as
disclosures of contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. Revenue Recognition
The Company recognizes revenue when there is persuasive evidence that an arrangement exists,
title has passed, the price is fixed or determinable, and collectibility is reasonably assured.
Product Sales, Net. The Company received approval from the U.S. Food and Drug Administration
(FDA) to market Zegerid ® (omeprazole/sodium bicarbonate) Capsules in 2006
for the treatment of heartburn and other symptoms associated with gastroesophageal reflux disease
(GERD), treatment and maintenance of healing of erosive esophagitis and treatment of duodenal and
gastric ulcers. The Company received approval from the FDA to market Zegerid (omeprazole/sodium
bicarbonate) Powder for Oral Suspension for these same indications in 2004. In addition, Zegerid
Powder for Oral Suspension is approved for the reduction of risk of upper gastrointestinal bleeding
in critically ill patients, and is currently the only proton pump inhibitor (PPI) product
approved for this indication. The Company commercially launched Zegerid Capsules in early 2006 and
launched Zegerid Powder for Oral Suspension 20 mg in late 2004 and the 40 mg dosage strength in
early 2005.
The Company sells its Zegerid products primarily to pharmaceutical wholesale distributors.
The Company is obligated to accept from customers products that are returned within six months of
their expiration date or up to 12 months beyond their expiration date. The Company authorizes
returns for expired or damaged products in accordance with its return goods policy and procedures.
The Company issues credit to the customer for expired or damaged returned product. The Company
rarely exchanges product from inventory for returned product. At the time of sale, the Company
records its
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estimates for product returns as a reduction to revenue at full sales value with a
corresponding increase in the allowance for product returns liability. Actual returns are recorded
as a reduction to the allowance for product returns liability at sales value with a corresponding
decrease in accounts receivable for credit issued to the customer.
The Company recognizes product sales net of estimated allowances for product returns,
estimated rebates in connection with contracts relating to managed care, Medicaid, Medicare, and
patient coupons, and estimated chargebacks from distributors, wholesaler fees and prompt payment
and other discounts. The Company establishes allowances for estimated product returns, rebates and
chargebacks based primarily on the following qualitative and quantitative factors:
| the number of and specific contractual terms of agreements with customers; | ||
| estimated levels of inventory in the distribution channel; | ||
| estimated remaining shelf life of products; | ||
| analysis of prescription data gathered by a third-party prescription data provider; | ||
| direct communication with customers; | ||
| historical product returns, rebates and chargebacks; | ||
| anticipated introduction of competitive products or generics; | ||
| anticipated pricing strategy changes by the Company and/or its competitors; and | ||
| the impact of state and federal regulations. |
In its analyses, the Company utilizes prescription data purchased from a third-party data
provider to develop estimates of historical inventory channel pull-through. The Company utilizes a
separate analysis which compares historical product shipments less returns to estimated historical
prescriptions written. Based on that analysis, the Company develops an estimate of the quantity of
product in the distribution channel which may be subject to various product return, rebate and
chargeback exposures.
The Companys estimates of product returns, rebates and chargebacks require managements most
subjective and complex judgment due to the need to make estimates about matters that are inherently
uncertain. If actual future payments for returns, rebates, chargebacks and other discounts exceed
the estimates the Company made at the time of sale, its financial position, results of operations
and cash flows would be negatively impacted.
The Companys allowance for product returns was $12.2 million as of September 30, 2009 and
$10.3 million as of December 31, 2008. In order to provide a basis for estimating future product
returns on sales to its customers at the time title transfers, the Company has been tracking its
Zegerid products return history by individual production batches from the time of its first
commercial product launch of Zegerid Powder for Oral Suspension 20 mg in late 2004, taking into
consideration product expiration dating and estimated inventory levels in the distribution channel.
The Company recognizes product sales at the time title passes to its customers, and the Company
provides for an estimate of future product returns at that time based upon these historical product
returns trends, analysis of product expiration dating and inventory levels in the distribution
channel, and the other factors discussed above. There may be a significant time lag between the
date the Company determines the estimated allowance and when it receives the product return and
issues credit to a customer. Due to this time lag, the Company records adjustments to its
estimated allowance over several periods, which can result in a net increase or a net decrease in
its operating results in those periods.
The Companys allowance for rebates, chargebacks and other discounts was $37.5 million as of
September 30, 2009 and $29.3 million as of December 31, 2008. These allowances reflect an estimate
of the Companys liability for rebates due to managed care organizations under specific contracts,
rebates due to various governmental organizations under Medicaid and Medicare contracts and
regulations, chargebacks due to various organizations purchasing the Companys products through
federal contracts and/or group purchasing agreements, and other rebates and customer discounts due
in connection with wholesaler fees and prompt payment and other discounts. The Company estimates
its liability for rebates and chargebacks at each reporting period based on a combination of the
qualitative and quantitative assumptions listed above. In each reporting period, the Company
evaluates its outstanding contracts and applies the contractual discounts to the invoiced price of
wholesaler shipments recognized. Although the total invoiced price of shipments to wholesalers for
the reporting period and the contractual terms are known during the reporting period, the Company
projects the ultimate disposition of the sale (e.g. future utilization rates of cash payors,
managed care, Medicaid, Medicare or other contracted organizations). This estimate is based on
historical trends adjusted for anticipated changes based on specific contractual terms of new
agreements with customers, anticipated pricing strategy changes by the Company and/or its
competitors and the other qualitative and quantitative factors described above. There may be a
significant time lag between the date the
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Company determines the estimated allowance and when the Company makes the contractual payment
or issues credit to a customer. Due to this time lag, the Company records adjustments to its
estimated allowance over several periods, which can result in a net increase or a net decrease in
its operating results in those periods. To date, actual results have not materially differed from
the Companys estimates.
Promotion Revenue and License and Royalty Revenue. The Company analyzes each element of its
promotion and licensing agreements to determine the appropriate revenue recognition. The Company
recognizes revenue on upfront payments over the period of significant involvement under the related
agreements unless the fee is in exchange for products delivered or services rendered that represent
the culmination of a separate earnings process and no further performance obligation exists under
the contract. The Company recognizes milestone payments upon the achievement of specified
milestones if (1) the milestone is substantive in nature, and the achievement of the milestone was
not reasonably assured at the inception of the agreement and (2) the fees are nonrefundable. Any
milestone payments received prior to satisfying these revenue recognition criteria are recognized
as deferred revenue. Sales milestones, royalties and promotion fees are recognized as revenue when
earned under the agreements.
4. Stock-Based Compensation
For the three months ended September 30, 2009 and 2008 and the nine months ended September 30,
2009 and 2008, the Company recognized approximately $1.1 million, $1.0 million, $3.5 million and
$3.2 million of total stock-based compensation, respectively. Stock-based compensation included
approximately $355,000 for the nine months ended September 30, 2009 related to stock options
containing performance-based vesting. As of September 30, 2009, total unrecognized compensation
cost related to stock options and employee stock purchase plan rights was approximately $5.9
million, and the weighted average period over which it was expected to be recognized was 2.1 years.
In March 2009, the Company granted options to purchase an aggregate of 2,558,370 shares of its
common stock in connection with annual option grants to all eligible employees. These stock
options vest over a four-year period from the date of grant. In addition, in March and June 2009,
the Company granted options to purchase an aggregate of 406,500 shares of its common stock to
non-employee directors of the Company, which vest over a one-year period from the date of grant.
5. Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income
(loss). Other comprehensive income (loss) includes certain changes in stockholders equity that
are excluded from net income (loss), specifically unrealized gains and losses on securities
available-for-sale. Comprehensive income (loss) consists of the following (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net income (loss) |
$ | 5,340 | $ | (3,952 | ) | $ | 7,614 | $ | (8,366 | ) | ||||||
Unrealized loss on investments |
(2 | ) | (116 | ) | (2 | ) | (404 | ) | ||||||||
Comprehensive income (loss) |
$ | 5,338 | $ | (4,068 | ) | $ | 7,612 | $ | (8,770 | ) | ||||||
6. Net Income (Loss) Per Share
Basic income (loss) per share is calculated by dividing the net income (loss) by the weighted
average number of common shares outstanding for the period, without consideration for common stock
equivalents. Diluted income (loss) per share is computed by dividing the net income (loss) by the
weighted average number of common share equivalents outstanding for the period determined using the
treasury-stock method. For purposes of this calculation, common stock subject to repurchase by the
Company, preferred stock, options and warrants are considered to be common stock equivalents and
are only included in the calculation of diluted income (loss) per share when their effect is
dilutive. Potentially dilutive securities totaling 10.0 million shares and 11.4 million shares for
the three months ended September 30, 2009 and 2008 and 11.0 million shares and 10.8 million shares
for the nine months ended September 30, 2009 and 2008, respectively, were excluded from the
calculation of diluted income (loss) per share because of their anti-dilutive effect.
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Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Numerator: |
||||||||||||||||
Net income (loss) (in thousands) |
$ | 5,340 | $ | (3,952 | ) | $ | 7,614 | $ | (8,366 | ) | ||||||
Denominator: |
||||||||||||||||
Weighted average common shares
outstanding |
58,052,418 | 51,528,133 | 57,932,135 | 51,412,154 | ||||||||||||
Weighted average unvested
common shares subject to
repurchase |
| | | (1,392 | ) | |||||||||||
Denominator for basic net
income (loss) per share |
58,052,418 | 51,528,133 | 57,932,135 | 51,410,762 | ||||||||||||
Net effect of dilutive common
stock equivalents |
2,057,442 | | 1,086,864 | | ||||||||||||
Denominator for diluted net
income (loss) per share |
60,109,860 | 51,528,133 | 59,018,999 | 51,410,762 | ||||||||||||
Net income (loss) per share |
||||||||||||||||
Basic |
$ | 0.09 | $ | (0.08 | ) | $ | 0.13 | $ | (0.16 | ) | ||||||
Diluted |
$ | 0.09 | $ | (0.08 | ) | $ | 0.13 | $ | (0.16 | ) | ||||||
7. Segment Reporting
Management has determined that the Company operates in one business segment which is the
acquisition, development and commercialization of pharmaceutical products.
8. Fair Value Measurements
The authoritative guidance for fair value measurements establishes a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level
1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs
other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3, defined as unobservable inputs in which little or no market data exists, therefore
requiring an entity to develop its own assumptions.
The Companys financial assets measured at fair value on a recurring basis at September 30,
2009 are as follows (in thousands):
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant Other | Significant | ||||||||||||||
Identical Assets | Observable Inputs | Unobservable Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
Money market funds |
$ | 40,501 | $ | | $ | | $ | 40,501 | ||||||||
U.S. Treasury securities |
503 | | | 503 | ||||||||||||
U.S. government sponsored enterprise
securities |
| 18,197 | | 18,197 | ||||||||||||
Municipal debt obligations
auction rate securities |
| | 3,553 | 3,553 | ||||||||||||
Auction rate securities rights |
| | 493 | 493 | ||||||||||||
$ | 41,004 | $ | 18,197 | $ | 4,046 | $ | 63,247 | |||||||||
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Level 3 assets held as of September 30, 2009 include municipal debt obligations with an
auction rate reset mechanism issued by state municipalities. These auction rate securities (ARS)
are AAA-rated debt instruments with long-term maturity dates ranging from 2034 to 2042 and interest
rates that are reset at short-term intervals (every 28 days) through auctions. Due to conditions
in the global credit markets, these securities, representing a par value of approximately $4.1
million, had insufficient demand resulting in multiple failed auctions since early 2008. As a
result, these affected securities are currently not liquid.
In October 2008, the Company received an offer of Auction Rate Securities Rights (ARS
Rights) from UBS Financial Services, Inc., a subsidiary of UBS AG (UBS), and in November 2008,
the Company accepted the ARS Rights offer. The ARS Rights permit the Company to require UBS to
purchase the Companys ARS at par value at any time during the period of June 30, 2010 through July
2, 2012. If the Company does not exercise its ARS Rights, the ARS will continue to accrue interest
as determined by the auction process, or if the auction fails, by the terms of the ARS. If the ARS
Rights are not exercised before July 2, 2012 they will expire and UBS will have no further
obligation to buy the Companys ARS. UBS has the discretion to purchase or sell the Companys ARS
at any time without prior notice so long as the Company receives a payment at par upon any sale or
disposition. UBS has agreed to only exercise its discretion to purchase or sell the Companys ARS
for the purpose of restructurings, dispositions or other solutions that will provide the Company
with par value for its ARS. As a condition to accepting the offer of ARS Rights, the Company
released UBS from all claims except claims for consequential damages relating to its marketing and
sales of ARS. The Company also agreed not to serve as a class representative or receive benefits
under any class action settlement or investor fund.
Typically the fair value of ARS approximates par value due to the frequent resets through the
auction process. While the Company continues to earn interest on its ARS at the maximum
contractual rates, these investments are not currently trading and therefore do not currently have
a readily determinable market value. Accordingly, the estimated fair value of the ARS no longer
approximates par value. The Company has used a discounted cash flow model to determine the
estimated fair value of its investment in ARS and its ARS Rights as of September 30, 2009. The
assumptions used in preparing the discounted cash flow model include estimates for interest rates,
timing and amount of cash flows and expected holding period of the ARS and ARS Rights.
In 2008, the Company elected to measure the ARS Rights under the authoritative guidance for
the fair value option for financial assets and financial liabilities. Reflecting managements
intent to exercise its ARS Rights during the period of June 30, 2010 through July 2, 2012, the
Company transferred its ARS from investments available-for-sale to trading securities in 2008.
Changes in the fair values of the Companys ARS and ARS Rights are recognized as an increase or
decrease in interest income. The ARS Rights will continue to be measured at fair value utilizing
Level 3 inputs until the earlier of their maturity or exercise. The Company has classified the
balance of its ARS and ARS Rights as short-term investments in the condensed balance sheet as of
September 30, 2009 reflecting managements intent to exercise its ARS Rights within the next 12
months.
The following table provides a summary of changes in fair value of the Companys Level 3
financial assets as of September 30, 2009 (in thousands):
Three Months Ended | Nine Months Ended | |||||||
September 30, 2009 | September 30, 2009 | |||||||
Auction Rate Securities and Rights: |
||||||||
Beginning balance |
$ | 4,239 | $ | 4,250 | ||||
Redemptions (at par) |
(200 | ) | (250 | ) | ||||
Net
unrealized gain included in net income |
7 | 46 | ||||||
Ending balance as of September 30, 2009 |
$ | 4,046 | $ | 4,046 | ||||
9. Available-for-Sale Securities
The following is a summary of the Companys available-for-sale investment securities as of
September 30, 2009 and December 31, 2008 (in thousands). All available-for-sale securities held as
of September 30, 2009 and December 31, 2008 have contractual maturities within one year. There were no gross realized gains or losses on
sales of available-for-sale securities for the nine months ended September 30, 2009 and the year
ended December 31, 2008.
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Amortized | Market | Unrealized | ||||||||||
Cost | Value | Gain | ||||||||||
September 30, 2009: |
||||||||||||
U.S. government sponsored enterprise securities |
$ | 2,233 | $ | 2,233 | $ | | ||||||
U.S. Treasury securities |
503 | 503 | | |||||||||
$ | 2,736 | $ | 2,736 | $ | | |||||||
December 31, 2008 |
||||||||||||
U.S. government sponsored enterprise securities |
$ | 3,549 | $ | 3,551 | $ | 2 | ||||||
The classification of available-for-sale securities in the Companys condensed balance sheets
is as follows (in thousands):
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Short-term investments |
$ | 1,336 | $ | 2,151 | ||||
Restricted cash |
1,400 | 1,400 | ||||||
$ | 2,736 | $ | 3,551 | |||||
As discussed in Note 8, the Company holds ARS and ARS Rights which are classified as trading
securities. The Company has classified the balance of its ARS and ARS Rights totaling $4.0 million
in aggregate as short-term investments in the balance sheet as of September 30, 2009.
10. Balance Sheet Details
Inventories, net consist of the following (in thousands):
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Raw materials |
$ | 886 | $ | 977 | ||||
Finished goods |
4,261 | 4,561 | ||||||
5,147 | 5,538 | |||||||
Allowance for excess and obsolete inventory |
(47 | ) | (308 | ) | ||||
$ | 5,100 | $ | 5,230 | |||||
Inventories are stated at the lower of cost (FIFO) or market and consist of finished goods and
raw materials used in the manufacture of the Companys Zegerid Capsules and Zegerid Powder for Oral
Suspension products. Also included in inventories are product samples of
Glumetza® (metformin hydrochloride extended release tablets) which the Company
purchases from Depomed, Inc. (Depomed) under its promotion agreement. The Company provides
reserves for potentially excess, dated or obsolete inventories based on an analysis of inventory on
hand and on firm purchase commitments, compared to forecasts of future sales.
Accounts payable and accrued liabilities consist of the following (in thousands):
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Accounts payable |
$ | 6,598 | $ | 6,102 | ||||
Accrued compensation and benefits |
6,071 | 6,862 | ||||||
Accrued rebates |
34,027 | 26,034 | ||||||
Accrued license fees and royalties |
1,591 | 4,038 | ||||||
Accrued contract sales organization expenses |
1,764 | 1,774 | ||||||
Accrued research and development expenses |
1,328 | 4,126 | ||||||
Other accrued liabilities |
3,716 | 4,173 | ||||||
$ | 55,095 | $ | 53,109 | |||||
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11. Long-Term Debt
On July 11, 2008, the Company entered into an Amended and Restated Loan and Security Agreement
(the Amended Loan Agreement) with Comerica Bank (Comerica). The Amended Loan Agreement amends
and restates the terms of the original Loan and Security Agreement entered into between the Company
and Comerica in July 2006. In December 2008, the Company drew down $10.0 million under the Amended
Loan Agreement. The credit facility under the Amended Loan Agreement consists of a revolving line
of credit, pursuant to which the Company may request advances in an aggregate outstanding amount
not to exceed $25.0 million. Under the Amended Loan Agreement, the revolving loan bears interest,
as selected by the Company, at either the variable rate of interest, per annum, most recently
announced by Comerica as its prime rate plus 0.50% or the LIBOR rate (as computed in the Amended
and Restated LIBOR Addendum to the Amended Loan Agreement) plus 3.00%. The Company has selected
the prime rate plus 0.50% interest rate option, which as of September 30, 2009 was 3.75%.
Interest payments on advances made under the Amended Loan Agreement are due and payable in arrears
on the first calendar day of each month during the term of the Amended Loan Agreement. Amounts
borrowed under the Amended Loan Agreement may be repaid and re-borrowed at any time prior to July
11, 2011. There is a non-refundable unused commitment fee equal to 0.50% per annum on the
difference between the amount of the revolving line and the average daily balance outstanding
thereunder during the term of the Amended Loan Agreement, payable quarterly in arrears. The
Amended Loan Agreement will remain in full force and effect for so long as any obligations remain
outstanding or Comerica has any obligation to make credit extensions under the Amended Loan
Agreement.
Amounts borrowed under the Amended Loan Agreement are secured by substantially all of the
Companys personal property, excluding intellectual property. Under the Amended Loan Agreement,
the Company is subject to certain affirmative and negative covenants, including limitations on the
Companys ability to: undergo certain change of control events; convey, sell, lease, license,
transfer or otherwise dispose of assets; create, incur, assume, guarantee or be liable with respect
to certain indebtedness; grant liens; pay dividends and make certain other restricted payments; and
make investments. In addition, under the Amended Loan Agreement the Company is required to
maintain a cash balance with Comerica in an amount of not less than $4.0 million and to maintain
any other cash balances with either Comerica or another financial institution covered by a control
agreement for the benefit of Comerica. The Company is also subject to specified financial
covenants with respect to a minimum liquidity ratio and, in specified limited circumstances,
minimum EBITDA requirements as defined in the Amended Loan Agreement. The Company has currently
met all of its obligations under the Amended Loan Agreement.
12. Contingencies
In September 2007, the Company filed a lawsuit in the United States District Court for the
District of Delaware against Par Pharmaceutical, Inc. (Par) for infringement of U.S. Patent Nos.
6,645,988; 6,489,346; and 6,699,885, each of which is listed in the Approved Drug Products with
Therapeutic Equivalence Evaluations (the Orange Book) for Zegerid Capsules. In December 2007, the
Company filed a second lawsuit in the United States District Court for the District of Delaware
against Par for infringement of U.S. Patent Nos. 6,645,988; 6,489,346; 6,699,885; and 6,780,882,
each of which is listed in the Orange Book for Zegerid Powder for Oral Suspension. The University
of Missouri, licensor of the patents, is a co-plaintiff in the litigation, and both lawsuits have
been consolidated for all purposes. The lawsuits are in response to Abbreviated New Drug
Applications (ANDAs) filed by Par with the FDA regarding Pars intent to market generic versions
of the Companys Zegerid Capsules and Zegerid Powder for Oral Suspension products prior to the July
2016 expiration of the asserted patents. Each complaint seeks a judgment that Par has infringed the
asserted patents and that the effective date of approval of Pars ANDA shall not be earlier than
the expiration date of the asserted patents. Par has filed answers in each case, primarily
asserting non-infringement, invalidity and/or unenforceability. Par has also filed counterclaims
seeking a declaration in its favor on those issues. On July 15, 2008, the U.S. Patent and Trademark
Office (PTO) issued U.S. Patent No. 7,399,772 (the 772 patent), which is now listed in the
Orange Book for both Zegerid Capsules and Zegerid Powder for Oral Suspension. In October 2008, the
Company amended its complaint to add the 772 patent to the pending litigation with Par. A claim
construction (Markman) hearing was held in November 2008. Following the Markman hearing, the
court adopted all of the claim constructions the Company and the University of Missouri proposed.
In addition, as part of this litigation, Par initially filed counterclaims seeking a
declaration that U.S. Patent No. 5,840,737 (the 737 patent) is not infringed, is invalid and/or
is unenforceable. The Company moved to dismiss, or in
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the alternative, stay these claims due to a reissue proceeding involving the 737 patent currently
pending before the PTO, and the Company and the University of Missouri also granted Par a covenant
not to sue on the original 737 patent. In November 2008, Par dismissed its counterclaims relating
to the 737 patent.
The Company commenced each of the lawsuits within the applicable 45 day period required to
automatically stay, or bar, the FDA from approving Pars ANDAs for 30 months or until a district
court decision that is adverse to the asserted patents, whichever may occur earlier. The 30-month
stay with regard to Zegerid Capsules expires in February 2010 and the 30-month stay with regard to
Zegerid Powder for Oral Suspension expires in May/June 2010. If the litigation is still ongoing
after expiration of the applicable 30-month stay, the termination of the stay could result in the
introduction of one or more products generic to Zegerid Capsules and/or Zegerid Powder for Oral
Suspension prior to resolution of the litigation.
A bench trial for the consolidated lawsuit was held in July 2009. During the trial, the court
ruled in favor of the Company and the University of Missouri on the issue of infringement.
Post-trial briefs were submitted in August 2009, and the court has not yet ruled on Pars defenses
of invalidity and inequitable conduct.
Although the Company intends to vigorously defend and enforce its patent rights, the Company
is not able to predict the timing or outcome of the litigation. The court may render its decision
at any time after the filing of the post-trial briefs, which may be before or after the expiration
of the applicable 30-month stays. Any adverse outcome in this litigation could result in one or
more generic versions of Zegerid Capsules and/or Zegerid Powder for Oral Suspension being launched
before the expiration of the listed patents in July 2016, which could adversely affect the
Companys ability to successfully execute its business strategy to maximize the value of Zegerid
Capsules and Zegerid Powder for Oral Suspension and would negatively impact the Companys financial
condition and results of operations, including causing a significant decrease in our revenues and
cash flows. An adverse outcome may also impact the patent protection for the products being
commercialized pursuant to the Companys strategic alliances with GlaxoSmithKline plc,
Schering-Plough Healthcare Products, Inc. and Norgine B.V. (Norgine) which in turn may impact the
amount of, or the Companys ability to receive, milestone payments and royalties under the
Companys agreements with these strategic partners. Following any decision from the lower court,
the losing party may choose to exercise its right to appeal, which could result in a change of the
lower courts decision as well as additional time and expense. Regardless of how the litigation is
ultimately resolved, the litigation has been and may continue to be costly, time-consuming and
distracting to management, which could have a material adverse effect on the Companys business.
In December 2007, the University of Missouri filed an Application for Reissue of the 737
patent with the PTO. It is not feasible to predict the impact that the reissue proceeding may have
on the scope and validity of the 737 patent claims. If the claims of the 737 patent ultimately
are narrowed substantially or invalidated by the PTO, the extent of the patent coverage afforded to
the Companys Zegerid family of products could be impaired, which could potentially harm the
Companys business and operating results.
13. Accounting Pronouncements
Adoption of Recent Accounting Pronouncements
In November 2007, the Emerging Issues Task Force (EITF) issued authoritative guidance on
accounting for collaborative arrangements related to the development and commercialization of
intellectual property. Companies may enter into arrangements with other companies to jointly
develop, manufacture, distribute, and market a product. Often the activities associated with these
arrangements are conducted by the collaborators without the creation of a separate legal entity
(that is, the arrangement is operated as a virtual joint venture). The arrangements generally
provide that the collaborators will share, based on contractually defined calculations, the profits
or losses from the associated activities. Periodically, the collaborators share financial
information related to product revenues generated (if any) and costs incurred that may trigger a
sharing payment for the combined profits or losses. The consensus requires collaborators in such
an arrangement to present the result of activities for which they act as the principal on a gross
basis and report any payments received from (made to) other collaborators based on other applicable
GAAP or, in the absence of other applicable GAAP, based on analogy to authoritative accounting
literature or a reasonable, rational, and consistently applied accounting policy election. This
guidance is effective for collaborative arrangements in place at the beginning of the annual period
beginning after December 15, 2008. The adoption of the guidance did not have a material impact on
the Companys financial statements.
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In December 2007, the FASB issued authoritative guidance for business combinations which
changes the requirements for an acquirers recognition and measurement of the assets acquired and
liabilities assumed in a business combination, including the treatment of contingent consideration,
pre-acquisition contingencies, transaction costs, in-process research and development and
restructuring costs. In addition, under this guidance changes in an acquired entitys deferred tax
assets and uncertain tax positions after the measurement period will impact income tax expense.
This guidance is effective for the Company with respect to business combination transactions for
which the acquisition date is after December 31, 2008. The adoption of the guidance did not have a
material impact on the Companys financial statements.
In December 2007, the FASB issued authoritative guidance for noncontrolling interests in
consolidated financial statements which requires that noncontrolling (minority) interests be
reported as a component of equity, that net income attributable to the parent and to the
noncontrolling interest be separately identified in the income statement, that changes in a
parents ownership interest while the parent retains its controlling interest be accounted for as
equity transactions, and that any retained noncontrolling equity investment upon the
deconsolidation of a subsidiary be initially measured at fair value. This guidance is effective
for fiscal years beginning after December 31, 2008, and shall be applied prospectively. However,
the presentation and disclosure requirements of this guidance are required to be applied
retrospectively for all periods presented. The retrospective presentation and disclosure
requirements of this guidance will be applied to any prior periods presented in financial
statements for the fiscal year ending December 31, 2009, and later periods during which we have a
consolidated subsidiary with a noncontrolling interest. As of September 30, 2009, the Company does
not have any consolidated subsidiaries in which there is a noncontrolling interest.
Pending Adoption of Recent Accounting Pronouncements
In October 2009, the EITF issued authoritative guidance on revenue recognition with regard to
multiple element arrangements. The consensus in this recently issued guidance supersedes certain
prior guidance and requires an entity to allocate arrangement consideration at the inception of an
arrangement to all of its deliverables based on their relative selling prices (i.e., the relative
selling-price method). The consensus eliminates the use of the residual method of allocation
(i.e., in which the undelivered element is measured at its estimated selling price and the
delivered element is measured as the residual of the arrangement consideration) and requires the
relative-selling-price method in all circumstances in which an entity recognizes revenue for an
arrangement with multiple deliverables subject to the issued guidance. This guidance requires both
ongoing disclosures regarding an entitys multiple-element revenue arrangements as well as certain
transitional disclosures during periods after adoption. This guidance is effective for the first
fiscal year beginning on or after June 15, 2010. The Company does not expect the adoption of this
guidance will have a material impact on its financial statements.
14. Subsequent Event
In October 2009, the Company entered into a license agreement with Norgine granting Norgine
certain exclusive rights to develop, manufacture and commercialize prescription immediate-release
omeprazole products in specified markets in Western, Central and Eastern Europe and in Israel.
Under the license agreement, the Company received a nonrefundable upfront payment of $2.5 million
in October 2009. The Company will also be entitled to receive up to an additional $10.0 million in
milestone payments upon the achievement of certain regulatory events, subject to reductions based
on Norgines actual out-of-pocket costs directly related to its clinical, regulatory and
reimbursement efforts for a major country as defined under the license agreement. Norgine will
also pay the Company tiered royalties ranging from the mid- to high-teens, subject to reduction in
certain limited circumstances, on net sales of any products sold under the license agreement. In
turn, the Company will be obligated to pay royalties to the University of Missouri based on net
sales of any licensed products sold by Norgine. The Norgine agreement may be terminated by either
party in the event of the other partys uncured material breach or bankruptcy or insolvency. In
addition, Norgine may terminate the license agreement on 12 months prior written notice to the
Company at any time.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion contains forward-looking statements, which involve risks and
uncertainties. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set forth below under
the caption Risk Factors. The interim condensed financial statements and this
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Managements Discussion and Analysis of Financial Condition and Results of Operations should
be read in conjunction with the financial statements and notes thereto for the year ended December
31, 2008 and the related Managements Discussion and Analysis of Financial Condition and Results of
Operations, both of which are contained in our Annual Report on Form 10-K for the year ended
December 31, 2008.
Overview
We are a specialty biopharmaceutical company focused on acquiring, developing and
commercializing proprietary products that address the needs of patients treated by
gastroenterologists and other physicians.
Our commercial organization is currently promoting Zegerid®
(omeprazole/sodium bicarbonate) Capsules and Powder for Oral Suspension, which are proprietary
formulations that combine omeprazole, which is a proton pump inhibitor, or PPI, and an antacid. We
developed these products as the first immediate-release oral PPIs for the U.S. prescription market,
and they have been approved by the U.S. Food and Drug Administration, or FDA, to treat or reduce
the risk of a variety of upper gastrointestinal, or GI, diseases and disorders, including
gastroesophageal reflux disease, or GERD. Our Zegerid products are based on patented technology
and utilize antacids, which raise the gastric pH and thus protect the PPI, omeprazole, from acid
degradation in the stomach, allowing the omeprazole to be quickly absorbed into the bloodstream.
We commercially launched Zegerid Capsules in early 2006 and Zegerid Powder for Oral Suspension in
late 2004 and early 2005.
Our commercial organization also promotes Glumetza® (metformin
hydrochloride extended release tablets) prescription products in the U.S., under the terms of an
exclusive promotion agreement that we entered into with Depomed, Inc., or Depomed, in July 2008.
Glumetza is a once-daily, extended-release formulation of metformin that incorporates patented drug
delivery technology and is indicated as an adjunct to diet and exercise to improve glycemic control
in adult patients with type 2 diabetes. The extended-release delivery system is designed to offer
patients with diabetes an ability to reach their optimal dose of metformin with fewer GI side
effects. We began our promotion of the Glumetza products in October 2008.
We are developing two product candidates targeting lower GI conditions under the terms of a
strategic collaboration that we entered into with Cosmo Technologies Limited, or Cosmo, in December
2008. The product candidates utilize Cosmos patented MMX® technology, which
is a proprietary multi-matrix system that is designed to result in the controlled release and
homogeneous distribution of a drug substance throughout the length of the colon. The goal of the
MMX technology is to improve efficacy while reducing side effects by minimizing systemic
absorption. Budesonide MMX is an oral corticosteroid and is currently being investigated in two
phase III clinical trials for the induction of remission of mild or moderate active ulcerative
colitis. Rifamycin SV MMX is a broad spectrum, semi-synthetic antibiotic and has been investigated
in a phase II clinical program for patients with travelers diarrhea. Under the strategic
collaboration, we were granted exclusive rights to develop and commercialize these product
candidates in the U.S.
In addition, in January 2009, we submitted a new drug application, or NDA, to the FDA, which
NDA was accepted for filing in April 2009, for a new tablet formulation to add to our Zegerid
family of prescription products. Pursuant to Prescription Drug User Fee Act, or PDUFA, guidelines,
we expect the FDA will complete its review or otherwise respond to the NDA by December 4, 2009. If
we receive FDA approval of our tablet formulation in December, then we expect to launch the new
tablet product in mid-2010. The new formulation is an immediate-release tablet that combines
omeprazole with a mix of buffers.
To further leverage our proprietary PPI technology and diversify our sources of revenue, we
licensed exclusive rights to Schering-Plough Healthcare Products, Inc., or Schering-Plough, under
our patented PPI technology to develop, manufacture and sell Zegerid brand over-the-counter, or
OTC, products in the lower dosage strength of 20 mg of omeprazole in the U.S. and Canada.
Schering-Plough was recently merged with Merck & Co., Inc., and references to Schering-Plough in
this report are to the newly combined entity. We have also entered into a license agreement and a
distribution agreement granting exclusive rights to Glaxo Group Limited, an affiliate of
GlaxoSmithKline, plc, or GSK, under our patented PPI technology to develop, manufacture and
commercialize prescription and OTC products in up to 114 specified countries outside of the U.S.,
Europe, Australia, Japan and Canada (including markets within Africa, Asia, the Middle-East, and
Central and South America), and to distribute and sell Zegerid brand prescription products in
Puerto Rico and the U.S. Virgin Islands. In October 2009, we entered into a license agreement
granting certain exclusive rights to Norgine B.V., or Norgine, under our patented PPI technology to
develop, manufacture and commercialize prescription products in specified markets in Western, Central and Eastern Europe and in Israel.
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Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on
our financial statements, which have been prepared in accordance with U.S. generally accepted
accounting principles, or GAAP. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and liabilities. We review our estimates on
an on-going basis. We base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities. Actual results may differ
from these estimates under different assumptions or conditions. We believe the following
accounting policies to be critical to the judgments and estimates used in the preparation of our
financial statements.
Revenue Recognition
We recognize revenue when there is persuasive evidence that an arrangement exists, title has
passed, the price is fixed or determinable, and collectibility is reasonably assured.
Product Sales, Net. We sell our Zegerid products primarily to pharmaceutical wholesale
distributors. We are obligated to accept from customers products that are returned within six
months of their expiration date or up to 12 months beyond their expiration date. We authorize
returns for expired or damaged products in accordance with our return goods policy and procedures.
We issue credit to the customer for expired or damaged returned product. We rarely exchange
product from inventory for returned product. At the time of sale, we record our estimates for
product returns as a reduction to revenue at full sales value with a corresponding increase in the
allowance for product returns liability. Actual returns are recorded as a reduction to the
allowance for product returns liability at sales value with a corresponding decrease in accounts
receivable for credit issued to the customer.
We recognize product sales net of estimated allowances for product returns, estimated rebates
in connection with contracts relating to managed care, Medicaid, Medicare, and patient coupons, and
estimated chargebacks from distributors, wholesaler fees and prompt payment and other discounts.
We establish allowances for estimated product returns, rebates and chargebacks based primarily on
the following qualitative and quantitative factors:
| the number of and specific contractual terms of agreements with customers; | ||
| estimated levels of inventory in the distribution channel; | ||
| estimated remaining shelf life of products; | ||
| analysis of prescription data gathered by a third-party prescription data provider; | ||
| direct communication with customers; | ||
| historical product returns, rebates and chargebacks; | ||
| anticipated introduction of competitive products or generics; | ||
| anticipated pricing strategy changes by us and/or our competitors; and | ||
| the impact of state and federal regulations. |
In our analyses, we utilize prescription data purchased from a third-party data provider to
develop estimates of historical inventory channel pull-through. We utilize a separate analysis
which compares historical product shipments less returns to estimated historical prescriptions
written. Based on that analysis, we develop an estimate of the quantity of product in the
distribution channel which may be subject to various product return, rebate and chargeback
exposures.
Our estimates of product returns, rebates and chargebacks require our most subjective and
complex judgment due to the need to make estimates about matters that are inherently uncertain. If
actual future payments for returns, rebates, chargebacks and other discounts exceed the estimates
we made at the time of sale, our financial position, results of operations and cash flows would be
negatively impacted.
Our allowance for product returns was $12.2 million as of September 30, 2009 and $10.3 million
as of December 31, 2008. In order to provide a basis for estimating future product returns on
sales to our customers at the time title transfers, we have been tracking our Zegerid products
return history by individual production batches from the time of our first
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commercial product launch of Zegerid Powder for Oral Suspension 20 mg in late 2004, taking
into consideration product expiration dating and estimated inventory levels in the distribution
channel. We recognize product sales at the time title passes to our customers, and we provide for
an estimate of future product returns at that time based upon these historical product returns
trends, our analysis of product expiration dating and estimated inventory levels in the
distribution channel, and the other factors discussed above. There may be a significant time lag
between the date we determine the estimated allowance and when we receive the product return and
issue credit to a customer. Due to this time lag, we record adjustments to our estimated allowance
over several periods, which can result in a net increase or a net decrease in our operating results
in those periods.
Our allowance for rebates, chargebacks and other discounts was $37.5 million as of September
30, 2009 and $29.3 million as of December 31, 2008. These allowances reflect an estimate of our
liability for rebates due to managed care organizations under specific contracts, rebates due to
various governmental organizations under Medicaid and Medicare contracts and regulations,
chargebacks due to various organizations purchasing our products through federal contracts and/or
group purchasing agreements, and other rebates and customer discounts due in connection with
wholesaler fees and prompt payment and other discounts. We estimate our liability for rebates and
chargebacks at each reporting period based on a combination of the qualitative and quantitative
assumptions listed above. In each reporting period, we evaluate our outstanding contracts and
apply the contractual discounts to the invoiced price of wholesaler shipments recognized. Although
the total invoiced price of shipments to wholesalers for the reporting period and the contractual
terms are known during the reporting period, we project the ultimate disposition of the sale (e.g.
future utilization rates of cash payors, managed care, Medicaid, Medicare or other contracted
organizations). This estimate is based on historical trends adjusted for anticipated changes based
on specific contractual terms of new agreements with customers, anticipated pricing strategy
changes by us and/or our competitors and the other qualitative and quantitative factors described
above. There may be a significant time lag between the date we determine the estimated allowance
and when we make the contractual payment or issue credit to a customer. Due to this time lag, we
record adjustments to our estimated allowance over several periods, which can result in a net
increase or a net decrease in our operating results in those periods. To date, actual results have
not materially differed from our estimates.
Promotion Revenue and License and Royalty Revenue. We analyze each element of our promotion
and licensing agreements to determine the appropriate revenue recognition. We recognize revenue on
upfront payments over the period of significant involvement under the related agreements unless the
fee is in exchange for products delivered or services rendered that represent the culmination of a
separate earnings process and no further performance obligation exists under the contract. We
recognize milestone payments upon the achievement of specified milestones if (1) the milestone is
substantive in nature, and the achievement of the milestone was not reasonably assured at the
inception of the agreement and (2) the fees are nonrefundable. Any milestone payments received
prior to satisfying these revenue recognition criteria are recognized as deferred revenue. Sales
milestones, royalties and promotion fees are recognized as revenue when earned under the
agreements.
Inventories and Related Reserves
Inventories are stated at the lower of cost (FIFO) or market and consist of finished goods and
raw materials used in the manufacture of our Zegerid Capsules and Zegerid Powder for Oral
Suspension products. Also included in inventories are product samples of the Glumetza products
which we purchase from Depomed under our promotion agreement. We provide reserves for potentially
excess, dated or obsolete inventories based on an analysis of inventory on hand and on firm
purchase commitments compared to forecasts of future sales.
Stock-Based Compensation
We estimate the fair value of stock options and employee stock purchase plan rights granted
using the Black-Scholes valuation model. This estimate is affected by our stock price, as well as
assumptions regarding a number of complex and subjective variables. These variables include the
expected volatility of our stock price, the expected term of the stock option, the risk-free
interest rate and expected dividends. As the length of time our shares have been publicly traded
is generally shorter than the expected life of the option, we consider the expected volatility of
similar entities as well as our historical volatility since our initial public offering in April
2004 in determining our volatility factor. In evaluating similar entities, we consider factors
such as industry, stage of development, size and financial leverage. In determining the expected
life of the options, we use the simplified method. Under this method, the expected life is
presumed to be the mid-point between the vesting date and the end of the contractual term. We will
continue to use the simplified method until we have sufficient historical exercise data to estimate the expected life of the
options.
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The fair value of options granted is amortized on a straight-line basis over the requisite
service period of the awards, which is generally the vesting period ranging from one to four years.
Pre-vesting forfeitures were estimated to be approximately 0% for the three and nine months ended
September 30, 2009 and 2008 as the majority of options granted contain monthly vesting terms. In
2008, certain stock options were granted to employees at or above the vice president level that
vest upon the attainment of specific financial performance targets. The measurement date of stock
options containing performance-based vesting is the date the stock option grant is authorized and
the specific performance goals are communicated. Compensation expense is recognized based on the
probability that the performance criteria will be met. The recognition of compensation expense
associated with performance-based vesting requires judgment in assessing the probability of meeting
the performance goals, as well as defined criteria for assessing achievement of the
performance-related goals. The continued assessment of probability may result in additional
expense recognition or expense reversal depending on the level of achievement of the performance
goals. We recorded compensation expense of approximately $355,000 for the nine months ended
September 30, 2009 related to stock options containing performance-based vesting.
The following table includes stock-based compensation recognized in our condensed statements
of operations (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Cost of product sales |
$ | 30 | $ | 22 | $ | 82 | $ | 73 | ||||||||
Research and development |
135 | 123 | 464 | 357 | ||||||||||||
Selling, general and administrative |
941 | 875 | 2,948 | 2,775 | ||||||||||||
Total |
$ | 1,106 | $ | 1,020 | $ | 3,494 | $ | 3,205 | ||||||||
As of September 30, 2009, total unrecognized compensation cost related to stock options was
approximately $5.9 million, and the weighted average period over which it was expected to be
recognized was 2.1 years.
The above listing is not intended to be a comprehensive list of all of our accounting
policies. In many cases, the accounting treatment of a particular transaction is specifically
dictated by GAAP. There are also areas in which our managements judgment in selecting any
available alternative would not produce a materially different result. Please see our audited
financial statements and notes thereto included in our annual report on Form 10-K, which contain
accounting policies and other disclosures required by GAAP.
Results of Operations
Comparison of Three Months Ended September 30, 2009 and 2008
Product Sales, Net. Product sales, net were $31.5 million for the three months ended
September 30, 2009 and $28.1 million for the three months ended September 30, 2008 and consisted of
sales of Zegerid Capsules and Zegerid Powder for Oral Suspension. The $3.4 million increase in
product sales, net was comprised of approximately $1.1 million related to an increase in the sales
volume of our Zegerid products primarily driven by Zegerid Capsules, as well as approximately $2.3
million related to increased average selling prices.
Promotion Revenue. Promotion revenue was $6.8 million for the three months ended September
30, 2009 and $1.4 million for the three months ended September 30, 2008. For the three months
ended September 30, 2009, promotion revenue was comprised of fees earned under our promotion
agreement with Depomed related to our promotion of the Glumetza products. For the three months
ended September 30, 2008, promotion revenue was comprised of co-promotion fees earned under our
agreements with Victory Pharma, Inc., or Victory, pursuant to which we co-promoted
Naprelan® (naproxen sodium) Controlled Release Tablets and with C.B. Fleet
Company, Incorporated, or Fleet, pursuant to which we co-promoted the Fleet®
Phospho-soda® EZ-Prep Bowel Cleansing System. In July
2008, we and Victory mutually agreed to terminate our co-promotion agreement previously entered
into in June 2007. We ceased all promotional efforts under the agreement with Victory as of
September 30, 2008. We entered into our co-promotion agreement with Fleet in August 2007, which
was subsequently amended in May 2008. Effective as of October 1, 2008, our co-promotion agreement
with Fleet expired in accordance with its terms.
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License and Royalty Revenue. License and royalty revenue was $1.2 million for the three
months ended September 30, 2009 and $2.7 million for the three months ended September 30, 2008.
Significant components of our license and royalty revenue are described below:
| In November 2006, we received a nonrefundable $15.0 million upfront license fee in connection with our license agreement with Schering-Plough. The $15.0 million upfront payment is being amortized to revenue on a straight-line basis over a 37-month period through the end of 2009, which represents the estimated period during which we have significant responsibilities under the agreement. | ||
| In December 2007, we received a nonrefundable $11.5 million upfront payment in connection with our license and distribution agreements with GSK. To support GSKs initial launch costs, we agreed to waive the first $2.5 million of aggregate royalties payable under the agreements. Of the total $11.5 million upfront payment, the $2.5 million in waived royalty obligations was recorded as deferred revenue and is being recognized as revenue as the royalties are earned. The remaining $9.0 million was also recorded as deferred revenue and was amortized to revenue on a straight-line basis over an 18-month period through May 2009, which represented the estimated period we were obligated to supply Zegerid products to GSK for sale in Puerto Rico and the U.S. Virgin Islands under the distribution agreement. |
Cost of Product Sales. Cost of product sales was $2.0 million for the three months ended
September 30, 2009 and $1.9 million for the three months ended September 30, 2008, or approximately
6.4% and 6.8% of net product sales, respectively. Cost of product sales consists primarily of raw
materials, third-party manufacturing costs, freight and indirect personnel and other overhead costs
associated with the sales of our Zegerid products. Cost of product sales also includes reserves
for excess, dated or obsolete commercial inventories based on an analysis of inventory on hand and
on firm purchase commitments compared to forecasts of future sales. The decrease in our cost of
product sales as a percentage of net product sales was primarily attributable to increased average
selling prices.
License Fees and Royalties. License fees and royalties were $2.0 million for the three months
ended September 30, 2009 and $3.6 million for the three months ended September 30, 2008. For both
periods, license fees and royalties included royalties due to the University of Missouri based upon
our net product sales as well as products sold by GSK under our license and distribution
agreements. In addition, for the three months ended September 30, 2008, license fees and royalties
included an accrual of approximately $1.8 million related to a one-time $2.5 million sales
milestone paid to the University of Missouri under our license agreement. For the three months
ended September 30, 2009 and 2008, license fees and royalties also included license fee
amortization from the $12.0 million upfront fee paid to Depomed under our promotion agreement
entered into in July 2008. The $12.0 million upfront fee has been capitalized and is being
amortized to license fee expense over the estimated useful life of the asset on a straight-line
basis through mid-2016.
Research and Development. Research and development expenses were $3.4 million for the three
months ended September 30, 2009 and $2.3 million for the three months ended September 30, 2008.
The $1.1 million increase in our research and development expenses was primarily attributable to
the two ongoing multi-center budesonide MMX phase III clinical trials currently being conducted
under our strategic collaboration with Cosmo entered into in December 2008. We are responsible for
one-half of the total out-of-pocket costs associated with these studies. These increases in our
research and development expenses were offset in part by a decrease in manufacturing development
costs associated with a new tablet formulation to add to our Zegerid family of prescription
products. In January 2009, we submitted an NDA to the FDA for the tablet formulation, which NDA
has a PDUFA date of December 4, 2009. The new formulation is an immediate-release tablet that
combines omeprazole with a mix of buffers.
Selling, General and Administrative. Selling, general and administrative expenses were $26.3
million for the three months ended September 30, 2009 and $28.5 million for the three months ended
September 30, 2008. The $2.2 million decrease in our selling, general and administrative expenses
was primarily attributable to a decrease in costs associated with advertising and promotional
activities related to our Zegerid products, decreased meeting costs and a decrease in the number of
sales representatives under our contract sales organization agreement. These decreases in our
selling, general and administrative expenses were offset in part by an increase in legal fees
primarily due to the patent infringement litigation against Par Pharmaceutical, Inc., or Par.
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Interest Income. Interest income was $25,000 for the three months ended September 30, 2009
and $177,000 for the three months ended September 30, 2008. The $152,000 decrease in interest
income was primarily attributable to a lower rate of return on our cash, cash equivalents and
short-term investments.
Interest Expense. Interest expense was $117,000 for the three months ended September 30, 2009
and was comprised primarily of interest due in connection with our revolving credit facility with
Comerica Bank, or Comerica.
Income Tax Expense. Income tax expense was $223,000 for the three months ended September 30,
2009, and there was no income tax expense for the three months ended September 30, 2008. We
generated estimated pre-tax income for the three months ended September 30, 2009 as compared to an
estimated pre-tax loss for the three months ended September 30, 2008.
Comparison of Nine Months Ended September 30, 2009 and 2008
Product Sales, Net. Product sales, net were $87.0 million for the nine months ended September
30, 2009 and $71.5 million for the nine months ended September 30, 2008 and consisted of sales of
Zegerid Capsules and Zegerid Powder for Oral Suspension. The $15.5 million increase in product
sales, net was comprised of approximately $10.5 million related to an increase in the sales volume
of our Zegerid products primarily driven by Zegerid Capsules, as well as approximately $5.0 million
related to increased average selling prices.
Promotion Revenue. Promotion revenue was $16.9 million for the nine months ended September
30, 2009 and $4.8 million for the nine months ended September 30, 2008. For the nine months ended
September 30, 2009, promotion revenue was comprised primarily of fees earned under our promotion
agreement with Depomed related to our promotion of the Glumetza products. For the nine months
ended September 30, 2008, promotion revenue was comprised of co-promotion fees earned under our
agreements with Victory and Fleet. In July 2008, we and Victory mutually agreed to terminate our
co-promotion agreement previously entered into in June 2007. We ceased all promotional efforts
under the agreement with Victory as of September 30, 2008. We entered into our co-promotion
agreement with Fleet in August 2007, which was subsequently amended in May 2008. Effective as of
October 1, 2008, our co-promotion agreement with Fleet expired in accordance with its terms.
License and Royalty Revenue. License and royalty revenue was $6.2 million for the nine months
ended September 30, 2009 and $16.4 million for the nine months ended September 30, 2008.
Significant components of our license and royalty revenue are described below:
| In November 2006, we received a nonrefundable $15.0 million upfront license fee in connection with our license agreement with Schering-Plough. The $15.0 million upfront payment is being amortized to revenue on a straight-line basis over a 37-month period through the end of 2009, which represents the estimated period during which we have significant responsibilities under the agreement. In June 2008, we received a $2.5 million regulatory milestone relating to FDA acceptance for filing of an NDA submitted by Schering-Plough which was recognized as license and royalty revenue in the nine months ended September 30, 2008. | ||
| In December 2007, we received a nonrefundable $11.5 million upfront payment in connection with our license and distribution agreements with GSK. To support GSKs initial launch costs, we agreed to waive the first $2.5 million of aggregate royalties payable under the agreements. Of the total $11.5 million upfront payment, the $2.5 million in waived royalty obligations was recorded as deferred revenue and is being recognized as revenue as the royalties are earned. The remaining $9.0 million was also recorded as deferred revenue and was amortized to revenue on a straight-line basis over an 18-month period through May 2009, which represents the estimated period we were obligated to supply Zegerid products to GSK for sale in Puerto Rico and the U.S. Virgin Islands under the distribution agreement. | ||
| In October 2004, we received a nonrefundable $15.0 million upfront payment in connection with our non-exclusive agreement with Otsuka America Pharmaceutical Inc., or Otsuka America, under which Otsuka America had been co-promoting Zegerid Capsules and Zegerid Powder for Oral Suspension. The $15.0 million upfront payment initially was being amortized to revenue on a straight-line basis over the 63-month contractual term through the end of 2009. On May 28, 2008, we agreed to terminate the co-promotion agreement effective as of June 30, 2008 and amortized the remaining balance of the $15.0 million up-front payment. We recognized approximately $5.7 million in license and royalty revenue in the nine months ended September 30, 2008 associated with this amortization. |
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Cost of Product Sales. Cost of product sales was $6.0 million for the nine months ended
September 30, 2009 and $5.3 million for the nine months ended September 30, 2008, or approximately
6.9% and 7.4% of net product sales, respectively. Cost of product sales consists primarily of raw
materials, third-party manufacturing costs, freight and indirect personnel and other overhead costs
associated with the sales of our Zegerid products. Cost of product sales also includes reserves
for excess, dated or obsolete commercial inventories based on an analysis of inventory on hand and
on firm purchase commitments compared to forecasts of future sales. The decrease in our cost of
product sales as a percentage of net product sales was primarily attributable to increased average
selling prices. Additionally, the decrease in our cost of product sales as a percentage of net
product sales was attributable to certain fixed costs being applied to increased sales volumes.
License Fees and Royalties. License fees and royalties were $5.7 million for the nine months
ended September 30, 2009 and $9.7 million for the nine months ended September 30, 2008. For both
periods, license fees and royalties included royalties due to the University of Missouri based upon
our net product sales as well as products sold by GSK under our license and distribution
agreements. In addition, for the nine months ended September 30, 2008, license fees and royalties
included an accrual of approximately $1.8 million related to a one-time $2.5 million sales
milestone paid to the University of Missouri under our license agreement. For both periods,
license fees and royalties also included license fee amortization from the $12.0 million upfront
fee paid to Depomed under our promotion agreement entered into in July 2008. The $12.0 million
upfront fee has been capitalized and is being amortized to license fee expense over the estimated
useful life of the asset on a straight-line basis through mid-2016. For the nine months ended
September 30, 2008, license fees and royalties also included royalties due to Otsuka America under
our co-promotion agreement based upon our net product sales. Following the termination of our
co-promotion agreement effective as of June 30, 2008, we are no longer obligated to pay royalties
to Otsuka America.
Research and Development. Research and development expenses were $9.8 million for the nine
months ended September 30, 2009 and $6.2 million for the nine months ended September 30, 2008. The
$3.6 million increase in our research and development expenses was primarily attributable to the
two ongoing multi-center budesonide MMX phase III clinical trials currently being conducted under
our strategic collaboration with Cosmo entered into in December 2008. We are responsible for
one-half of the total out-of-pocket costs associated with these studies. In addition to the costs
associated with our strategic collaboration with Cosmo, the increase in our research and
development expenses was attributable to increased compensation costs associated with an increase
in research and development personnel and annual merit increases, and payment of the user fee
associated with the submission of our 505(b)(2) NDA to the FDA for a new tablet formulation we
intend to add to our Zegerid family of branded prescription pharmaceutical products. These
increases in our research and development expenses were offset in part by a decrease in
manufacturing development costs associated with the new tablet formulation.
Research and development expenses have historically consisted primarily of costs associated
with clinical trials of our products under development as well as clinical studies designed to
further differentiate our Zegerid products from those of our competitors, development of and
preparation for commercial manufacturing of our products, compensation and other expenses related
to research and development personnel and facilities expenses. In connection with our strategic
collaboration with Cosmo entered into in December 2008, we are developing two product candidates
targeting lower GI conditions. Budesonide MMX is an oral corticosteroid and is currently being
investigated in two multi-center phase III clinical trials for the induction of remission of mild
or moderate active ulcerative colitis. Assuming successful and timely completion of the clinical
program, we plan to submit an NDA for budesonide MMX to the FDA in the second half of 2011.
Rifamycin SV MMX is a broad spectrum, semi-synthetic antibiotic and has been investigated in a
phase II clinical program for patients with travelers diarrhea. Assuming successful and timely
completion of certain non-clinical and pharmacokinetic clinical activities, we would then expect to
file an investigational new drug application with the FDA and initiate the first of two planned
phase III U.S. clinical trials in patients with travelers diarrhea in the first half of 2010. We
are unable to estimate with any certainty the research and development costs that we may incur in
the future. We have also committed, in connection with the approval of our NDAs for Zegerid Powder
for Oral Suspension, to evaluate the product in pediatric populations, including
pharmacokinetic/pharmacodynamic, or PK/PD, and safety studies. In the future, we may conduct
additional clinical trials to further differentiate our Zegerid family of products, as well as
conduct research and development related to any future products that we may in-license or otherwise
acquire. Although we are currently focused primarily on advancing our Zegerid family of products
and development of the budesonide MMX and rifamycin SV MMX product candidates, we anticipate that
we will make determinations as to which development projects to pursue and how
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much funding to direct to each project on an ongoing basis in response to the scientific, clinical and commercial
merits of each project.
Selling, General and Administrative. Selling, general and administrative expenses were $80.4
million for the nine months ended September 30, 2009 and $80.8 million for the nine months ended
September 30, 2008. The $405,000 decrease in our selling, general and administrative expenses was
primarily attributable to decreases in costs associated with advertising and promotional activities
related to our Zegerid products, a decrease in the number of sales representatives under our
contract sales organization agreement, decreased meeting costs and decreased fuel costs associated
with our leased vehicles. These decreases in our selling, general and administrative expenses were
offset in part by an increase in legal fees primarily due to the patent infringement litigation
against Par, costs associated with the advertising and promotion of the Glumetza products and
increased compensation costs resulting from annual merit increases.
Interest Income. Interest income was $179,000 for the nine months ended September 30, 2009
and $1.0 million for the nine months ended September 30, 2008. The $821,000 decrease in interest
income was primarily attributable to a lower rate of return on our cash, cash equivalents and
short-term investments.
Interest Expense. Interest expense was $345,000 for the nine months ended September 30, 2009
and was comprised primarily of interest due in connection with our revolving credit facility with
Comerica.
Income Tax Expense. Income tax expense was $445,000 for the nine months ended September 30,
2009, and there was no income tax expense for the nine months ended September 30, 2008. We
generated estimated pre-tax income for the nine months ended September 30, 2009 as compared to an
estimated pre-tax loss for the nine months ended September 30, 2008.
Liquidity and Capital Resources
As of September 30, 2009, cash, cash equivalents and short-term investments were $61.8
million, compared to $52.0 million as of December 31, 2008, an increase of $9.8 million. This net
increase resulted from our net income for the nine months ended September 30, 2009, adjusted for
non-cash charges and changes in operating assets and liabilities. Additionally, in the nine months
ended September 30, 2009, we reclassified the fair value of our auction rate securities, or ARS,
and auction rate securities rights, or ARS Rights, from long-term to short-term investments
reflecting our intent to exercise the ARS Rights in the next 12 months. The ARS Rights permit us
to require our investment provider to purchase our ARS at par value at any time during the period
June 30, 2010 through July 2, 2012. The total fair value of our ARS and ARS Rights as of September
30, 2009 was approximately $4.0 million.
Net cash provided by operating activities was $5.3 million for the nine months ended September
30, 2009, and net cash used in operating activities was $13.7 million for the nine months ended
September 30, 2008. The primary source of cash for the nine months ended September 30, 2009
resulted from our net income for the period adjusted for non-cash expenses, including $1.6 million
in depreciation and amortization and $3.5 million in stock-based compensation, and changes in
operating assets and liabilities. The primary use of cash for the nine months ended September 30,
2008 resulted from our net loss for the period adjusted for non-cash expenses, including $3.2
million in stock-based compensation, and changes in operating assets and liabilities. Significant
working capital uses of cash for the nine months ended September 30, 2009 included decreases in
deferred revenue and increases in accounts receivable, offset in part by increases in the allowance
for product returns and accounts payable and accrued liabilities. Significant working capital uses
of cash for the nine months ended September 30, 2008 included decreases in deferred revenue and
increases in accounts receivable, offset in part by an increase in the allowance for product
returns and increases in accounts payable and accrued liabilities primarily driven by an increase
in accrued rebates.
Net cash provided by investing activities was $850,000 for the nine months ended September 30,
2009 and net cash used in investing activities was $12.7 million for the nine months ended
September 30, 2008. These activities consisted of purchases and maturities of short-term
investments and purchases of property and equipment. Additionally, for the nine months ended
September 30, 2008, net cash used in investing activities consisted primarily of the acquisition of
intangible assets in connection with our $12.0 million upfront payment to Depomed.
Net cash provided by financing activities was $447,000 for the nine months ended September 30,
2009 and $432,000 for the nine months ended September 30, 2008 consisting of proceeds from the
issuance of common stock under our employee stock purchase plan and the exercise of stock options.
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While we support the commercialization of our Zegerid products, promote Glumetza under
our promotion agreement with Depomed, develop and manufacture our Zegerid products and our
budesonide MMX and rifamycin SV MMX product candidates under our strategic collaboration with Cosmo
and pursue new product opportunities, we anticipate significant cash requirements for personnel
costs for our own organization, as well as in connection with our contract sales agreement with
inVentiv, advertising and promotional activities, clinical trial costs, capital expenditures, and
investment in additional office space, internal systems and infrastructure.
We currently rely on Norwich Pharmaceuticals, Inc. as our manufacturer of Zegerid Capsules and
Patheon, Inc. as our manufacturer of Zegerid Powder for Oral Suspension. We also purchase
commercial quantities of omeprazole, an active ingredient in our Zegerid products, from Union
Quimico Farmaceutica, S.A. At September 30, 2009, we had finished goods and raw materials
inventory purchase commitments of approximately $2.8 million.
The following summarizes our long-term contractual obligations as of September 30, 2009,
excluding potential sales-based royalty obligations and milestone payments under our agreements
with the University of Missouri, Depomed and Cosmo which are described below:
Payments Due by Period | ||||||||||||||||||||
Less than One Year |
||||||||||||||||||||
(Remainder | One to | Four to | ||||||||||||||||||
Contractual Obligations | Total | of 2009) | Three Years | Five Years | Thereafter | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Operating leases |
$ | 4,579 | $ | 485 | $ | 4,014 | $ | 80 | $ | | ||||||||||
Other long-term contractual obligations |
170 | | 170 | | | |||||||||||||||
Total |
$ | 4,749 | $ | 485 | $ | 4,184 | $ | 80 | $ | | ||||||||||
Under our exclusive worldwide license agreement with the University of Missouri entered into
in January 2001, we are required to make milestone payments to the University of Missouri upon
initial commercial sale in specified territories outside the U.S., which may total up to $3.5
million in the aggregate. We are also required to make milestone payments based on first-time
achievement of significant sales thresholds, up to a maximum of $83.8 million, which includes sales
by us, GSK, Schering-Plough and Norgine. We are also obligated to pay royalties on net sales of
our products and any products commercialized by GSK under our license and distribution agreements,
Schering-Plough under our OTC license agreement and Norgine under our license agreement.
Under our promotion agreement with Depomed entered into in July 2008, we may be required to
pay Depomed one-time sales milestones totaling up to $16.0 million in aggregate. Under the
promotion agreement, we are required to meet certain minimum promotion obligations during the term
of the agreement. We began promoting the Glumetza products in October 2008. For a period of one
year from the date we began promoting the Glumetza products, we were required to deliver a minimum
number of sales calls to potential Glumetza prescribers. Following the end of that one-year
period, for a period of three years, we are required to make specified minimum sales force
expenditures. In addition, during the term of the agreement, we are required to make certain
minimum marketing, advertising, medical affairs and other commercial support expenditures.
Under our license agreement, stock issuance agreement and registration rights agreement with
Cosmo entered into in December 2008, Cosmo is entitled to receive up to a total of $9.0 million in
clinical and regulatory milestones for the initial indications for the licensed products, up to
$6.0 million in clinical and regulatory milestones for a second indication for rifamycin SV MMX and
up to $57.5 million in commercial milestones. The milestones may be paid in cash or through
issuance of additional shares of our common stock, at Cosmos option, subject to certain
limitations. We will pay tiered royalties to Cosmo ranging from 12% to 14% on net sales of any
licensed products we sell. We will be responsible for one-half of the total out-of-pocket costs
associated with the two ongoing budesonide MMX multi-center phase III clinical trials. We will
have responsibility for the out-of-pocket costs for the first of two planned rifamycin SV MMX phase
III U.S. clinical trials and will share the cost of the second U.S. trial with Cosmo. We also will
have the right to use the data generated in the European phase III clinical trials conducted by
Cosmos European partner.
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The amount and timing of cash requirements will depend on market acceptance of Zegerid
Capsules and Zegerid Powder for Oral Suspension, the Glumetza products and any other products that we may market in
the future, the success of our strategic alliances, the resources we devote to researching,
developing, formulating, manufacturing, commercializing and supporting our products, and our
ability to enter into third-party collaborations.
Based on our assessment of the overall cost associated with continued participation, we have
recently elected to terminate our existing Medicaid drug rebate agreements, effective as of October
2009. Although we believe the termination of these agreements will not have an unfavorable impact
on our business and financial results, we cannot be certain. Since we will no longer be
participating in the Medicaid segment of the market, we expect to experience a reduction in Zegerid
prescription levels on at least a short term basis, and termination of these agreements may also
negatively impact physician prescribing practices over a longer term period.
Any adverse outcome in the litigation against Par could result in one or more generic versions
of Zegerid Capsules and/or Zegerid Powder for Oral Suspension being launched before the expiration
of the listed patents in July 2016, which could adversely affect our ability to successfully
execute our business strategy to maximize the value of Zegerid Capsules and Zegerid Powder for Oral
Suspension and would negatively impact our financial condition and results of operations, including
causing a significant decrease in our revenues and cash flows. An adverse outcome may also impact
the patent protection for the products being commercialized pursuant to our strategic alliances
with GSK, Schering-Plough and Norgine, which in turn may impact the amount of, or our ability to
receive, milestone payments and royalties under our agreements with these strategic partners.
Following any decision from the lower court, the losing party may choose to exercise its right to
appeal, which could result in a change of the lower courts decision as well as additional time and
expense.
Although we intend to vigorously defend and enforce our patent rights, we are not able to
predict the outcome of the litigation. Regardless of how the litigation is ultimately resolved,
the litigation has been and may continue to be costly, time-consuming and distracting to
management, which could have a material adverse effect on our business.
We believe that our current cash, cash equivalents and short-term investments will be
sufficient to fund our current operations for at least the next 12 months; however, our projected
revenue may decrease or our expenses may increase and that would lead to our cash resources being
consumed earlier than we expect. Although we do not believe that we will need to raise additional
funds to finance our current operations over the next 12 months, we may pursue raising additional
funds in connection with licensing or acquisition of new products. Sources of additional funds may
include funds generated through strategic collaborations or licensing agreements, or through
equity, debt and/or royalty financing.
In November 2008, we filed a universal shelf registration statement on Form S-3 with the
Securities and Exchange Commission, which was declared effective in December 2008. The universal
shelf registration statement replaced our previous universal shelf registration statement that
expired in December 2008. The universal shelf registration statement may permit us, from time to
time, to offer and sell up to an additional approximately $75.0 million of equity or debt
securities. However, there can be no assurance that we will be able to complete any such offerings
of securities. Factors influencing the availability of additional financing include the progress
of our commercial and development activities, investor perception of our prospects and the general
condition of the financial markets, among others.
In July 2006, we entered into our loan agreement with Comerica, which was subsequently amended
in July 2008, pursuant to which we may request advances in an aggregate outstanding amount not to
exceed $25.0 million. In December 2008, we drew down $10.0 million under the loan agreement. The
revolving loan bears interest at a variable rate of interest, per annum, most recently announced by
Comerica as its prime rate plus 0.50%, which as of September 30, 2009 was 3.75%. Interest
payments on advances made under the loan agreement are due and payable in arrears on the first
calendar day of each month during the term of the loan agreement. Amounts borrowed under the loan
agreement may be repaid and re-borrowed at any time prior to July 11, 2011. There is a
non-refundable unused commitment fee equal to 0.50% per annum on the difference between the amount
of the revolving line and the average daily balance outstanding thereunder during the term of the
loan agreement, payable quarterly in arrears. The loan agreement will remain in full force and
effect for so long as any obligations remain outstanding or Comerica has any obligation to make
credit extensions under the loan agreement.
Amounts borrowed under the loan agreement are secured by substantially all of our personal
property, excluding intellectual property. Under the loan agreement, we are subject to certain
affirmative and negative covenants, including
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limitations on our ability to: undergo certain
change of control events; convey, sell, lease, license, transfer or otherwise
dispose of assets; create, incur, assume, guarantee or be liable with respect to certain
indebtedness; grant liens; pay dividends and make certain other restricted payments; and make
investments. In addition, under the loan agreement, we are required to maintain a cash balance
with Comerica in an amount of not less than $4.0 million and to maintain any other cash balances
with either Comerica or another financial institution covered by a control agreement for the
benefit of Comerica. We are also subject to specified financial covenants with respect to a
minimum liquidity ratio and, in specified limited circumstances, minimum EBITDA requirements. We
have currently met all of our obligations under the loan agreement.
We cannot be certain that our existing cash and marketable securities resources will be
adequate to sustain our current operations. To the extent we require additional funding, we cannot
be certain that such funding will be available to us on acceptable terms, or at all. For example,
we may not be successful in obtaining collaboration agreements, or in receiving milestone or
royalty payments under those agreements. In addition, if we raise additional funds through
collaboration, licensing or other similar arrangements, it may be necessary to relinquish
potentially valuable rights to our products or proprietary technologies, or grant licenses on terms
that are not favorable to us. To the extent that we raise additional capital by issuing equity or
convertible securities, our stockholders ownership will be diluted. Any debt financing we enter
into may involve covenants that restrict our operations. If adequate funds are not available on
terms acceptable to us at that time, our ability to continue our current operations or pursue new
product opportunities would be significantly limited.
In addition, our results of operations could be materially affected by economic conditions
generally, both in the U.S. and elsewhere around the world. Continuing concerns over inflation,
energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market
and a declining residential real estate market in the U.S. have contributed to increased volatility
and diminished expectations for the economy and the markets going forward. These factors, combined
with volatile oil prices, declining business and consumer confidence and increased unemployment,
have precipitated an economic recession. Domestic and international equity markets continue to
experience heightened volatility and turmoil. These events and the continuing market upheavals may
have an adverse effect on us. In the event of a continuing market downturn, our results of
operations could be adversely affected by those factors in many negative ways, including making it
more difficult for us to raise funds if necessary, and our stock price may further decline. In
addition, we maintain significant amounts of cash and cash equivalents at one or more financial
institutions that are in excess of federally insured limits. Given the current instability of
financial institutions, we cannot be assured that we will not experience losses on these deposits.
As of September 30, 2009, we did not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance or special purpose
entities, which would have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes. In addition, we do not engage in
trading activities involving non-exchange traded contracts. As such, we are not materially exposed
to any financing, liquidity, market or credit risk that could arise if we had engaged in these
relationships.
Accounting Pronouncements
Adoption of Recent Accounting Pronouncements
In November 2007, the Emerging Issues Task Force, or EITF, issued authoritative guidance on
accounting for collaborative arrangements related to the development and commercialization of
intellectual property. Companies may enter into arrangements with other companies to jointly
develop, manufacture, distribute, and market a product. Often the activities associated with these
arrangements are conducted by the collaborators without the creation of a separate legal entity
(that is, the arrangement is operated as a virtual joint venture). The arrangements generally
provide that the collaborators will share, based on contractually defined calculations, the profits
or losses from the associated activities. Periodically, the collaborators share financial
information related to product revenues generated (if any) and costs incurred that may trigger a
sharing payment for the combined profits or losses. The consensus requires collaborators in such
an arrangement to present the result of activities for which they act as the principal on a gross
basis and report any payments received from (made to) other collaborators based on other applicable
GAAP or, in the absence of other applicable GAAP, based on analogy to authoritative accounting
literature or a reasonable, rational, and consistently applied accounting policy election. This
guidance is effective for collaborative arrangements in place at the beginning of the annual period
beginning after December 15, 2008. The adoption of this guidance did not have a material impact on
our financial statements.
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In December 2007, the Financial Accounting Standards Board, or FASB, issued authoritative
guidance for business combinations which changes the requirements for an acquirers recognition and measurement of
the assets acquired and liabilities assumed in a business combination, including the treatment of
contingent consideration, pre-acquisition contingencies, transaction costs, in-process research and
development and restructuring costs. In addition, under this guidance changes in an acquired
entitys deferred tax assets and uncertain tax positions after the measurement period will impact
income tax expense. This guidance is effective for us with respect to business combination
transactions for which the acquisition date is after December 31, 2008. The adoption of the
guidance did not have a material impact on our financial statements.
In December 2007, the FASB issued authoritative guidance for noncontrolling interests in
consolidated financial statements which requires that noncontrolling (minority) interests be
reported as a component of equity, that net income attributable to the parent and to the
noncontrolling interest be separately identified in the income statement, that changes in a
parents ownership interest while the parent retains its controlling interest be accounted for as
equity transactions, and that any retained noncontrolling equity investment upon the
deconsolidation of a subsidiary be initially measured at fair value. This guidance is effective
for fiscal years beginning after December 31, 2008, and shall be applied prospectively. However,
the presentation and disclosure requirements of this guidance are required to be applied
retrospectively for all periods presented. The retrospective presentation and disclosure
requirements of this guidance will be applied to any prior periods presented in financial
statements for the fiscal year ending December 31, 2009, and later periods during which we have a
consolidated subsidiary with a noncontrolling interest. As of September 30, 2009, we do not have
any consolidated subsidiaries in which there is a noncontrolling interest.
Pending Adoption of Recent Accounting Pronouncements
In October 2009, the EITF issued authoritative guidance on revenue recognition with regard to
multiple element arrangements. The consensus in this recently issued guidance supersedes certain
prior guidance and requires an entity to allocate arrangement consideration at the inception of an
arrangement to all of its deliverables based on their relative selling prices (i.e., the relative
selling-price method). The consensus eliminates the use of the residual method of allocation
(i.e., in which the undelivered element is measured at its estimated selling price and the
delivered element is measured as the residual of the arrangement consideration) and requires the
relative-selling-price method in all circumstances in which an entity recognizes revenue for an
arrangement with multiple deliverables subject to the issued guidance. This guidance requires both
ongoing disclosures regarding an entitys multiple-element revenue arrangements as well as certain
transitional disclosures during periods after adoption. This guidance is effective for the first
fiscal year beginning on or after June 15, 2010. We do not expect the adoption of this guidance
will have a material impact on our financial statements.
Caution on Forward-Looking Statements
Any statements in this report and the information incorporated herein by reference about our
expectations, beliefs, plans, objectives, assumptions or future events or performance that are not
historical facts are forward-looking statements. You can identify these forward-looking statements
by the use of words or phrases such as believe, may, could, will, estimate, continue,
anticipate, intend, seek, plan, expect, should, or would. Among the factors that
could cause actual results to differ materially from those indicated in the forward-looking
statements are risks and uncertainties inherent in our business including, without limitation: our
ability to increase market demand for, and sales of, our Zegerid® and
Glumetza® products; the scope and validity of patent protection for our products,
including the timing and outcome of our patent infringement lawsuit against Par Pharmaceutical,
Inc., and our ability to commercialize products without infringing the patent rights of others;
whether we are successful in generating revenue under our strategic alliances, including our
over-the-counter, or OTC, license agreement with Schering-Plough Healthcare Products, Inc., or
Schering-Plough, our license and distribution agreements with Glaxo Group Limited, an affiliate of
GlaxoSmithKline plc, and our license agreement with Norgine B.V.; whether the Food and Drug
Administration, or FDA, ultimately approves Schering-Ploughs new drug application, or NDA, in a
timely manner or at all; our ability to successfully develop (including successful completion of
the ongoing and planned phase III clinical trials) and obtain regulatory approval for our
budesonide MMX® and rifamycin SV MMX product candidates in a timely manner or at all;
whether the FDA completes its review and approves the NDA for the new tablet formulation of our
Zegerid products in a timely manner or at all; adverse side effects or inadequate therapeutic
efficacy of our products or products we promote that could result in product recalls, market
withdrawals or product liability claims; competition from other pharmaceutical or biotechnology
companies and evolving market dynamics, including the impact of currently available generic
prescription and OTC proton pump
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inhibitor, or PPI, products and the introduction of additional
generic or branded PPI products; our ability to further diversify
our sources of revenue and product portfolio; other difficulties or delays relating to the
development, testing, manufacturing and marketing of, and obtaining and maintaining regulatory
approvals for, our and our strategic partners products; fluctuations in quarterly and annual
results; our ability to obtain additional financing as needed to support our operations or future
product acquisitions; the impact of the recent turmoil in the financial markets; and other risks
detailed below under Part II Item 1A Risk Factors.
Although we believe that the expectations reflected in our forward-looking statements are
reasonable, we cannot guarantee future results, events, levels of activity, performance or
achievement. We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise, unless required by
law.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Under the terms of our loan agreement with Comerica Bank, or Comerica, the interest rate
applicable to any amounts borrowed by us under the credit facility will be, at our election,
indexed to either Comericas prime rate or the LIBOR rate. If we elect Comericas prime rate for
all or any portion of our borrowings, the interest rate will be variable, which would expose us to
the risk of increased interest expense if interest rates rise. If we elect the LIBOR rate for all
or any portion of our borrowings, such LIBOR rate will remain fixed only for a specified, limited
period of time after the date of our election, after which we will be required to repay the
borrowed amount, or elect a new interest rate indexed to either Comericas prime rate or the LIBOR
rate. The new rate may be higher than the earlier interest rate applicable under the loan
agreement. As of September 30, 2009, the balance outstanding under the credit facility was $10.0
million, and we had elected the prime rate plus 0.50% interest rate option, which was 3.75% as of
September 30, 2009. Under our current policies, we do not use interest rate derivative instruments
to manage our exposure to interest rate changes. A hypothetical 1% increase or decrease in the
interest rate under the loan agreement would not materially affect our interest expense at our
current level of borrowing.
In addition to market risk related to our loan agreement with Comerica, we are exposed to
market risk primarily in the area of changes in U.S. interest rates and conditions in the credit
markets, particularly because the majority of our investments are in short-term marketable
securities. We do not have any material foreign currency or other derivative financial
instruments. Our short-term investment securities have consisted of corporate debt securities,
government agency securities and U.S. Treasury securities which are classified as
available-for-sale and therefore reported on the balance sheet at estimated market value. As of
September 30, 2009, our short-term investments also included AAA-rated auction rate securities, or
ARS, issued by state municipalities. Our ARS are debt instruments with a long-term maturity and an
interest rate that is reset in short-term intervals through auctions. The conditions in the global
credit markets have prevented many investors from liquidating their holdings of ARS because the
amount of securities submitted for sale has exceeded the amount of purchase orders for such
securities. If there is insufficient demand for the securities at the time of an auction, the
auction may not be completed and the interest rates may be reset to predetermined higher rates.
When auctions for these securities fail, the investments may not be readily convertible to cash
until a future auction of these investments is successful or they are redeemed or mature.
Due to conditions in the global credit markets, our ARS, representing a par value of
approximately $4.1 million, had insufficient demand resulting in multiple failed auctions since
early 2008. As a result, these affected securities are currently not liquid.
In October 2008, we received an offer of Auction Rate Securities Rights, or ARS Rights, from
our investment provider, UBS Financial Services, Inc., a subsidiary of UBS AG, or UBS. In November
2008, we accepted the ARS Rights offer. The ARS Rights permit us to require UBS to purchase our
ARS at par value at any time during the period of June 30, 2010 through July 2, 2012. If we do not
exercise our ARS Rights, the ARS will continue to accrue interest as determined by the auction
process or, if the auction fails, by the terms of the ARS. If the ARS Rights are not exercised
before July 2, 2012 they will expire and UBS will have no further obligation to buy our ARS. UBS
has the discretion to purchase or sell our ARS at any time without prior notice so long as we
receive a payment at par upon any sale or disposition. UBS will only exercise its discretion to
purchase or sell our ARS for the purpose of restructurings, dispositions or other solutions that
will provide us with par value for our ARS. As a condition to accepting the offer of ARS Rights, we
released UBS from all claims except claims for consequential damages relating to its marketing and
sales of ARS. We also agreed not to serve as a class representative or receive benefits under any
class action settlement or investor fund. We intend to exercise the ARS Rights within the next 12
months.
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In the event we need to access the funds that are in an illiquid state, we will not be able to
do so without the likely loss of principal, until a future auction for these investments is
successful or they are redeemed by the issuer or they mature. If we are unable to sell these
securities in the market or they are not redeemed, then we may be required to hold them to
maturity. We do not believe we have a need to access these funds for operational purposes for the
foreseeable future. We will continue to monitor and evaluate these investments on an ongoing basis
for impairment. Based on our ability to access our cash, cash equivalents and other short-term
investments, our expected operating cash flows, and our other sources of cash, we do not anticipate
that the potential illiquidity of these investments will affect our ability to execute our current
business plan.
Our results of operations could be materially affected by economic conditions generally, both
in the U.S. and elsewhere around the world. Continuing concerns over inflation, energy costs,
geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining
residential real estate market in the U.S. have contributed to increased volatility and diminished
expectations for the economy and the markets going forward. These factors, combined with volatile
oil prices, declining business and consumer confidence and increased unemployment, have
precipitated an economic recession. Domestic and international equity markets continue to
experience heightened volatility and turmoil. These events and the continuing market upheavals may
have an adverse effect on us. In the event of a continuing market downturn, our results of
operations could be adversely affected by those factors in many negative ways, including making it
more difficult for us to raise funds if necessary, and our stock price may further decline. In
addition, we maintain significant amounts of cash and cash equivalents at one or more financial
institutions that are in excess of federally insured limits. Given the current instability of
financial institutions, we cannot be assured that we will not experience losses on these deposits.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and
forms and that such information is accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as appropriate, to allow for timely decisions
regarding required disclosure. In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
As required by Securities and Exchange Commission Rule 13a-15(b), we carried out an
evaluation, under the supervision and with the participation of our management, including our chief
executive officer and chief financial officer, of the effectiveness of the design and operation of
our disclosure controls and procedures as of the end of the quarter covered by this report. Based
on the foregoing, our chief executive officer and chief financial officer concluded that our
disclosure controls and procedures were effective at the reasonable assurance level.
There has been no change in our internal control over financial reporting during our most
recent fiscal quarter that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
In September 2007, we filed a lawsuit in the United States District Court for the District of
Delaware against Par Pharmaceutical, Inc., or Par, for infringement of U.S. Patent Nos. 6,645,988;
6,489,346; and 6,699,885, each of which is listed in the Approved Drug Products with Therapeutic
Equivalence Evaluations, or the Orange Book, for Zegerid Capsules. In December 2007, we filed a
second lawsuit in the United States District Court for the District of Delaware against Par for
infringement of U.S. Patent Nos. 6,645,988; 6,489,346; 6,699,885; and 6,780,882, each of which is
listed in the Orange Book for Zegerid Powder for Oral Suspension. The University of Missouri,
licensor of the patents, is a co-plaintiff in the litigation, and both lawsuits have been
consolidated for all purposes. The lawsuits are in response to abbreviated new drug applications,
or ANDAs, filed by Par with the U.S. Food and Drug Administration, or FDA, regarding Pars intent
to market generic versions of our Zegerid Capsules and Zegerid Powder for Oral Suspension products
prior to the July 2016 expiration of the asserted patents. Each complaint seeks a judgment that
Par has infringed the asserted patents and that the effective date of approval of Pars ANDA shall
not be earlier than the expiration date of the asserted patents. Par has filed answers in each
case, primarily asserting non-infringement, invalidity and/or unenforceability. Par has also filed
counterclaims seeking a declaration in its favor on those issues. On July 15, 2008, the U.S.
Patent and Trademark Office, or PTO, issued U.S. Patent No. 7,399,772, or the 772 patent, which is
now listed in the Orange Book for both Zegerid Capsules and Zegerid Powder for Oral Suspension. In
October 2008, we amended our complaint to add the 772 patent to the pending litigation with Par.
A claim construction, or Markman, hearing was held in November 2008. Following the Markman
hearing, the court adopted all of the claim constructions we and the University of Missouri
proposed.
In addition, as part of this litigation, Par initially filed counterclaims seeking a
declaration that U.S. Patent No. 5,840,737, or the 737 patent, is not infringed, is invalid and/or
is unenforceable. We moved to dismiss, or in the alternative, stay these claims due to a reissue
proceeding involving the 737 patent currently pending before the PTO, and we and the University of
Missouri also granted Par a covenant not to sue on the original 737 patent. In November 2008, Par
dismissed its counterclaims relating to the 737 patent.
We commenced each of the lawsuits against Par within the applicable 45 day period required to
automatically stay, or bar, the FDA from approving Pars ANDAs for 30 months or until a district
court decision that is adverse to the asserted patents, whichever may occur earlier. If the
litigation is still ongoing after 30 months, the termination of the stay could result in the
introduction of one or more products generic to Zegerid Capsules and/or Zegerid Powder for Oral
Suspension prior to resolution of the litigation.
A bench trial for the consolidated lawsuit was held in July 2009. During the trial, the court
ruled in favor of Santarus and the University of Missouri on the issue of infringement. Post-trial
briefs were submitted in August 2009, and the court has not yet ruled on Pars defenses of
invalidity and inequitable conduct.
Although we intend to vigorously defend and enforce our patent rights, we are not able to
predict the outcome of the litigation. The court may render its decision at any time after the
filing of the post-trial briefs, which may be before or after the expiration of the applicable
30-month stays. Any adverse outcome in this litigation could result in one or more generic
versions of Zegerid Capsules and/or Zegerid Powder for Oral Suspension being launched before the
expiration of the listed patents in July 2016, which could adversely affect our ability to
successfully execute our business strategy to maximize the value of Zegerid Capsules and Zegerid
Powder for Oral Suspension and would negatively impact our financial condition and results of
operations, including causing a significant decrease in our revenues and cash flows. An adverse
outcome may also impact the patent protection for the products being commercialized pursuant to our
strategic alliances with Glaxo Group Limited, an affiliate of GlaxoSmithKline, plc, Schering-Plough
Healthcare Products, Inc., and Norgine B.V., which in turn may impact the amount of, or our ability
to receive, milestone payments and royalties under our agreements with these strategic partners.
Following any decision from the lower court, the losing party may choose to exercise its right to
appeal, which could result in a change of the lower courts decision as well as additional time and
expense. Regardless of how the litigation is ultimately resolved, the litigation has been and may
continue to be costly, time-consuming and distracting to management, which could have a material
adverse effect on our business.
In December 2007, the University of Missouri filed an Application for Reissue of the 737
patent with the PTO. The 737 patent is one of six issued patents listed in the Orange Book for
Zegerid Powder for Oral Suspension. The 737 patent is not one of the four patents listed in the
Orange Book for Zegerid Capsules. It is not feasible to predict the impact that
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the reissue proceeding may have on the scope and validity of the 737 patent claims. If the
claims of the 737 patent ultimately are narrowed substantially or invalidated by the PTO, the
extent of the patent coverage afforded to our Zegerid family of products could be impaired, which
could potentially harm our business and operating results.
In October 2009, we became aware of two lawsuits filed by individual plaintiffs in Ohio state
court relating to C.B. Fleet Co., Inc., or Fleet, and claiming injuries purportedly caused by
Fleets Phospho-soda®, sodium phosphate oral solution product. The complaints name
Fleet, Santarus, the Cleveland Clinic Foundation, the Research Foundation of the American Society
of Colon and Rectal Surgeons, the Society of American Gastrointestinal and Endoscopic Surgeons and
several other individuals as defendants. The complaints allege, among other things, that the
defendants fraudulently concealed, misrepresented and suppressed material medical and scientific
information about Fleets Phospho-soda product. The plaintiffs are seeking compensatory damages,
exemplary damages, damages for loss of consortium, damages under the Ohio Consumer Protection Act,
and attorneys fees and expenses.
We co-promoted Fleets Phospho-soda® EZ-Prep Bowel Cleansing System, a different
sodium phosphate oral solution product manufactured by Fleet, under a co-promotion agreement, which
we and Fleet entered into in August 2007 and which expired in October 2008. Under the terms of the
co-promotion agreement, we have requested that Fleet indemnify us in connection with these matters.
In addition, we have tendered notice of these matters to our insurance carriers pursuant to the
terms of our insurance policies. Due to the uncertainty of the ultimate outcome of these matters
and our ability to secure indemnification and/or insurance coverage, we cannot predict the effect,
if any, this matter will have on our business.
Santaris Pharma A/S has filed a Request for Revocation against our European Union, or EU,
registration for the mark Santarus® on the basis of non-use. This Request for
Revocation was filed in response to our filing of an opposition against the EU application for the
mark Santaris Pharma. These disputes have recently been resolved with the parties
agreeing to withdraw their respective actions against each others marks, and agreeing to a
co-existence agreement in Europe and in the United States, subject to certain limitations.
Item 1A. Risk Factors
Certain factors may have a material adverse effect on our business, financial condition and
results of operations, and you should carefully consider them. Accordingly, in evaluating our
business, we encourage you to consider the following discussion of risk factors in its entirety, in
addition to other information contained in this report as well as our other public filings with the
Securities and Exchange Commission, or SEC.
In the near-term, the success of our business will depend on many factors, including:
| whether we are able to increase market demand for, and sales of, our currently marketed prescription products Zegerid® (omeprazole/sodium bicarbonate) Capsules and Powder for Oral Suspension and Glumetza® (metformin hydrochloride extended release tablets); | ||
| whether we are able to maintain patent protection for our products, including whether we obtain a favorable outcome in our litigation against Par Pharmaceutical, Inc., or Par, for infringement of patents covering Zegerid Capsules and Zegerid Powder for Oral Suspension; | ||
| whether we are successful in generating revenue under our strategic alliances, including our over-the-counter, or OTC, license agreement with Schering-Plough Healthcare Products, Inc., or Schering-Plough, our license and distribution agreements with Glaxo Group Limited, an affiliate of GlaxoSmithKline plc, or GSK, and our license agreement with Norgine B.V., or Norgine; and | ||
| whether we are successful in progressing the development, obtaining regulatory approval and advancing the commercialization of our development products, including the budesonide MMX® and rifamycin SV MMX product candidates and the new tablet formulation of our Zegerid prescription products, in a timely manner. |
Each of these factors, as well as other factors that may impact our business, are described in
more detail in the following discussion. Although the factors highlighted above are among the most
significant, any of the following factors could materially adversely affect our business or cause
our actual results to differ materially from those contained in forward-
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looking statements we have made in this report and those we may make from time to time, and
you should consider all of the factors described when evaluating our business.
Risks Related to Our Business and Industry
We depend on the commercial success of the Zegerid and Glumetza prescription products, and we cannot be certain that we will be able to continue to increase sales of these products.
We anticipate that in the near term our ability to generate revenues will depend in large part
on the commercial success of our currently marketed Zegerid and Glumetza prescription products,
which in turn, will depend on several factors, including our ability to:
| successfully increase market demand for, and sales of, these products through the promotional efforts of our own sales force, the contract sales representatives under our agreement with inVentiv Commercial Services, LLC, or inVentiv, and any other promotional arrangements that we may later establish; | ||
| successfully maintain patent protection for these products, including whether we obtain a favorable outcome in our litigation against Par for infringement of patents covering our Zegerid Capsules and Zegerid Powder for Oral Suspension products; | ||
| obtain greater acceptance of the products by physicians and patients and obtain and maintain distribution at the retail level; | ||
| maintain adequate levels of reimbursement coverage for our products from third-party payors, particularly in light of the availability of other branded and generic competitive prescription and OTC products; | ||
| establish and maintain agreements with wholesalers and distributors on commercially reasonable terms; and | ||
| maintain commercial manufacturing arrangements with third-party manufacturers as necessary to meet commercial demand for the products. |
In addition, the occurrence of adverse side effects or inadequate therapeutic efficacy of the
Zegerid or Glumetza products, and any resulting product liability claims or product recalls, could
impact our ability to increase sales of these products.
We cannot be certain that our continued marketing of the Zegerid and Glumetza products will
result in increased demand for, and sales of, those products. If we fail to successfully
commercialize our prescription products, we may be unable to generate sufficient revenues to grow
our business and sustain profitability, and our business, financial condition and results of
operations will be materially adversely affected.
Our ability to generate revenues also depends on the success of our strategic alliances with GSK, Schering-Plough and Norgine, many aspects of which are out of our control.
Our ability to generate revenues in the longer term will also depend on whether our strategic
alliances with GSK, Schering-Plough and Norgine lead to the successful commercialization of
additional omeprazole products using our patented proton pump inhibitor, or PPI, technology, and we
cannot be certain that we will receive any additional milestone payments or sales-based royalties
from these alliances. In November 2007, we entered into a license agreement and a distribution
agreement granting exclusive rights to GSK under our patented PPI technology to develop,
manufacture and commercialize prescription and OTC products in up to 114 specified countries within
Africa, Asia, the Middle-East, and Central and South America, and to distribute and sell Zegerid
brand prescription products in Puerto Rico and the U.S. Virgin Islands. In October 2006, we
entered into an OTC license agreement with Schering-Plough, pursuant to which we granted exclusive
rights under our patented PPI technology to develop, manufacture, market and sell omeprazole
products for the OTC market in the U.S. and Canada. In October 2009, we entered into a license
agreement granting certain exclusive rights to Norgine under our patented PPI technology to
develop, manufacture and commercialize prescription products in specified markets in Western,
Central and Eastern Europe and in Israel.
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Under these agreements, we depend on the efforts of GSK, Schering-Plough and Norgine, and we
have limited control over their commercialization efforts. For example, GSK, Schering-Plough and
Norgine may not commercialize products as fast as we would like or as fast as the market may expect
and may not generate the level of sales that we would like. GSK is currently distributing and
selling our Zegerid prescription products in Puerto Rico and the U.S. Virgin Islands and is working
to prepare the filings necessary to obtain marketing approval authorization in various countries
covered by the license agreement, and we cannot be certain that GSK will be successful in those
efforts. In January 2009, Schering-Plough received a complete response letter from the U.S. Food
and Drug Administration, or FDA, which outlined questions that the FDA identified during its review
of Schering-Ploughs new drug application, or NDA, for its first product under the license
agreement. Schering-Plough submitted a response to the FDA in June 2009 and has received
notification from the FDA of a December 2009 action date. We cannot be certain that
Schering-Plough will ultimately receive FDA approval for a licensed product in a timely manner or
at all.
Any failures by GSK, Schering-Plough or Norgine could have a negative impact on physician and
patient impressions of our prescription products in the U.S. Even if GSK, Schering-Plough and
Norgines efforts are successful, we will only receive specified milestone payments and royalties
on net sales and may not enjoy the same financial rewards as we would have had we developed and
launched the products ourselves. Furthermore, the availability of products developed by
Schering-Plough using our patented PPI technology for the U.S. OTC market could decrease demand or
negatively impact reimbursement coverage for our prescription products in the U.S.
We are also subject to risks associated with termination of our agreements with GSK,
Schering-Plough and Norgine. The GSK license and distribution agreements may be terminated by
either party in the event of the other partys uncured material breach or bankruptcy or insolvency.
In addition, GSK may terminate the license and distribution agreements on six months prior written
notice to us at any time. The Schering-Plough license agreement may be terminated by either party
if the other party is in material breach of its material obligations, subject to certain
limitations. In addition, Schering-Plough may terminate the agreement in its entirety on 180 days
prior written notice to us at any time. The Norgine license agreement may be terminated by either
party in the event of the other partys uncured material breach or bankruptcy or insolvency. In
addition, Norgine may terminate the license agreement on 12 months prior written notice to us at
any time.
If GSK, Schering-Plough or Norgine fail to successfully commercialize products using our
patented PPI technology or are significantly delayed in doing so, we may be unable to generate
sufficient revenues to grow our business and sustain profitability, and our business, financial
condition and results of operations will be materially adversely affected.
In addition, Merck & Co., Inc., or Merck, recently announced the completion of its planned
merger with Schering-Plough. We cannot predict the effect, if any, the merger will have on our
strategic alliance with Schering-Plough.
We may not generate adequate revenues under our promotion agreement for Glumetza products to justify our level of promotional effort and expense under the agreement.
In July 2008, we entered into a promotion agreement with Depomed, Inc., or Depomed, pursuant
to which we agreed to promote Depomeds Glumetza prescription products in the U.S. Under the terms
of the promotion agreement, Depomed pays us a fee ranging from 75% to 80% of the gross margin
earned from all net sales of Glumetza products in the U.S., with gross margin defined as net sales
less cost of goods including product-related fees paid by Depomed to Biovail Laboratories
International SRL. We paid Depomed a $12.0 million upfront fee, and based on the achievement of
specified levels of annual Glumetza net product sales, we may be required to pay Depomed one-time
sales milestones, totaling up to $16.0 million in aggregate. We are also responsible for all costs
associated with our sales force and for all other sales and marketing-related expenses associated
with our promotion of Glumetza products. We began promotion of Glumetza products in October 2008.
Our ability to generate adequate revenues under the promotion agreement to justify the
resources and the level of promotional effort we will have to expend is subject to a number of
risks and uncertainties, including those described in the previous risk factor relating to our
ability to increase sales of the Glumetza products, as well as the potential for termination of the
promotion arrangement and Depomeds ability to maintain commercial supply and patent protection for
the Glumetza products. In addition, the promotion of the Glumetza products could detract from our
sales representatives efforts to promote our Zegerid products and have an adverse impact on
Zegerid sales. If our promotion efforts are not successful, our ability to generate sufficient
revenues to grow our business and sustain profitability may be adversely affected.
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Our budesonide MMX and rifamycin SV MMX product candidates will require significant development
activities and ultimately may not be approved by the FDA, and any failure or delays associated with
these activities or the FDAs approval of such products would increase our costs and time to
market.
We are currently developing our budesonide MMX and rifamycin SV MMX product candidates under a
strategic collaboration with Cosmo Technologies Limited, or Cosmo, and in connection with those
development programs we face substantial risks of failure that are inherent in developing
pharmaceutical products. The pharmaceutical industry is subject to stringent regulation by many
different agencies at the federal, state and international levels. For example, our product
candidates must satisfy rigorous standards of safety and efficacy before the FDA will approve them
for commercial use.
Product development is generally a long, expensive and uncertain process. Successful
development of product formulations depends on many factors, including our ability to select key
components, establish a stable formulation (for both development and commercial use), develop a
product that demonstrates our intended safety and efficacy profile, and transfer from development
stage to commercial-scale operations. Any delays we encounter during our product development
activities would in turn adversely affect our ability to commercialize the product under
development.
Once we have manufactured formulations of our product candidates that we believe will be
suitable for clinical testing, we then must complete our clinical testing, and failure can occur at
any stage of testing. These clinical tests must comply with FDA and other applicable regulations.
We may encounter delays based on our inability to timely enroll enough patients to complete our
clinical trials. We may suffer significant setbacks in advanced clinical trials, even after showing
promising results in earlier trials. The results of later clinical trials may not replicate the
results of prior clinical trials. Based on results at any stage of clinical trials, we may decide
to discontinue development of a product candidate. We or the FDA may suspend clinical trials at any
time if the patients participating in the trials are exposed to unacceptable health risks or if the
FDA finds deficiencies in our applications to conduct the clinical trials or in the conduct of our
trials. Moreover, not all product candidates in clinical trials will receive timely, or any,
regulatory approval.
Even if clinical trials are completed as planned, their results may not support our
assumptions or our product claims. The clinical trial process may fail to demonstrate that our
products are safe for humans or effective for their intended uses. Our product development costs
will increase and our product revenues will be delayed if we experience delays in testing or
regulatory approvals or if we need to perform more or larger clinical trials than planned. In
addition, such failures could cause us to abandon a product entirely. If we fail to take any
current or future product from the development stage to market, we will have incurred significant
expenses without the possibility of generating revenues, and our business will be adversely
affected.
With regard to budesonide MMX, two multicenter phase III clinical trials are being conducted
to evaluate the product candidate for the induction of remission in patients with mild or moderate
active ulcerative colitis in North America and Europe, both of which are intended to support U.S.
regulatory approval. Each trial is expected to enroll approximately 490 patients and is powered at
80 percent to show a difference of at least 20 percent between budesonide MMX and placebo. We are
responsible for overseeing one of the phase III trials. Assuming timely enrollment, we currently
anticipate that we will have preliminary results from the phase III clinical program, excluding the
safety extension trial, during the first half of 2010 for the European phase III clinical trial and
during the second half of 2010 for the U.S. phase III clinical trial. Assuming successful and
timely completion of the phase III clinical program and safety extension trial, we plan to submit
an NDA for budesonide MMX to the FDA in the second half of 2011.
With regard to rifamycin SV MMX, Cosmo is currently conducting various pre-IND activities,
including a multiple-dose PK clinical study and a single dose food effect clinical study in healthy
volunteers, as well as a genotoxicity study in an appropriate animal species and a reproductive
toxicity study. Assuming successful and timely completion of those activities, we would then
expect to file an IND and initiate the first of two planned phase III U.S. clinical trials in
patients with travelers diarrhea in the first half of 2010. It is anticipated that a European
phase III clinical trial in the same indication will be conducted by Cosmos European partner Dr.
Falk Pharma. The phase III trials are intended to support U.S. regulatory approval.
We cannot be certain that the ongoing and planned clinical and development programs will
proceed in a timely manner. We also cannot be certain that the budesonide MMX and rifamycin SV MMX
product candidates will achieve the desired safety and efficacy profile in one or more of the
ongoing or future clinical trials or that the other development activities will
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be completed in a successful and timely manner. For example, the phase II clinical trial for
the budesonide MMX product candidate was pilot in nature and involved a different design than the
currently ongoing phase III clinical trials. As a result, there may be a higher degree of
uncertainty regarding the potential outcome of the phase III clinical trials. Moreover, it is
anticipated that U.S. regulatory approval for each of the product candidates will be supported in
part by clinical trials being conducted by Cosmo or its European partners, in addition to the
clinical trials that we will oversee or conduct. We utilize clinical research organizations, or
CROs, to conduct many aspects of these trials, including in the case of budesonide MMX a CRO
located in India. As a result, certain of the clinical activities for these product candidates are
not within our direct control.
Any failures or delays in the product development or clinical programs relating to our product
candidates could adversely affect our ability to commercialize one or more of our development
products and the timing for commercial availability, which in turn could adversely affect our
business.
Our pending NDA for the tablet formulation of our Zegerid prescription products may not be approved
by the FDA in a timely manner, or at all, which would adversely impact our ability to commercialize
this product.
In January 2009, we submitted a 505(b)(2) NDA for a new tablet formulation of our Zegerid
prescription products, which NDA was accepted for filing by the FDA in April 2009. Pursuant to
Prescription Drug User Fee Act, or PDUFA, guidelines, we expect the FDA will complete its review or
otherwise respond to the NDA by December 4, 2009. As part of its review, the FDA may request
additional information from us, including data from additional clinical trials. Ultimately, the
FDA may not approve the tablet product in a timely manner or at all. Any failure to obtain FDA
approval or delay associated with the FDAs review process could adversely impact our ability to
commercialize this product, which in turn could adversely impact our business, financial condition
and results of operations.
The markets in which we compete are intensely competitive and many of our competitors have
significantly more resources and experience, which may limit our commercial opportunity.
The pharmaceutical industry is intensely competitive, particularly in the gastrointestinal, or
GI, and diabetes fields in which our currently marketed products compete and our development
products may compete, and there are many other currently marketed products that are
well-established and successful, as well as development programs underway. In addition, many of
our competitors are large, well-established companies in the pharmaceutical field. Given our
relatively small size and the nature of the GI and diabetes markets, we may not be able to compete
effectively.
In addition, many of our competitors, either alone or together with their collaborative
partners, may have significantly greater experience in:
| developing prescription and OTC drugs; | ||
| undertaking preclinical testing and human clinical trials; | ||
| formulating and manufacturing drugs; | ||
| obtaining FDA and other regulatory approvals of drugs; and | ||
| launching, marketing, distributing and selling drugs. |
As a result, they may have a greater ability to undertake more extensive research and
development, manufacturing, marketing and other programs. Many of these companies may succeed in
developing products earlier than we do, completing the regulatory process and showing safety and
efficacy of products more rapidly than we do or developing products that are more effective than
our products. Additionally, many of our competitors have greater resources to conduct clinical
studies differentiating their products, as compared to our limited resources. Further, the
products they develop may be based on new and different technology and may exhibit benefits
relative to our products.
Many of these companies with which we compete also have significantly greater financial and
other resources than we do. Larger pharmaceutical companies typically have significantly larger
field sales force organizations and invest significant amounts in advertising and marketing their
products, including through the purchase of television
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advertisements and the use of other direct-to-consumer methods. As a result, these larger
companies are able to reach a greater number of physicians and consumers and reach them more
frequently than we can with our smaller sales organization.
If we are unable to compete successfully, our business, financial condition and results of
operations will be materially adversely affected.
Our currently marketed products compete with many other drug products, which could put downward
pressure on pricing and market share and limit our ability to generate revenues.
Our Zegerid prescription products compete with many other products, including:
| branded PPI prescription products (such as Nexium®, Prevacid®, Aciphex®, Protonix® and Kapidex); | ||
| generic PPI prescription products (such as delayed-release omeprazole and delayed-release pantoprazole); | ||
| OTC PPI products (such as Prilosec OTC® and store-brand versions); and | ||
| other prescription and/or OTC acid-reducing agents (such as histamine-2 receptor antagonists and antacids). |
In addition, various companies are developing new products that may compete with our Zegerid
prescription and OTC products in the future, including new PPIs, motility agents, reversible acid
inhibitors, cytoprotective compounds and products that act on the lower esophageal sphincter, or
LES. For example, it is anticipated that in November 2009 Novartis AG will launch an OTC version
of Takedas Prevacid PPI product and one or more companies will also launch generic prescription
versions of Prevacid.
Similarly, the Glumetza prescription products compete with many other products, including:
| other branded immediate-release and extended-release metformin products (such as Fortamet®, Glucophage® and Glucophage XR®); | ||
| generic immediate-release and extended-release metformin products; and | ||
| other prescription diabetes treatments. |
In addition, various companies are developing new products that may compete with the Glumetza
products in the future. For example, Depomed has announced that it has licensed rights to Merck to
develop products combining sitagliptin, the active ingredient in Mercks Januvia®
product, with extended-release metformin utilizing Depomeds extended-release technology.
We or our strategic partners may also face competition for our products from lower priced
products from foreign countries that have placed price controls on pharmaceutical products.
Proposed federal legislative changes may expand consumers ability to import lower priced versions
of our products and competing products from Canada and other developed countries. Further, several
states and local governments have implemented importation schemes for their citizens, and, in the
absence of federal action to curtail such activities, we expect other states and local governments
to launch importation efforts. The importation of foreign products that compete with our own
products could negatively impact our business and prospects.
The existence of numerous competitive products may put downward pressure on pricing and market
share, which in turn may adversely affect our business, financial condition and results of
operations.
If we are unable to maintain adequate levels of reimbursement for our products on reasonable
pricing terms, their commercial success may be severely hindered.
Our ability to sell our products may depend in large part on the extent to which reimbursement
for the costs of our products is available from private health insurers, managed care
organizations, government entities and others. Third-party payors are increasingly attempting to
contain their costs. We cannot predict actions third-party payors may take, or whether they will
limit the coverage and level of reimbursement for our products or refuse to provide any coverage at
all. Reduced or partial reimbursement coverage could make our products less attractive to patients,
suppliers and prescribing physicians and may not be adequate for us to maintain price levels
sufficient to realize an appropriate return on our investment in our products or compete on price.
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Based on our assessment of the overall cost associated with continued participation, we have
recently elected to terminate our existing Medicaid drug rebate agreements, effective as of October
2009. Although we believe the termination of these agreements will not have an unfavorable impact
on our business and financial results, we cannot be certain. Since we will no longer be
participating in the Medicaid segment of the market, we expect to experience a reduction in Zegerid
prescription levels on at least a short term basis, and termination of these agreements may also
negatively impact physician prescribing practices over a longer term period.
In many cases, insurers and other healthcare payment organizations encourage the use of less
expensive alternative generic brands and OTC products through their prescription benefits coverage
and reimbursement policies. For example, in the case of our Zegerid prescription products, the
availability of generic prescription and OTC PPI products has created, and will continue to create,
a competitive reimbursement environment. Insurers and other healthcare payment organizations
frequently make the generic or OTC alternatives more attractive to the patient by providing
different amounts of reimbursement so that the net cost of the generic or OTC product to the
patient is less than the net cost of a prescription branded product. Aggressive pricing policies by
our generic or OTC product competitors and the prescription benefit policies of insurers could have
a negative effect on our product revenues and profitability. In addition, even though we are
eligible to receive sales-based royalties on OTC products under our OTC Zegerid license agreement
with Schering-Plough, those potential revenues could be offset by the impact of lost sales of our
prescription products to the extent the OTC products are preferred by customers over our current
prescription products.
The competition among pharmaceutical companies to have their products approved for
reimbursement also results in downward pricing pressure in the industry and in the markets where
our products compete. In some cases, we aggressively discount our products in order to obtain
reimbursement coverage, and we may not be successful in any efforts we take to mitigate the effect
of a decline in average selling prices for our products. Declines in our average selling prices
also reduce our gross margins.
If we fail to successfully secure and maintain reimbursement coverage for our products on
favorable terms, we will have difficulty sustaining market acceptance of our products and our
business will be materially adversely affected.
Our reliance on third-party clinical investigators and clinical research organizations may result
in delays in completing, or a failure to complete, clinical trials or we may be unable to use the
clinical data gathered if they fail to comply with regulatory requirements or perform under our
agreements with them.
As an integral component of our clinical development programs, we engage clinical
investigators and CROs to enroll patients and conduct and manage our clinical studies. As a result,
many key aspects of this process have been and will be out of our direct control. If the CROs and
other third parties that we rely on for patient enrollment and other portions of our clinical
trials fail to perform the clinical trials in a timely and satisfactory manner and in compliance
with applicable U.S. and foreign regulations, we could face significant delays in completing our
clinical trials or we may be unable to rely in the future on the clinical data generated. If these
clinical investigators and CROs do not carry out their contractual duties or obligations or fail to
meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is
compromised due to their failure to adhere to our clinical protocols, regulatory requirements or
for other reasons, our clinical trials may be extended, delayed or terminated, we may be required
to repeat one or more of our clinical trials and we may be unable to obtain or maintain regulatory
approval for or successfully commercialize our products.
We depend on a limited number of wholesaler customers for retail distribution of our Zegerid
products, and if we lose any of our significant wholesaler customers, our business could be harmed.
Our wholesaler customers for our Zegerid products include some of the nations leading
wholesale pharmaceutical distributors, such as Cardinal Health, Inc., McKesson Corporation and
AmerisourceBergen Corporation, and major drug chains. Sales to Cardinal, McKesson and
AmerisourceBergen accounted for approximately 30%, 27% and 16%, respectively, of our annual
revenues during 2008 and 31%, 27% and 16%, respectively, of our revenues for the nine months ended
September 30, 2009. The loss of any of these wholesaler customers accounts or a material
reduction in their purchases could harm our business, financial condition or results of operations.
In addition, we may face pricing pressure from our wholesaler customers.
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We do not currently have any manufacturing facilities and instead rely on third-party
manufacturers.
We rely on third-party manufacturers to provide us with an adequate and reliable supply of our
products on a timely basis, and we do not currently have any of our own manufacturing or
distribution facilities. Our manufacturers must comply with U.S. regulations, including the FDAs
current good manufacturing practices, applicable to the manufacturing processes related to
pharmaceutical products, and their facilities must be inspected and approved by the FDA and other
regulatory agencies on an ongoing basis as part of their business. In addition, because several of
our key manufacturers are located outside of the U.S., they must also comply with applicable
foreign laws and regulations.
We have limited control over our third-party manufacturers, including with respect to
regulatory compliance and quality assurance matters. Any delay or interruption of supply related to
a third-party manufacturers failure to comply with regulatory or other requirements would limit
our ability to make sales of our products. Any manufacturing defect or error discovered after
products have been produced and distributed could result in even more significant consequences,
including costly recall procedures, re-stocking costs, damage to our reputation and potential for
product liability claims. With respect to any future products under development, if the FDA finds
significant issues with any of our manufacturers during the pre-approval inspection process, the
approval of those products could be delayed while the manufacturer addresses the FDAs concerns, or
we may be required to identify and obtain the FDAs approval of a new supplier. This could result
in significant delays before manufacturing of our products can begin, which in turn would delay
commercialization of our products. In addition, the importation of pharmaceutical products into the
U.S. is subject to regulation by the FDA, and the FDA can refuse to allow an imported product into
the U.S. if it is not satisfied that the product complies with applicable laws or regulations.
For our Zegerid prescription products, we currently rely on Norwich Pharmaceuticals, Inc.,
located in New York, as the sole third-party manufacturer of Zegerid Capsules. In addition, we rely
on a single third-party manufacturer located outside of the U.S., Patheon Inc., for the supply of
Zegerid Powder for Oral Suspension. We also currently rely on a single third-party supplier located
outside of the U.S., Union Quimico Farmaceutica, S.A., or Uquifa, for the supply of omeprazole,
which is an active pharmaceutical ingredient in each of our current Zegerid products. We are
obligated under our supply agreement with Uquifa to purchase all of our requirements of omeprazole
from this supplier.
For the Glumetza products, we rely on Depomed to oversee product manufacturing and supply. In
turn, Depomed relies on a single third-party manufacturer for each of the Glumetza products. For
our budesonide MMX and rifamycin SV MMX product candidates, we rely on Cosmo to manufacture and
supply all of our drug product requirements.
Any significant problem that our sole source manufacturers or suppliers experience could
result in a delay or interruption in the supply to us until the manufacturer or supplier cures the
problem or until we locate an alternative source of supply. In addition, because our sole source
manufacturers and suppliers provide services to a number of other pharmaceutical companies, they
may experience capacity constraints or choose to prioritize one or more of their other customers
over us. In addition, to the extent one or more of our strategic partners utilizes our suppliers
for our Zegerid prescription products, capacity at those suppliers may become further constrained.
Although alternative sources of supply exist, the number of third-party manufacturers with the
manufacturing and regulatory expertise and facilities necessary to manufacture the finished forms
of our pharmaceutical products or the key ingredients in our products is limited, and it would take
a significant amount of time to arrange for alternative manufacturers. Any new supplier of products
or key ingredients would be required to qualify under applicable regulatory requirements and would
need to have sufficient rights under applicable intellectual property laws to the method of
manufacturing such products or ingredients. The FDA may require us to conduct additional clinical
trials, collect stability data and provide additional information concerning any new supplier
before we could distribute products from that supplier. Obtaining the necessary FDA approvals or
other qualifications under applicable regulatory requirements and ensuring non-infringement of
third-party intellectual property rights could result in a significant interruption of supply and
could require the new supplier to bear significant additional costs which may be passed on to us.
Our reporting and payment obligations under the Medicaid rebate program and other governmental
purchasing and rebate programs are complex and may involve subjective decisions, and any failure to
comply with those obligations could subject us to penalties and sanctions, which in turn could have
a material adverse effect on our business and financial condition.
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As a condition of reimbursement by various federal and state healthcare programs, we must
calculate and report certain pricing information to federal and state healthcare agencies. The
regulations regarding reporting and payment obligations with respect to Medicaid reimbursement and
rebates and other governmental programs are complex. Our calculations and methodologies are
subject to review and challenge by the applicable governmental agencies, and it is possible that
such reviews could result in material changes. In addition, because our processes for these
calculations and the judgments involved in making these calculations involve subjective decisions
and complex methodologies, these calculations are subject to the risk of errors. Any failure to
comply with the government reporting and payment obligations could result in civil and/or criminal
sanctions.
Regulatory approval for our currently marketed products is limited by the FDA to those specific
indications and conditions for which clinical safety and efficacy have been demonstrated.
Any regulatory approval is limited to those specific diseases and indications for which our
products are deemed to be safe and effective by the FDA. In addition to the FDA approval required
for new formulations, any new indication for an approved product also requires FDA approval. If we
are not able to obtain FDA approval for any desired future indications for our products, our
ability to effectively market and sell our products may be reduced and our business may be
adversely affected.
While physicians may choose to prescribe drugs for uses that are not described in the
products labeling and for uses that differ from those tested in clinical studies and approved by
the regulatory authorities, our ability to promote the products is limited to those indications
that are specifically approved by the FDA. These off-label uses are common across medical
specialties and may constitute an appropriate treatment for many patients in varied circumstances.
Regulatory authorities in the U.S. generally do not regulate the behavior of physicians in their
choice of treatments. Regulatory authorities do, however, restrict communications by pharmaceutical
companies on the subject of off-label use. If our promotional activities fail to comply with these
regulations or guidelines, we may be subject to warnings from, or enforcement action by, these
authorities. In addition, our failure to follow FDA rules and guidelines relating to promotion and
advertising may cause the FDA to delay its approval or refuse to approve a product, the suspension
or withdrawal of an approved product from the market, recalls, fines, disgorgement of money,
operating restrictions, injunctions or criminal prosecution, any of which could harm our business.
We are subject to ongoing regulatory review of our currently marketed products.
Following receipt of regulatory approval, any products that we market continue to be subject
to extensive regulation. These regulations impact many aspects of our operations, including the
manufacture, labeling, packaging, adverse event reporting, storage, distribution, advertising,
promotion and record keeping related to the products. The FDA also frequently requires
post-marketing testing and surveillance to monitor the effects of approved products or place
conditions on any approvals that could restrict the commercial applications of these products. For
example, in connection with the approval of our NDAs for Zegerid Powder for Oral Suspension, we
committed to commence clinical studies to evaluate the product in pediatric populations in 2005.
We have not yet commenced any of the studies and, prior to doing so, will need to finalize study
designs, including receiving FDA input on one of the proposed study designs, engage clinical
research organizations and undertake other related activities. In addition, the subsequent
discovery of previously unknown problems with the product may result in restrictions on the
product, including withdrawal of the product from the market. If we fail to comply with applicable
regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory
approvals, product recalls, seizure of products, disgorgement of money, operating restrictions and
criminal prosecution.
In addition to FDA restrictions on marketing of pharmaceutical products, several other types
of state and federal laws have been applied to restrict certain marketing practices in the
pharmaceutical industry in recent years. These laws include anti-kickback statutes and false claims
statutes. The federal healthcare program anti-kickback statute prohibits, among other things,
knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in
return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any
healthcare item or service reimbursable under Medicare, Medicaid or other federally financed
healthcare programs. This statute has been interpreted to apply to arrangements between
pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on
the other. Violations of the anti-kickback statute are punishable by imprisonment, criminal fines,
civil monetary penalties and exclusion from participation in federal healthcare programs. Although
there are a number of statutory exemptions and regulatory safe harbors protecting certain common
activities from prosecution or other regulatory sanctions, the exemptions and safe harbors are
drawn narrowly, and practices that involve remuneration intended to induce
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prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify
for an exemption or safe harbor. Our practices may not in all cases meet all of the criteria for
safe harbor protection from anti-kickback liability.
Federal false claims laws prohibit any person from knowingly presenting, or causing to be
presented, a false claim for payment to the federal government, or knowingly making, or causing to
be made, a false statement to have a false claim paid. Recently, several pharmaceutical and other
healthcare companies have been prosecuted under these laws for allegedly inflating drug prices they
report to pricing services, which in turn are used by the government to set Medicare and Medicaid
reimbursement rates, and for allegedly providing free product to customers with the expectation
that the customers would bill federal programs for the product. In addition, certain marketing
practices, including off-label promotion, may also violate false claims laws. The majority of
states also have statutes or regulations similar to the federal anti-kickback law and false claims
laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in
several states, apply regardless of the payor. Sanctions under these federal and state laws may
include civil monetary penalties, exclusion of a manufacturers products from reimbursement under
government programs, criminal fines and imprisonment.
Because of the breadth of these laws and the narrowness of the safe harbors, it is possible
that some of our business activities could be subject to challenge under one or more of such laws.
Such a challenge could have a material adverse effect on our business, financial condition and
results of operations.
In addition, as part of the sales and marketing process, pharmaceutical companies frequently
provide samples of approved drugs to physicians. This practice is regulated by the FDA and other
governmental authorities, including, in particular, requirements concerning record keeping and
control procedures. Any failure to comply with the regulations may result in significant criminal
and civil penalties as well as damage to our credibility in the marketplace.
We are subject to new legislation, regulatory proposals and managed care initiatives that may
increase our costs of compliance and adversely affect our ability to market our products, obtain
collaborators and raise capital.
There have been a number of legislative and regulatory proposals aimed at changing the
healthcare system and pharmaceutical industry, including reductions in the cost of prescription
products, changes in the levels at which consumers and healthcare providers are reimbursed for
purchases of pharmaceutical products, proposals concerning reimportation of pharmaceutical products
and proposals concerning safety matters. For example, in an attempt to protect against counterfeit
drugs, the federal government and numerous states have enacted pedigree legislation. In
particular, California has enacted legislation that requires development of an electronic pedigree
to track and trace each prescription drug at the saleable unit level through the distribution
system. Californias electronic pedigree requirement is scheduled to take effect beginning in
January 2015. Compliance with California and future federal or state electronic pedigree
requirements will likely require an increase in our operational expenses and will likely be
administratively burdensome.
It is also possible that other proposals will be adopted, particularly in light of the 2008
presidential and congressional elections and the agenda of the new administration. For example,
the U.S. Congress is considering a number of legislative and regulatory proposals with an objective
of ultimately reducing healthcare costs. Legislative and regulatory actions under consideration in
the U.S. include health care reform initiatives that could significantly alter the market for
pharmaceuticals (such as private health insurance expansion, the creation of competing public
health insurance plans, a variety of proposals that would reduce government expenditures for
prescription drugs to help finance healthcare reform, or the eventual transition of the U.S.
multiple payer system to a single payer system). Other actions under consideration include
proposals for government intervention in pharmaceutical pricing under Medicare, changes in
government reimbursement, increasing rebates that pharmaceutical manufacturers pay to Medicaid, an
abbreviated approval process for follow-on biologics, and legalization of commercial drug
importation into the U.S. The enactment of any cost containment measures could result in decreased
net revenues from our pharmaceutical products and decrease potential returns from our research and
development efforts. It has also been reported that the new presidential administration may be
seeking to curb practices that extend the period of market exclusivity for pharmaceuticals, which
may include applications for new indications or product enhancements. As a result of these and
other new proposals, we may determine to change our current manner of operation, provide additional
benefits or change our contract arrangements, any of which could have a material adverse effect on
our business, financial condition and results of operations.
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We face a risk of product liability claims and may not be able to obtain adequate insurance.
Our business exposes us to potential liability risks that may arise from the clinical testing,
manufacture and sale of our products and product candidates. These risks exist even if a product is approved for
commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA. Any
product liability claim or series of claims brought against us could significantly harm our
business by, among other things, reducing demand for our products, injuring our reputation and
creating significant adverse media attention and costly litigation. Plaintiffs have received
substantial damage awards in some jurisdictions against pharmaceutical companies based upon claims
for injuries allegedly caused by the use of their products. Any judgment against us that is in
excess of our insurance policy limits would have to be paid from our cash reserves, which would
reduce our capital resources. Although we have product and clinical trials liability insurance with
a coverage limit of $15.0 million, this coverage may prove to be inadequate. Furthermore, we cannot
be certain that our current insurance coverage will continue to be available for our commercial or
clinical trial activities on reasonable terms, if at all. Further, we may not have sufficient
capital resources to pay a judgment, in which case our creditors could levy against our assets,
including our intellectual property.
In October 2009, we became aware of two lawsuits filed by individual plaintiffs in Ohio state
court relating to C.B. Fleet Co., Inc., or Fleet, and claiming injuries purportedly caused by
Fleets Phospho-soda®, sodium phosphate oral solution product. The complaints name
Fleet, Santarus, the Cleveland Clinic Foundation, the Research Foundation of the American Society
of Colon and Rectal Surgeons, the Society of American Gastrointestinal and Endoscopic Surgeons and
several other individuals as defendants. The complaints allege, among other things, that the
defendants fraudulently concealed, misrepresented and suppressed material medical and scientific
information about Fleets Phospho-soda product. The plaintiffs are seeking compensatory damages,
exemplary damages, damages for loss of consortium, damages under the Ohio Consumer Protection Act,
and attorneys fees and expenses. We co-promoted Fleets Phospho-soda® EZ-Prep Bowel
Cleansing System, a different sodium phosphate oral solution product manufactured by Fleet, under a
co-promotion agreement, which we and Fleet entered into in August 2007 and which expired in October
2008. Under the terms of the co-promotion agreement, we have requested that Fleet indemnify us in
connection with these matters. In addition, we have tendered notice of these matters to our
insurance carriers pursuant to the terms of our insurance policies. Due to the uncertainty of the
ultimate outcome of these matters and our ability to secure indemnification and/or insurance
coverage, we cannot predict the effect, if any, this matter will have on our business. Regardless
of how this litigation is ultimately resolved, this matter may be costly, time-consuming and
distracting to our management, which could have a material adverse effect on our business.
We rely on third parties to perform many necessary services for our commercial products, including
services related to the distribution, storage and transportation of our products.
We have retained third-party service providers to perform a variety of functions related to
the sale and distribution of our products, key aspects of which are out of our direct control. For
example, we rely on one third-party service provider to provide key services related to warehousing
and inventory management, distribution, contract administration and chargeback processing, accounts
receivable management and call center management, and, as a result, most of our inventory is stored
at a single warehouse maintained by the service provider. We place substantial reliance on this
provider as well as other third-party providers that perform services for us, including entrusting
our inventories of products to their care and handling. If these third-party service providers fail
to comply with applicable laws and regulations, fail to meet expected deadlines, or otherwise do
not carry out their contractual duties to us, or encounter physical or natural damage at their
facilities, our ability to deliver product to meet commercial demand would be significantly
impaired. In addition, we utilize third parties to perform various other services for us relating
to sample accountability and regulatory monitoring, including adverse event reporting, safety
database management and other product maintenance services. If the quality or accuracy of the data
maintained by these service providers is insufficient, our ability to continue to market our
products could be jeopardized or we could be subject to regulatory sanctions. We do not currently
have the internal capacity to perform these important commercial functions, and we may not be able
to maintain commercial arrangements for these services on reasonable terms.
If we are unable to attract and retain key personnel, our business will suffer.
We are a small company and, as of September 30, 2009, had 339 employees. Our success depends
on our continued ability to attract, retain and motivate highly qualified management, clinical,
manufacturing, product development, business development and sales and marketing personnel. We, as
well as inVentiv, our contract sales provider, may not be able to recruit and retain qualified
personnel in the future, due to competition for personnel among pharmaceutical businesses, and the
failure to do so could have a significant negative impact on our future product revenues and
business results.
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Our success depends on a number of key senior management personnel, particularly Gerald T.
Proehl, our President and Chief Executive Officer. Although we have employment agreements with our
executive officers, these agreements are terminable at will at any time with or without notice and,
therefore, we cannot be certain that we will be able to retain their services. In addition,
although we have a key person insurance policy on Mr. Proehl, we do not have key person
insurance policies on any of our other employees that would compensate us for the loss of their
services. If we lose the services of one or more of these individuals, replacement could be
difficult and may take an extended period of time and could impede significantly the achievement of
our business objectives.
Risks Related to Our Intellectual Property
The protection of our intellectual property rights is critical to our success and any failure on
our part to adequately maintain such rights would materially affect our business.
We regard the protection of patents, trademarks and other proprietary rights that we own or
license as critical to our success and competitive position. Laws and contractual restrictions,
however, may not be sufficient to prevent unauthorized use or misappropriation of our technology or
deter others from independently developing products that are substantially equivalent or superior
to our products.
Patents
Our commercial success will depend in part on the patent rights we have licensed or will
license and on patent protection for our own inventions related to the products that we market and
intend to market. Our success also depends on maintaining these patent rights against third-party
challenges to their validity, scope or enforceability. Our patent position is subject to
uncertainties similar to other biotechnology and pharmaceutical companies. For example, the U.S.
Patent and Trademark Office, or PTO, or the courts may deny, narrow or invalidate patent claims,
particularly those that concern biotechnology and pharmaceutical inventions.
We may not be successful in securing or maintaining proprietary or patent protection for our
products, and protection that we have and do secure may be challenged and possibly lost. Our
competitors may develop products similar to ours using methods and technologies that are beyond the
scope of our intellectual property rights. Other drug companies may challenge the scope, validity
and enforceability of our patent claims and may be able to develop generic versions of our products
if we are unable to maintain our proprietary rights. For example, although we believe that we have
valid patent protection in the U.S. for our Zegerid products until at least 2016, depending on the
outcome of our patent infringement suits against Par, described below, a generic version of Zegerid
could be launched prior to the expiration of our patents. It is also possible that other generic
drug makers will attempt to introduce generic versions of our Zegerid products, or that the
Glumetza products will face similar challenges, prior to the expiration of the applicable patents.
We also may not be able to protect our intellectual property rights against third-party
infringement, which may be difficult to detect.
Zegerid Products and Related PPI Technology
We have entered into an exclusive, worldwide license agreement with the University of Missouri
for patents and pending patent applications relating to specific formulations of PPIs with antacids
and other buffering agents and methods of using these formulations. Currently, there are six
issued U.S. patents that provide coverage for our Zegerid products (U.S. Patent Nos. 5,840,737;
6,489,346; 6,645,988; 6,699,885; 6,780,882; and 7,399,772), all of which are subject to the
University of Missouri license agreement. There are also several pending U.S. patent applications
relating to our Zegerid products and technology, some of which are subject to the University of
Missouri license agreement and some of which we own. The issued patents generally cover
pharmaceutical compositions combining PPIs with buffering agents, such as antacids, and methods of
treating GI disorders by administering solid or liquid forms of such compositions, and each of the
patents expires in July 2016. In addition to the U.S. patent coverage, several international
patents have been issued, including in Australia, Austria, Belgium, Canada, Cyprus, Denmark,
Finland, France, Germany, Greece, Ireland, Israel, Italy, Luxembourg, Mexico, Monaco, Netherlands,
New Zealand, Poland, Portugal, Russia, Singapore, South Africa, South Korea, Spain, Sweden,
Switzerland, Turkey and the United Kingdom, and several international patent applications are
pending, some of which are subject to the University of Missouri license agreement and some of
which we own. The issued claims in these international patents vary between the different
countries and include claims covering pharmaceutical compositions combining PPIs with buffering
agents and the use of these compositions in the manufacture of drug products for the treatment of GI disorders.
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We consult with the University of Missouri in its pursuit of the patent applications that we
have licensed, but the University of Missouri remains primarily responsible for prosecution of the
applications. We cannot control the amount or timing of resources that the University of Missouri
devotes on our behalf. It may not assign as great a priority to prosecution of patent applications
relating to technology we license as we would if we were undertaking such prosecution ourselves. As
a result of this lack of control and general uncertainties in the patent prosecution process, we
cannot be sure that any additional patents will ever be issued. Issued patents generally require
the payment of maintenance or similar fees to continue their validity. We rely on the University of
Missouri to do this, subject to our obligation to provide reimbursement, and the Universitys
failure to do so could result in the forfeiture of patents not maintained. In addition, the
initial U.S. patent from the University of Missouri does not have corresponding international or
foreign counterpart applications and there can be no assurance that we will be able to obtain
foreign patent rights to protect each of our products in all foreign countries of interest.
In December 2007, the University of Missouri filed an Application for Reissue of U.S. Patent
No. 5,840,737, or the 737 patent, with the PTO. The 737 patent is one of six issued patents
listed in the Approved Drug Products with Therapeutic Equivalence Evaluations, or the Orange Book,
for Zegerid Powder for Oral Suspension. The 737 patent is not one of the four patents listed in
the Orange Book for Zegerid Capsules. It is not feasible to predict the impact that the reissue
proceeding may have on the scope and validity of the 737 patent claims. If the claims of the 737
patent ultimately are narrowed substantially or invalidated by the PTO, the extent of the patent
coverage afforded to our Zegerid family of products could be impaired, which could potentially harm
our business and operating results.
Glumetza Extended Release Tablets
We have exclusive rights to promote the Glumetza products in the U.S. under our promotion
agreement with Depomed. Currently, there are 4 issued U.S. patents that provide coverage for the
Glumetza 500 mg dose product (U.S. Patent Nos. 6,340,475 (expires in September 2016); 6,635,280
(expires in September 2016); 6,488,962 (expires in June 2020); and 6,723,340 (expires in October
2021)). There is one issued U.S. patent that provides coverage for the Glumetza 1000 mg dose
product (U.S. Patent No. 6,488,962 (expires in June 2020)). The issued patents generally cover
various aspects of the delivery technology utilized in each of the Glumetza products. In addition,
there is one pending U.S. patent application that covers the Glumetza 1000 mg dose product.
We consult with Depomed concerning the patent rights relating to the Glumetza products, but
Depomed remains primarily responsible for prosecution of the applications. We cannot control the
amount or timing of resources that Depomed devotes to these activities. It may not assign as great
a priority to prosecution of patent applications as we would if we were undertaking such
prosecution ourselves. As a result of this lack of control and general uncertainties in the patent
prosecution process, we cannot be sure that any additional patents will ever be issued. Issued
patents generally require the payment of maintenance or similar fees to continue their validity. We
rely on Depomed to do this, and Depomeds failure to do so could result in the forfeiture of
patents not maintained.
Budesonide MMX and Rifamycin SV MMX
We have exclusive rights to develop and commercialize the budesonide MMX and rifamycin SV MMX
product candidates in the U.S. under our strategic collaboration with Cosmo. Currently, there are
two issued U.S. patents that provide coverage for the budesonide MMX product candidate (U.S. Patent
Nos. 7,431,943 and 7,410,651), as well as one pending U.S. patent application. The issued patents
cover the MMX technology generally and the MMX technology with budesonide, and each of these
patents expires in June 2020. There is one issued U.S. patent that provides coverage for the
rifamycin SV MMX product candidate (U.S. Patent No. 7,431,943), which expires in June 2020, and two
pending U.S. patent applications. The issued patent covers the MMX technology generally.
We consult with Cosmo concerning the patent rights relating to the budesonide MMX and
rifamycin SV MMX product candidates, but Cosmo remains primarily responsible for prosecution of the
applications. We cannot control the amount or timing of resources that Cosmo devotes to these
activities. It may not assign as great a priority to prosecution of patent applications as we
would if we were undertaking such prosecution ourselves. As a result of this lack of control and
general uncertainties in the patent prosecution process, we cannot be sure that any additional
patents will ever be issued. Issued patents generally require the payment of maintenance or similar
fees to continue their validity. We rely on Cosmo to do this, and Cosmos failure to do so could result in the forfeiture of patents not
maintained.
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Trade Secrets and Proprietary Know-how
We also rely upon unpatented proprietary know-how and continuing technological innovation in
developing our products. Although we require our employees, consultants, advisors and current and
prospective business partners to enter into confidentiality agreements prohibiting them from
disclosing or taking our proprietary information and technology, these agreements may not provide
meaningful protection for our trade secrets and proprietary know-how. Further, people who are not
parties to confidentiality agreements may obtain access to our trade secrets or know-how. Others
may independently develop similar or equivalent trade secrets or know-how. If our confidential,
proprietary information is divulged to third parties, including our competitors, our competitive
position in the marketplace will be harmed and our ability to successfully penetrate our target
markets could be severely compromised.
Trademarks
Our trademarks are important to our success and competitive position. We have received U.S.
and European Union, or EU, trademark registration for our corporate name, Santarus®. We
also have received trademark registration in the U.S., EU, Canada and Japan for our brand name,
Zegerid®, and have applied for trademark registration for various other names and logos.
Any objections we receive from the PTO, foreign trademark authorities or third parties relating to
our registered trademarks and pending applications could require us to incur significant expense in
defending the objections or establishing alternative names. There is no guarantee we will be able
to secure any of our pending trademark applications with the PTO or comparable foreign authorities.
If we do not adequately protect our rights in our various trademarks from infringement, any
goodwill that has been developed in those marks would be lost or impaired. We could also be forced
to cease using any of our trademarks that are found to infringe upon or otherwise violate the
trademark or service mark rights of another company, and, as a result, we could lose all the
goodwill which has been developed in those marks and could be liable for damages caused by any such
infringement or violation.
The timing and any potential negative outcome in the ongoing patent litigation with Par could
adversely affect our financial condition and results of operations as it could result in the
introduction of generic products prior to the expiration of the patents for Zegerid Capsules and
Zegerid Powder for Oral Suspension, as well as in significant legal expenses and diversion of
management time.
In September 2007, we filed a lawsuit in the United States District Court for the District of
Delaware against Par for infringement of U.S. Patent Nos. 6,645,988; 6,489,346; and 6,699,885, each
of which is listed in the Orange Book for Zegerid Capsules. In December 2007, we filed a second
lawsuit in the United States District Court for the District of Delaware against Par for
infringement of U.S. Patent Nos. 6,645,988; 6,489,346; 6,699,885; and 6,780,882, each of which is
listed in the Orange Book for Zegerid Powder for Oral Suspension. The University of Missouri,
licensor of the patents, is a co-plaintiff in the litigation, and both lawsuits have been
consolidated for all purposes. The lawsuits are in response to abbreviated new drug applications,
or ANDAs, filed by Par with the FDA regarding Pars intent to market generic versions of our
Zegerid Capsules and Zegerid Powder for Oral Suspension products prior to the July 2016 expiration
of the asserted patents. Each complaint seeks a judgment that Par has infringed the asserted
patents and that the effective date of approval of Pars ANDA shall not be earlier than the
expiration date of the asserted patents. Par has filed answers in each case, primarily asserting
non-infringement, invalidity and/or unenforceability. Par has also filed counterclaims seeking a
declaration in its favor on those issues. On July 15, 2008, the PTO issued U.S. Patent No.
7,399,772, or the 772 patent, which is now listed in the Orange Book for both Zegerid Capsules and
Zegerid Powder for Oral Suspension. In October 2008, we amended our complaint to add the 772
patent to the pending litigation with Par. A claim construction, or Markman, hearing was held in
November 2008. Following the Markman hearing, the court adopted all of the claim constructions we
and the University of Missouri proposed.
In addition, as part of this litigation, Par initially filed counterclaims seeking a
declaration that the 737 patent is not infringed, is invalid and/or is unenforceable. We moved to
dismiss, or in the alternative, stay these claims due to a reissue proceeding involving the 737
patent currently pending before the PTO, and we and the University of Missouri also granted Par a
covenant not to sue on the original 737 patent. In November 2008, Par dismissed its counterclaims
relating to the 737 patent.
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We commenced each of the lawsuits against Par within the applicable 45 day period required to
automatically stay, or bar, the FDA from approving Pars ANDAs for 30 months or until a district
court decision that is adverse to the asserted patents, whichever may occur earlier. The 30-month
stay with regard to Zegerid Capsules expires in February 2010 and the 30-month stay with regard to
Zegerid Powder for Oral Suspension expires in May/June 2010. If the litigation is still ongoing
after expiration of the applicable 30-month stay, the termination of the stay could result in the
introduction of one or more products generic to Zegerid Capsules and/or Zegerid Powder for Oral
Suspension prior to resolution of the litigation.
A bench trial for the consolidated lawsuit was held in July 2009. During the trial, the court
ruled in favor of Santarus and the University of Missouri on the issue of infringement. Post-trial
briefs were submitted in August 2009, and the court has not yet ruled on Pars defenses of
invalidity and inequitable conduct.
Although we intend to vigorously defend and enforce our patent rights, we are not able to
predict the timing or outcome of the litigation. The court may render its decision at any time
after the filing of the post-trial briefs, which may be before or after the expiration of the
applicable 30-month stays. Any adverse outcome in this litigation could result in one or more
generic versions of Zegerid Capsules and/or Zegerid Powder for Oral Suspension being launched
before the expiration of the listed patents in July 2016, which could adversely affect our ability
to successfully execute our business strategy to maximize the value of Zegerid Capsules and Zegerid
Powder for Oral Suspension and would negatively impact our financial condition and results of
operations, including causing a significant decrease in our revenues and cash flows. An adverse
outcome may also impact the patent protection for the products being commercialized pursuant to our
strategic alliances with GSK, Schering-Plough and Norgine, which in turn may impact the amount of,
or our ability to receive, milestone payments and royalties under our agreements with these
strategic partners. Following any decision from the lower court, the losing party may choose to
exercise its right to appeal, which could result in a change of the lower courts decision as well
as additional time and expense. Regardless of how the litigation is ultimately resolved, the
litigation has been and may continue to be costly, time-consuming and distracting to management,
which could have a material adverse effect on our business.
Third parties may choose to file patent infringement claims against us, which litigation would be
costly, time-consuming and distracting to management and could be materially adverse to our
business.
The products we currently market, and those we may market in the future, may infringe patent
and other rights of third parties. In addition, our competitors, many of which have substantially
greater resources than us and have made significant investments in competing technologies or
products, may seek to apply for and obtain patents that will prevent, limit or interfere with our
ability to make, use and sell products either in the U.S. or international markets. Intellectual
property litigation in the pharmaceutical industry is common, and we expect this to continue.
If we or our third-party manufacturers or suppliers are unsuccessful in any challenge to our
rights to manufacture, market and sell our products, we may be required to license the disputed
rights, if the holder of those rights is willing, or to cease manufacturing and marketing the
challenged products, or, if possible, to modify our products to avoid infringing upon those rights.
If we or our third-party manufacturers or suppliers are unsuccessful in defending our rights, we
could be liable for royalties on past sales or more significant damages, and we could be required
to obtain and pay for licenses if we are to continue to manufacture and sell our products. These
licenses may not be available and, if available, could require us to pay substantial upfront fees
and future royalty payments. Any patent owner may seek preliminary injunctive relief in connection
with an infringement claim, as well as a permanent injunction, and, if successful in the claim, may
be entitled to lost profits from infringing sales, attorneys fees and interest and other amounts.
Any damages could be increased if there is a finding of willful infringement. Even if we and our
third-party manufacturers and suppliers are successful in defending an infringement claim, the
expense, time delay and burden on management of litigation could have a material adverse effect on
our business.
Our Zegerid products depend on technology licensed from the University of Missouri and any loss of
our license rights would harm our business and seriously affect our ability to market our products.
Our Zegerid products are based on patented technology and technology for which patent
applications are pending that we have exclusively licensed from the University of Missouri. A loss
or adverse modification of our technology license from the University of Missouri would materially
harm our ability to develop and commercialize our current Zegerid
products and other products based on that licensed technology that we may attempt to develop
or commercialize in the
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future. The University of Missouri may claim that new patents or new patent
applications that result from new research performed by the University of Missouri are not part of
the licensed technology.
The licenses from the University of Missouri expire in each country when the last patent for
licensed technology expires in that country and the last patent application for licensed technology
in that country is abandoned. In addition, our rights under the University of Missouri license are
subject to early termination under specified circumstances, including our material and uncured
breach of the license agreement or our bankruptcy or insolvency. Further, we are required to use
commercially reasonable efforts to develop and sell products based on the technology we licensed
from the University of Missouri to meet market demand. If we fail to meet these obligations in
specified countries, after giving us an opportunity to cure the failure, the University of Missouri
can terminate our license or render it nonexclusive with respect to those countries. To date, we
believe we have met all of our obligations under the University of Missouri agreement. However, in
the event that the University of Missouri is able to terminate the license agreement for one of the
reasons specified in the license agreement, we would lose our rights to develop, market and sell
our current Zegerid products and we would not be able to develop, market and sell future products
based on those licensed technologies.
Risks Related to Our Financial Results and Need for Financing
We have incurred significant operating losses since our inception, and we may incur additional
operating losses and may not be able to sustain profitability.
The extent of our future operating losses and our ability to sustain profitability are highly
uncertain. We have been engaged in developing and commercializing drugs and have generated
significant operating losses since our inception in December 1996. Our commercial activities and
continued product development and clinical activities will require significant expenditures. For
the nine months ended September 30, 2009, we recognized $110.1 million in total revenues, and, as
of September 30, 2009, we had an accumulated deficit of $314.9 million. We may incur additional
operating losses and capital expenditures as we support the continued marketing of the Zegerid and
Glumetza products and any other products we commercialize, and continue our product development and
clinical research programs.
In addition, any adverse outcome in the litigation against Par could result in one or more
generic versions of Zegerid Capsules and/or Zegerid Powder for Oral Suspension being launched
before the expiration of the listed patents in July 2016. This could adversely affect our ability
to successfully execute our business strategy to maximize the value of Zegerid Capsules and Zegerid
Powder for Oral Suspension and would negatively impact our financial condition and results of
operations, including causing a significant decrease in our revenues and cash flows. An adverse
outcome may also impact the patent protection for the products being commercialized pursuant to our
strategic alliances with GSK, Schering-Plough and Norgine, which in turn may impact the amount of,
or our ability to receive, milestone payments and royalties under our agreements with these
strategic partners.
To the extent we need to raise additional funds in connection with the licensing or acquisition of
new products or to continue our operations, we may be unable to raise capital when needed.
We believe that our current cash, cash equivalents and short-term investments will be
sufficient to fund our current operations for at least the next 12 months; however, our projected
revenue may decrease or our expenses may increase and that would lead to our cash resources being
consumed earlier than we expect. Although we do not believe that we will need to raise additional
funds to finance our current operations over the next 12 months, we may pursue raising additional
funds in connection with licensing or acquisition of new products. Sources of additional funds may
include funds generated through strategic collaborations or licensing agreements, or through
equity, debt and/or royalty financing.
In November 2008, we filed a universal shelf registration statement on Form S-3 with the SEC,
which was declared effective in December 2008. The universal shelf registration statement replaced
our previous universal shelf registration statement that expired in December 2008. The universal
shelf registration statement may permit us, from time to time, to offer and sell up to
approximately $75.0 million of equity or debt securities. However, there can be no assurance that
we will be able to complete any such offerings of securities. Factors influencing the availability
of additional financing include the progress of our commercial and development activities, investor
perception of our prospects and the general condition of the financial markets, among others.
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In July 2006, we entered into a loan agreement with Comerica Bank, or Comerica, which we
subsequently amended in July 2008, pursuant to which we may request advances in an aggregate
outstanding amount not to exceed $25.0 million. Amounts borrowed under the loan agreement may be
repaid and re-borrowed at any time prior to July 11, 2011. In December 2008, we borrowed $10.0
million under the loan agreement. Our ability to borrow additional amounts under the loan
agreement depends upon a number of conditions and restrictions, and we cannot be certain that we
will satisfy all borrowing conditions at a time when we desire to borrow such amounts under the
loan agreement. For example, we have made comprehensive representations and warranties to Comerica
as our lender, and all of these representations and warranties generally must be true and correct
at the time of any proposed borrowing. Furthermore, we are subject to a number of affirmative and
negative covenants, each of which must be satisfied at the time of any proposed borrowing. If we
have not satisfied these various conditions, or an event of default otherwise has occurred, we may
be unable to borrow additional amounts under the loan agreement, and may be required to repay any
amounts previously borrowed. In addition, given the current financial market conditions, our
continued ability to borrow under the loan agreement may be dependent on the financial solvency of
banks in general, including Comerica.
We cannot be certain that our existing cash and marketable securities resources will be
adequate to sustain our current operations. To the extent we require additional funding, we cannot
be certain that such funding will be available to us on acceptable terms, or at all. If adequate
funds are not available on terms acceptable to us at that time, our ability to continue our current
operations or pursue new product opportunities would be significantly limited.
Our quarterly financial results are likely to fluctuate significantly due to uncertainties about
future sales levels for our currently marketed products and future costs associated with our
development products.
Our quarterly operating results are difficult to predict and may fluctuate significantly from
period to period, particularly because the commercial success of, and demand for currently marketed
products, as well as the success and costs of our development programs are uncertain and therefore
our future prospects are uncertain. The level of our revenues, if any, and results of operations at
any given time will be based primarily on the following factors:
| commercial success of the Zegerid and Glumetza prescription products; | ||
| the outcome of our patent infringement litigation against Par involving Zegerid Capsules and Zegerid Powder for Oral Suspension; | ||
| progress under the strategic alliances with GSK, Schering-Plough and Norgine, including Schering-Ploughs ability to obtain regulatory approval for a licensed OTC product; | ||
| our ability to obtain regulatory approval for any future products we develop, including the new tablet formulation of our Zegerid prescription products, which has a PDUFA date of December 4, 2009; | ||
| results of clinical trials and other development programs, including the ongoing and planned clinical trials for the budesonide MMX and rifamycin SV MMX product candidates, and our ability to establish safety and efficacy for our development products; | ||
| interruption in the manufacturing or distribution of our products; | ||
| timing of new product offerings, acquisitions, licenses or other significant events by us, GSK, Schering-Plough, Norgine or our competitors; | ||
| legislative changes affecting the products we may offer or those of our competitors; and | ||
| the effect of competing technological and market developments. |
It will continue to be difficult for us to forecast demand for our products with any degree of
certainty. In addition, we expect to incur significant operating expenses as we continue to support
the marketing of the Zegerid and Glumetza products and continue our product development and
clinical research programs. Accordingly, we may experience significant, unanticipated quarterly
losses. Because of these factors, our operating results in one or more future quarters
may fail to meet the expectations of securities analysts or investors, which could cause our
stock price to decline significantly.
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Our current and any future indebtedness under our loan agreement with Comerica could adversely
affect our financial health.
Under our loan agreement with Comerica, we may incur a significant amount of indebtedness.
Such indebtedness could have important consequences. For example, it could:
| impair our ability to obtain additional financing in the future for working capital needs, capital expenditures and general corporate purposes; | ||
| increase our vulnerability to general adverse economic and industry conditions; | ||
| make it more difficult for us to satisfy other debt obligations we may incur in the future; | ||
| require us to dedicate a substantial portion of our cash flows from operations to the payment of principal and interest on our indebtedness, thereby reducing the availability of our cash flows to fund working capital needs, capital expenditures and other general corporate purposes; | ||
| limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; | ||
| place us at a disadvantage compared to our competitors that have less indebtedness; and | ||
| expose us to higher interest expense in the event of increases in interest rates because our indebtedness under the loan agreement with Comerica bears interest at a variable rate. |
For a description of the loan agreement, see Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and Capital Resources.
Covenants in our loan agreement with Comerica may limit our ability to operate our business.
Under our loan agreement with Comerica, we are subject to specified affirmative and negative
covenants, including limitations on our ability: to undergo certain change of control events; to
convey, sell, lease, license, transfer or otherwise dispose of assets; to create, incur, assume,
guarantee or be liable with respect to certain indebtedness; to grant liens; to pay dividends and
make certain other restricted payments; and to make investments. In addition, under the loan
agreement we are required to maintain a balance of cash with Comerica in an amount of not less than
$4.0 million and to maintain any other cash balances with either Comerica or another financial
institution covered by a control agreement for the benefit of Comerica. We are also subject to
specified financial covenants with respect to a minimum liquidity ratio and, in specified limited
circumstances, minimum EBITDA requirements, as defined in the loan agreement.
If we default under the loan agreement because of a covenant breach or otherwise, all
outstanding amounts could become immediately due and payable, which would negatively impact our
liquidity and reduce the availability of our cash flows to fund working capital needs, capital
expenditures and other general corporate purposes.
Our results of operations and liquidity needs could be materially negatively affected by market
fluctuations and economic downturn.
Our results of operations could be materially negatively affected by economic conditions
generally, both in the U.S. and elsewhere around the world. Continuing concerns over inflation,
energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market
and a declining residential real estate market in the U.S. have contributed to increased volatility
and diminished expectations for the economy and the markets going forward. These factors, combined
with volatile oil prices, declining business and consumer confidence and increased unemployment,
have precipitated an economic recession. Domestic and international equity markets continue to
experience heightened volatility and turmoil. These events and the continuing market upheavals may
have an adverse effect on us. In the event of a continuing market downturn, our results of
operations could be adversely affected by those factors in many ways, including making it more
difficult for us to raise funds if necessary, and our stock price may further decline. In
addition, we maintain significant
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amounts of cash and cash equivalents at one or more financial
institutions that are in excess of federally insured limits. Given the current instability of
financial institutions, we cannot be assured that we will not experience losses on these deposits.
In addition, concern about the stability of markets generally and the strength of
counterparties specifically has led many lenders and institutional investors to reduce, and in some
cases, cease to provide credit to businesses and consumers.
Negative conditions in the global credit markets may impair the liquidity of a portion of our
investment portfolio.
As of September 30, 2009, our short-term investments included AAA-rated auction rate
securities, or ARS, issued by state municipalities. Our ARS are debt instruments with a long-term
maturity and an interest rate that is reset in short-term intervals through auctions. The
conditions in the global credit markets have prevented many investors from liquidating their
holdings of ARS because the amount of securities submitted for sale has exceeded the amount of
purchase orders for such securities. If there is insufficient demand for the securities at the
time of an auction, the auction may not be completed and the interest rates may be reset to
predetermined higher rates. When auctions for these securities fail, the investments may not be
readily convertible to cash until a future auction of these investments is successful or they are
redeemed or mature.
Due to conditions in the global credit markets, our ARS, representing a par value of
approximately $4.1 million, had insufficient demand resulting in multiple failed auctions since
early 2008. As a result, these affected securities are currently not liquid.
In October 2008, we received an offer of Auction Rate Securities Rights, or ARS Rights, from
our investment provider, UBS Financial Services, Inc., a subsidiary of UBS AG, or UBS. In November
2008, we accepted the ARS Rights offer. The ARS Rights permit us to require UBS to purchase our
ARS at par value at any time during the period of June 30, 2010 through July 2, 2012. If we do not
exercise our ARS Rights, the ARS will continue to accrue interest as determined by the auction
process or, if the auction fails, by the terms of the ARS. If the ARS Rights are not exercised
before July 2, 2012 they will expire and UBS will have no further obligation to buy our ARS. UBS
has the discretion to purchase or sell our ARS at any time without prior notice so long as we
receive a payment at par upon any sale or disposition. UBS has agreed to only exercise its
discretion to purchase or sell our ARS for the purpose of restructurings, dispositions or other
solutions that will provide us with par value for our ARS. As a condition to accepting the offer
of ARS Rights, we released UBS from all claims except claims for consequential damages relating to
its marketing and sales of ARS. We also agreed not to serve as a class representative or receive
benefits under any class action settlement or investor fund. We intend to exercise the ARS Rights
within the next 12 months.
In the event we need to access the funds that are in an illiquid state, we will not be able to
do so without the likely loss of principal, until a future auction for these investments is
successful or they are redeemed by the issuer or they mature. If we are unable to sell these
securities in the market or they are not redeemed, then we may be required to hold them to
maturity.
In connection with the reporting of our financial condition and results of operations, we are
required to make estimates and judgments which involve uncertainties, and any significant
differences between our estimates and actual results could have an adverse impact on our financial
position, results of operations and cash flows.
Our discussion and analysis of our financial condition and results of operations are based on
our financial statements, which have been prepared in accordance with U.S. generally accepted
accounting principles, or GAAP. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and liabilities. In particular, as part of
our revenue recognition policy, our estimates of product returns, rebates and chargebacks require
our most subjective and complex judgment due to the need to make estimates about matters that are
inherently uncertain. Any significant differences between our actual results and our estimates
under different assumptions or conditions could negatively impact our financial position, results
of operations and cash flows.
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Risks Related to the Securities Markets and Ownership of Our Common Stock
Our stock price has been and may continue to be volatile, and our stockholders may not be able to
sell their shares at attractive prices.
The market prices for securities of specialty biopharmaceutical companies in general have been
highly volatile and may continue to be highly volatile in the future. For example, during the year
ended December 31, 2008, the trading prices for our common stock ranged from a high of $3.24 to a
low of $1.23, and on September 30, 2009, the closing trading price for our common stock was $3.29.
In addition, we have not paid cash dividends since our inception and do not intend to pay cash
dividends in the foreseeable future. Furthermore, our loan agreement with Comerica prohibits us
from paying dividends. Therefore, investors will have to rely on appreciation in our stock price
and a liquid trading market in order to achieve a gain on their investment.
The trading price of our common stock may continue to fluctuate substantially as a result of
one or more of the following factors:
| announcements concerning our commercial progress and activities, including sales and revenue trends; | ||
| announcements concerning our product development programs, results of our clinical trials or status of our regulatory submissions; | ||
| the outcome of our pending patent infringement litigation against Par involving Zegerid Capsules and Zegerid Powder for Oral Suspension; | ||
| regulatory developments and related announcements in the U.S., including announcements by the FDA, and foreign countries; | ||
| other disputes or developments concerning proprietary rights, including patents and trade secrets, litigation matters, and our ability to patent or otherwise protect our products and technologies; | ||
| developments, including progress or delays, pursuant to our strategic alliances with GSK, Schering-Plough and Norgine; | ||
| conditions or trends in the pharmaceutical and biotechnology industries; | ||
| fluctuations in stock market prices and trading volumes of similar companies or of the markets generally; | ||
| changes in, or our failure to meet or exceed, investors and securities analysts expectations; | ||
| announcements of technological innovations or new commercial products by us or our competitors; | ||
| actual or anticipated fluctuations in our or our competitors quarterly or annual operating results; | ||
| announcements concerning borrowings under our loan agreement, takedowns under our existing universal shelf registration statement or other developments relating to the loan agreement, universal shelf registration statement or our other financing activities; | ||
| our entering into licenses, strategic partnerships and similar arrangements, or the termination of such arrangements; | ||
| acquisition of products or businesses by us or our competitors; | ||
| announcements made by, or events affecting, our strategic partners, our contract sales force provider, our suppliers or other third parties that provide services to us; |
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| litigation and government inquiries; or | ||
| economic and political factors, including wars, terrorism and political unrest. |
Our stock price could decline and our stockholders may suffer dilution in connection with future
issuances of equity or debt securities.
We believe that our current cash, cash equivalents and short-term investments will be
sufficient to fund our current operations for at least the next 12 months; however, our projected
revenue may decrease or our expenses may increase and that would lead to our cash resources being
consumed earlier than we expect. Although we do not believe that we will need to raise additional
funds to finance our current operations over the next 12 months, we may pursue raising additional
funds in connection with licensing or acquisition of new products. Sources of additional funds may
include funds generated through strategic collaborations or licensing agreements, or through
equity, debt and/or royalty financing. To the extent we conduct substantial future offerings of
equity or debt securities, such offerings could cause our stock price to decline. For example, we
may issue securities under our existing universal shelf registration statement or we may pursue
alternative financing arrangements.
The exercise of outstanding options and warrants and future equity issuances, including future
public offerings or future private placements of equity securities and any additional shares issued
in connection with acquisitions, will also result in dilution to investors. The market price of our
common stock could fall as a result of resales of any of these shares of common stock due to an
increased number of shares available for sale in the market.
Future sales of our common stock by our stockholders may depress our stock price.
A concentrated number of stockholders hold significant blocks of our outstanding common stock.
Sales by our current stockholders of a substantial number of shares, or the expectation that such
sales may occur, could significantly reduce the market price of our common stock. For example,
sales by Cosmo of any shares that we have issued or may issue to it in connection with our
strategic collaboration (following expiration of the applicable lock-up period), or the expectation
that sales may occur, could significantly reduce the market price of our common stock. In addition,
the holders of a substantial number of shares of common stock may have rights, subject to certain
conditions, to require us to file registration statements to permit the resale of their shares in
the public market or to include their shares in registration statements that we may file for
ourselves or other stockholders. Moreover, certain of our executive officers have from time to time
established programmed selling plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as
amended, for the purpose of effecting sales of common stock, and other employees and affiliates,
including our directors and executive officers, may choose to establish similar plans in the
future. If any of our stockholders cause securities to be sold in the public market, the sales
could reduce the trading price of our common stock. These sales also could impede our ability to
raise future capital.
We may become involved in securities or other class action litigation that could divert
managements attention and harm our business.
The stock market has from time to time experienced significant price and volume fluctuations
that have affected the market prices for the common stock of pharmaceutical and biotechnology
companies. These broad market fluctuations may cause the market price of our common stock to
decline. In the past, following periods of volatility in the market price of a particular
companys securities, securities class action litigation has often been brought against that
company. In addition, over the last few years, several class action lawsuits have been filed
against pharmaceutical companies alleging that the companies sales representatives have been
misclassified as exempt employees under the Federal Fair Labor Standards Act and applicable state
laws. Summary judgment has been granted in favor of the pharmaceutical companies in several of the
cases, however, they remain subject to appeal. We cannot be certain as to how the lawsuits will
ultimately be resolved. Although we have not been the subject of these types of lawsuits, we may
be targeted in the future. Litigation often is expensive and diverts managements attention and
resources, which could adversely affect our business.
Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent
a change in control, even if an acquisition would be beneficial to our stockholders, which could
adversely affect our stock price and prevent attempts by our stockholders to replace or remove our
current management.
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Our certificate of incorporation and bylaws contain provisions that may delay or prevent a
change in control, discourage bids at a premium over the market price of our common stock and
adversely affect the market price of our common stock and the voting and other rights of the
holders of our common stock.
These provisions include:
| dividing our board of directors into three classes serving staggered three-year terms; | ||
| prohibiting our stockholders from calling a special meeting of stockholders; | ||
| permitting the issuance of additional shares of our common stock or preferred stock without stockholder approval; | ||
| prohibiting our stockholders from making certain changes to our certificate of incorporation or bylaws except with 66 2/3% stockholder approval; and | ||
| requiring advance notice for raising business matters or nominating directors at stockholders meetings. |
We are also subject to provisions of the Delaware corporation law that, in general, prohibit
any business combination with a beneficial owner of 15% or more of our common stock for five years
unless the holders acquisition of our stock was approved in advance by our board of directors.
Together, these charter and statutory provisions could make the removal of management more
difficult and may discourage transactions that otherwise could involve payment of a premium over
prevailing market prices for our common stock.
In addition, in November 2004, we adopted a stockholder rights plan, which was subsequently
amended in April 2006 and December 2008. Although the rights plan will not prevent a takeover, it
is intended to encourage anyone seeking to acquire our company to negotiate with our board prior to
attempting a takeover by potentially significantly diluting an acquirers ownership interest in our
outstanding capital stock. The existence of the rights plan may also discourage transactions that
otherwise could involve payment of a premium over prevailing market prices for our common stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
Not applicable.
Issuer Purchases of Equity Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
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Item 6. Exhibits
Exhibit | ||
Number | Description | |
3.1(1)
|
Amended and Restated Certificate of Incorporation | |
3.2(2)
|
Amended and Restated Bylaws | |
3.3(3)
|
Certificate of Designations for Series A Junior Participating Preferred Stock | |
4.1(3)
|
Form of Common Stock Certificate | |
4.2(4)
|
Amended and Restated Investors Rights Agreement, dated April 30, 2003, among us and the parties named therein | |
4.3(4)
|
Amendment No. 1 to Amended and Restated Investors Rights Agreement, dated May 19, 2003, among us and the parties named therein | |
4.4(4)*
|
Stock Restriction and Registration Rights Agreement, dated January 26, 2001, between us and The Curators of the University of Missouri | |
4.5(4)
|
Form of Common Stock Purchase Warrant | |
4.6(3)
|
Rights Agreement, dated as of November 12, 2004, between us and American Stock Transfer & Trust Company, which includes the form of Certificate of Designations of the Series A Junior Participating Preferred Stock of Santarus, Inc. as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C | |
4.7(5)
|
First Amendment to Rights Agreement, dated as of April 19, 2006, between us and American Stock Transfer & Trust Company | |
4.8(6)
|
Second Amendment to Rights Agreement, dated December 10, 2008, between us and American Stock Transfer & Trust Company | |
4.9(7)
|
Warrant to Purchase Shares of Common Stock, dated February 3, 2006, issued by us to Kingsbridge Capital Limited | |
4.10(7)
|
Registration Rights Agreement, dated February 3, 2006, between us and Kingsbridge Capital Limited | |
4.11(8)
|
Registration Rights Agreement, dated December 10, 2008, between us and Cosmo Technologies Limited | |
4.12(8)
|
Amendment No. 1 to Registration Rights Agreement, dated April 23, 2009, between us and Cosmo Technologies Limited | |
10.1+
|
Amendment No. 1 to OTC License Agreement, dated July 24, 2009, between us and Schering-Plough Healthcare Products, Inc. | |
10.2+
|
License Agreement, dated October 9, 2009, between us and Norgine B.V. | |
31.1
|
Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934 | |
31.2
|
Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934 |
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Exhibit | ||
Number | Description | |
32
|
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(1) | Incorporated by reference to the Quarterly Report on Form 10-Q of Santarus, Inc. for the quarter ended March 31, 2004, filed with the Securities and Exchange Commission on May 13, 2004. | |
(2) | Incorporated by reference to the Current Report on Form 8-K of Santarus, Inc., filed with the Securities and Exchange Commission on December 5, 2008. | |
(3) | Incorporated by reference to the Current Report on Form 8-K of Santarus, Inc., filed with the Securities and Exchange Commission on November 17, 2004. | |
(4) | Incorporated by reference to the Registration Statement on Form S-1 of Santarus, Inc. (Registration No. 333-111515), filed with the Securities and Exchange Commission on December 23, 2003, as amended. | |
(5) | Incorporated by reference to the Current Report on Form 8-K of Santarus, Inc., filed with the Securities and Exchange Commission on April 21, 2006. | |
(6) | Incorporated by reference to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 15, 2008. | |
(7) | Incorporated by reference to the Current Report on Form 8-K of Santarus, Inc., filed with the Securities and Exchange Commission on February 3, 2006. | |
(8) | Incorporated by reference to the Registration Statement on Form S-3 of Santarus, Inc. (Registration No. 333-156806), filed with the Securities and Exchange Commission on January 20, 2009, as amended. | |
* | Santarus, Inc. has been granted confidential treatment with respect to certain portions of this exhibit (indicated by asterisks), which portions have been omitted and filed separately with the Securities and Exchange Commission. | |
+ | Application has been made to the Securities and Exchange Commission to seek confidential treatment of certain provisions. Omitted material for which confidential treatment has been requested has been filed separately with the Securities and Exchange Commission. | |
| These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of Santarus, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: November 4, 2009
/s/ Debra P. Crawford | ||||
Debra P. Crawford, | ||||
Senior Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) |
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