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EX-31 - EX-31 - PENWEST PHARMACEUTICALS CO | b77461exv31.htm |
EX-32 - EX-32 - PENWEST PHARMACEUTICALS CO | b77461exv32.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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 001-34267
PENWEST PHARMACEUTICALS CO.
(Exact name of registrant as specified in its charter)
Washington | 91-1513032 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
39 Old Ridgebury Road | ||
Suite 11 | ||
Danbury, Connecticut | 06810-5120 | |
(Address of Principal Executive Offices) | (Zip Code) |
(877) 736-9378
(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 at least the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock
as of November 3, 2009.
Class | Outstanding | |
Common Stock, par value $.001 | 31,762,831 |
PENWEST PHARMACEUTICALS CO.
TABLE OF CONTENTS
TABLE OF CONTENTS
Page | ||||||||
PART I FINANCIAL INFORMATION |
||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
21 | ||||||||
35 | ||||||||
36 | ||||||||
PART II OTHER INFORMATION |
||||||||
36 | ||||||||
39 | ||||||||
51 | ||||||||
52 | ||||||||
53 | ||||||||
EX-31 | ||||||||
EX-32 |
TIMERx®, Geminex® and SyncroDose® are our registered trademarks. GastroDose is also our
trademark. Other tradenames and trademarks appearing in this quarterly report, including Endo
Pharmaceuticals Inc.s Opana® trademark, are the property of their respective owners.
Forward-looking Statements
This quarterly report contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. All statements,
other than statements of historical facts, included or incorporated in this report regarding our
strategy, future operations, financial position, future revenues, projected costs, prospects, plans
and objectives are forward-looking statements. The words believes, anticipates, estimates,
plans, expects, intends, may, projects, will, could, should, targets, would and
similar expressions are intended to identify forward-looking statements, although not all
forward-looking statements contain these identifying words. We cannot guarantee that we actually
will achieve the plans, intentions or expectations disclosed in our forward-looking statements and
you should not place undue reliance on our forward-looking statements. There are a number of
important factors that could cause our actual results to differ materially from those indicated or
implied by forward-looking statements. These important factors include those set forth below under
Part II Item 1A, Risk Factors. In light of these risks, uncertainties, assumptions and
factors, the forward-looking events discussed herein may not occur, and our actual performance and
results may vary from those anticipated or otherwise suggested by such statements. You are
cautioned not to place undue reliance on these forward-looking statements. Any forward-looking
statements represent our estimates only as of the date this quarterly report is filed with the
Securities and Exchange Commission (SEC) and should not be relied upon as representing our
estimates as of any subsequent date. We do not assume any obligation to update any forward-looking
statements and readers should not rely on those forward-looking statements as representing our
views as of any date subsequent to the date of this quarterly report.
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. | Condensed Financial Statements (Unaudited) |
PENWEST PHARMACEUTICALS CO.
CONDENSED BALANCE SHEETS
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(Unaudited) | (Note 2) | |||||||
(In thousands, | ||||||||
except share amounts) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 10,802 | $ | 16,692 | ||||
Marketable securities |
719 | | ||||||
Trade accounts receivable |
5,730 | 4,894 | ||||||
Inventories finished goods |
168 | 440 | ||||||
Prepaid expenses and other current assets |
1,615 | 1,365 | ||||||
Total current assets |
19,034 | 23,391 | ||||||
Fixed assets, net |
1,692 | 2,177 | ||||||
Patents, net |
1,086 | 1,819 | ||||||
Deferred charges |
1,792 | 2,244 | ||||||
Other assets, net |
2,325 | 2,223 | ||||||
Total assets |
$ | 25,929 | $ | 31,854 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 709 | $ | 745 | ||||
Accrued expenses |
2,143 | 1,695 | ||||||
Accrued development costs |
426 | 385 | ||||||
Loan payable current portion |
5,483 | 5,483 | ||||||
Deferred compensation current portion |
294 | 291 | ||||||
Total current liabilities |
9,055 | 8,599 | ||||||
Loan payable |
| 4,112 | ||||||
Accrued financing fees |
| 360 | ||||||
Deferred revenue |
925 | 473 | ||||||
Deferred compensation |
2,251 | 2,384 | ||||||
Total liabilities |
12,231 | 15,928 | ||||||
Shareholders equity: |
||||||||
Preferred stock, par value $.001, authorized
1,000,000 shares, none outstanding |
| | ||||||
Common stock, par value $.001, authorized
60,000,000 shares, issued and outstanding
31,759,545 shares at September 30, 2009 and
31,697,250 shares at December 31, 2008 |
32 | 32 | ||||||
Additional paid in capital |
249,753 | 249,262 | ||||||
Accumulated deficit |
(236,344 | ) | (233,627 | ) | ||||
Accumulated other comprehensive income |
257 | 259 | ||||||
Total shareholders equity |
13,698 | 15,926 | ||||||
Total liabilities and shareholders equity |
$ | 25,929 | $ | 31,854 | ||||
See accompanying notes to condensed financial statements
3
Table of Contents
PENWEST PHARMACEUTICALS CO.
CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Unaudited) | ||||||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Revenues: |
||||||||||||||||
Royalties |
$ | 5,286 | $ | 1,039 | $ | 14,859 | $ | 1,998 | ||||||||
Product sales |
134 | 52 | 472 | 581 | ||||||||||||
Collaborative licensing and development revenue |
874 | 270 | 1,492 | 837 | ||||||||||||
Total revenues |
6,294 | 1,361 | 16,823 | 3,416 | ||||||||||||
Operating expenses: |
||||||||||||||||
Cost of revenues |
708 | 322 | 1,830 | 999 | ||||||||||||
Selling, general and administrative |
1,758 | 2,247 | 7,362 | 9,642 | ||||||||||||
Research and product development |
3,256 | 5,888 | 9,687 | 16,797 | ||||||||||||
Total operating expenses |
5,722 | 8,457 | 18,879 | 27,438 | ||||||||||||
Income (loss) from operations |
572 | (7,096 | ) | (2,056 | ) | (24,022 | ) | |||||||||
Investment income |
3 | 127 | 14 | 506 | ||||||||||||
Interest expense |
(192 | ) | (308 | ) | (675 | ) | (986 | ) | ||||||||
Income (loss) before income tax expense |
383 | (7,277 | ) | (2,717 | ) | (24,502 | ) | |||||||||
Income tax expense |
| | | | ||||||||||||
Net income (loss) |
$ | 383 | $ | (7,277 | ) | $ | (2,717 | ) | $ | (24,502 | ) | |||||
Net income (loss) per common share: |
||||||||||||||||
Basic |
$ | 0.01 | $ | (0.23 | ) | $ | (0.09 | ) | $ | (0.83 | ) | |||||
Diluted |
$ | 0.01 | $ | (0.23 | ) | $ | (0.09 | ) | $ | (0.83 | ) | |||||
Weighted average shares of common stock outstanding: |
||||||||||||||||
Basic |
31,760 | 31,521 | 31,652 | 29,381 | ||||||||||||
Diluted |
31,805 | 31,521 | 31,652 | 29,381 | ||||||||||||
See accompanying notes to condensed financial statements
4
Table of Contents
PENWEST PHARMACEUTICALS CO.
CONDENSED STATEMENTS OF CASH FLOWS
Nine months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
(Unaudited) | ||||||||
(In thousands) | ||||||||
Operating activities: |
||||||||
Net loss |
$ | (2,717 | ) | $ | (24,502 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities |
1,445 | 4,143 | ||||||
Net cash used in operating activities |
(1,272 | ) | (20,359 | ) | ||||
Investing activities: |
||||||||
Acquisitions of fixed assets |
(32 | ) | (37 | ) | ||||
Patent costs |
(34 | ) | (267 | ) | ||||
Proceeds from sale of fixed assets |
20 | 286 | ||||||
Reimbursements of patent costs by collaborator |
229 | | ||||||
Proceeds from maturities of marketable securities |
500 | 14,457 | ||||||
Purchases of marketable securities |
(1,219 | ) | (7,859 | ) | ||||
Loan disbursed to collaborator |
| (1,000 | ) | |||||
Net cash (used in) provided by investing activities |
(536 | ) | 5,580 | |||||
Financing activities: |
||||||||
Repayment of debt |
(4,112 | ) | (1,804 | ) | ||||
Issuance of common stock, net |
30 | 23,187 | ||||||
Net cash (used in) provided by financing activities |
(4,082 | ) | 21,383 | |||||
Net (decrease) increase in cash and cash equivalents |
(5,890 | ) | 6,604 | |||||
Cash and cash equivalents at beginning of period |
16,692 | 15,680 | ||||||
Cash and cash equivalents at end of period |
$ | 10,802 | $ | 22,284 | ||||
See accompanying notes to condensed financial statements
5
Table of Contents
PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Unaudited)
1. Business
Penwest Pharmaceuticals Co. (Penwest or the Company) is a drug development company focused
on identifying and developing products that address unmet medical needs, primarily for rare
disorders of the nervous system. The Company is currently developing A0001, or alpha tocopherol
quinone, a coenzyme Q analog drug candidate that it licensed from Edison Pharmaceuticals, Inc.
(Edison) for inherited mitochondrial respiratory chain diseases. The Company is also applying
its drug delivery technologies and drug formulation expertise to the formulation of product
candidates under licensing collaborations (drug delivery technology collaborations).
Opana® ER is an extended release formulation of oxymorphone hydrochloride that the
Company developed with Endo Pharmaceuticals Inc. (Endo) using the Companys proprietary
TIMERx® drug delivery technology. Opana ER was approved by the United States Food and
Drug Administration (FDA) in June 2006 for twice-a-day dosing in patients with moderate to severe
pain requiring continuous, around-the-clock opioid therapy for an extended period of time and is
being marketed by Endo in the United States. In the nine months ended September 30, 2009, the
Company recognized $13.7 million in royalties from Endo related to sales of Opana ER.
The Company is currently developing A0001 under a collaboration and license agreement with
Edison that the Company entered into in July 2007 (as amended, the Edison Agreement). Under the
Edison Agreement, the Company has agreed to collaborate with Edison on the development of A0001 and
up to one additional drug candidate of Edisons. In June 2009, the Company completed a Phase Ib
multiple ascending dose safety study of A0001 in healthy subjects. In the Phase Ib trial, the drug
was well tolerated by subjects and no serious adverse events were reported. In addition, the
Company observed a dose-dependent increase in exposure following repeat dosing, and was able to
establish a maximum tolerated dose. Based on these results, the Company plans to advance A0001
into Phase IIa studies in patients with mitochondrial diseases in the fourth quarter of 2009. The
Company intends to commence two Phase IIa trials of A0001 one trial focused on patients with
Friedreichs Ataxia and another trial focused on patients with the A3243G mitochondrial DNA point
mutation associated with MELAS syndrome. The goal of these trials will be to determine if A0001 has
biological activity in those indications. The Company expects data from both of these trials by the
third quarter of 2010. In September 2009, the Company exercised its option under the Edison
Agreement to acquire the right to a second drug candidate from Edison. The Company does not plan
to commence any additional development work on this compound until after it reviews the results of the Phase IIa studies of A0001.
The Company is a party to a number of collaborations involving the use of its extended release
drug delivery technologies as well as its formulation development expertise. Under these
collaborations, the Company is responsible for completing the formulation work on a product
specified by its collaborator. If the Company is successful, the formulation is transferred to its
collaborator, who is responsible for the completion of the clinical development, and ultimately the
commercialization of the product. Under the terms of these agreements, the Company generally
receives upfront fees, reimbursement of research and development costs incurred, up to amounts
specified in each agreement, and potential milestone payments upon the achievement of specified
events. These agreements also provide for the Company to receive payments from the sale of bulk
TIMERx material and royalties on product sales upon commercialization of the product.
2. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance
with U.S. generally accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by U.S. generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments considered necessary
for a fair presentation for the interim periods presented have been included. All such adjustments
are of a normal recurring nature, except for the following: a non-cash credit recorded in the three
month period ended September 30, 2009 in the amount of $347,000 relating to the cash surrender
value of insurance policies held by the Company (see Note 12); a charge recorded in the three month
period ended March 31, 2009 in the amount of $550,000 for severance costs associated with staff
reductions implemented in January 2009 (see Note 10); a non-cash credit recorded in the three month
period ended March 31, 2009 in the amount of $885,000 associated with the forfeiture of stock options held by the Companys former
employees (see Note 10);
6
Table of Contents
PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
and a charge recorded in the three month period ended March 31, 2008 in
the amount of $1.0 million to establish a reserve against a loan receivable from Edison (see Note
14). In addition, in connection with the Companys proxy contest associated with the Companys
2009 annual meeting of shareholders and the related litigation (see Note 15), the Company incurred
costs approximating $1.3 million during the six month period ended June 30, 2009. Operating
results for the three and nine month periods ended September 30, 2009 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2009. For further
information, refer to the financial statements and footnotes thereto included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2008.
The balance sheet at December 31, 2008 has been derived from the audited financial statements
at that date but does not include all of the information and footnotes required by U.S. generally
accepted accounting principles for complete financial statements.
Certain prior year amounts have been reclassified herein to conform to the current year
presentation. These reclassifications had no impact on the Companys financial position or results
of operations.
During the three and nine month periods ended September 30, 2009, there were no significant
changes in the Companys significant accounting policies as disclosed in our Annual Report on Form
10-K for the year ended December 31, 2008.
The Company has evaluated all subsequent events through November 9, 2009, which represents the
filing date of this Form 10-Q with the SEC, to ensure that this Form 10-Q includes appropriate
disclosure of events both recognized in the financial statements as of September 30, 2009, and
events which occurred subsequent to September 30, 2009 but were not recognized in the financial
statements.
3. Per Share Data
Income (Loss) Per Share
This table shows the computation of basic and diluted income (loss) per share (in thousands, except
per share data):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Numerator: |
||||||||||||||||
Net income (loss) |
$ | 383 | $ | (7,277 | ) | $ | (2,717 | ) | $ | (24,502 | ) | |||||
Denominator: |
||||||||||||||||
Denominator for basic income (loss) per
share weighted average shares |
31,760 | 31,521 | 31,652 | 29,381 | ||||||||||||
Dilutive effect of employee stock options |
45 | | | | ||||||||||||
Denominator for diluted income (loss) per
common share weighted average shares |
31,805 | 31,521 | 31,652 | 29,381 | ||||||||||||
Income (loss) per share-basic |
$ | 0.01 | $ | (0.23 | ) | $ | (0.09 | ) | $ | (0.83 | ) | |||||
Income (loss) per share-diluted |
$ | 0.01 | $ | (0.23 | ) | $ | (0.09 | ) | $ | (0.83 | ) | |||||
The following are the potential shares of common stock which were excluded from the
calculation of weighted-average shares outstanding because their effect was determined to be
anti-dilutive:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in thousands of shares) | ||||||||||||||||
Stock options outstanding |
2,210 | 2,683 | 2,656 | 2,607 | ||||||||||||
Restricted stock outstanding (unvested) |
| 134 | 86 | 144 | ||||||||||||
Warrants to purchase common stock |
4,070 | 4,070 | 4,070 | 3,026 | ||||||||||||
6,280 | 6,887 | 6,812 | 5,777 | |||||||||||||
7
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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
4. Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update 2009-01, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles a replacement of FASB Statement No. 162 (ASU 2009-01). The FASB
Accounting Standards Codification (the Codification) is intended to be the source of authoritative U.S. generally
accepted accounting principles (GAAP) and reporting standards as issued by the FASB. Its primary
purpose is to improve clarity and use of existing standards by grouping authoritative literature
under common topics. This statement is effective for financial statements issued for interim and
annual periods ending after September 15, 2009. The Codification does not change or alter existing
GAAP for public companies and there was no impact on the Companys results of operations, financial
position or cash flows. The Company conformed its financial statement
footnote disclosures to the Codification for the three and nine month periods ended September 30, 2009.
In August 2009, the FASB issued Accounting Standards Update 2009-05, Fair Value Measurements
and Disclosures (ASU 2009-05). The purpose of this update is to clarify that in circumstances in
which a quoted price in an active market for the identical liability is not available, a reporting
entity is required to measure fair value using a valuation technique that uses either the quoted
price of the identical liability when traded as an asset or the quoted prices for similar
liabilities or similar liabilities when traded as assets. This guidance is effective upon issuance.
The Companys adoption of ASU 2009-05 as of September 30, 2009 did not have a material effect on
its results of operations, financial position or cash flows.
In October 2009, the FASB issued Accounting Standards Update No. 2009-13,
Multiple-Deliverable Revenue Arrangements (ASU 2009-13). ASU 2009-13, amends existing revenue
recognition accounting pronouncements that are currently within the scope of FASB Accounting
Standards Codification, or ASC, Subtopic 605-25. This statement provides principles for allocation
of consideration among its multiple-elements, allowing more flexibility in identifying and
accounting for separate deliverables under an arrangement. ASU 2009-13 introduces an estimated
selling price method for valuing the elements of a bundled arrangement if vendor-specific objective
evidence or third-party evidence of selling price is not available, and significantly expands
related disclosure requirements. This standard is effective on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or after June 15,
2010. Alternatively, adoption may be on a retrospective basis, and early application is permitted.
The Company is currently evaluating the impact of adopting this pronouncement.
Other pronouncements issued by the FASB or other authoritative accounting standards groups
with future effective dates are either not applicable or not significant to the financial
statements of the Company.
5. Fair Value Measurement
Financial assets and financial liabilities are required to be measured and reported on a fair
value basis using the following three categories for classification and disclosure purposes:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. | |||
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data. | |||
Level 3: Unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. |
In determining fair value, the Company utilizes valuation techniques that maximize the use of
observable inputs and minimize the use of unobservable inputs to the extent possible. The Company
also considers counterparty credit risk in its assessment of fair value.
8
Table of Contents
PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
Financial assets and liabilities measured at fair value on a recurring basis as of September 30,
2009 are classified in the table below in one of the three categories described above:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(Unaudited) (In thousands) | ||||||||||||||||
Cash and cash equivalents |
$ | 10,802 | $ | | $ | | $ | 10,802 | ||||||||
Marketable securities |
| 719 | | 719 | ||||||||||||
Total |
$ | 10,802 | $ | 719 | $ | | $ | 11,521 | ||||||||
Marketable securities represent certificates of deposit held with several banking institutions.
Their original maturities are greater than three months but do not exceed one year. At September
30, 2009, the Company did not have any certificates of deposit in amounts which were in excess of
the FDIC insurance limit.
6. Other Assets
Other assets are comprised of the following:
September 30, | December 31, | |||||||||
2009 | 2008 | |||||||||
(Unaudited) (In thousands) | ||||||||||
Assets held in a trust for the Companys
Supplemental Executive Retirement Plan and
Deferred Compensation Plan (see Note 12): |
||||||||||
Cash surrender value of life insurance policies |
$ | 2,285 | $ | 1,924 | ||||||
Money market account |
40 | 299 | ||||||||
2,325 | 2,223 | |||||||||
Loan receivable from collaborator (see Note 14) |
1,000 | 1,000 | ||||||||
3,325 | 3,223 | |||||||||
Allowance for loan receivable from collaborator |
(1,000 | ) | (1,000 | ) | ||||||
Other assets, net |
$ | 2,325 | $ | 2,223 | ||||||
7. Loan Payable
Credit Facility
On March 13, 2007, the Company entered into a $24.0 million senior secured credit facility
(the Credit Facility) with Merrill Lynch Capital, a division of Merrill Lynch Business Financial
Services Inc., which was acquired by GE Capital in February 2008, and is now known as GE Business
Financial Services Inc. The Credit Facility consists of: (i) a $12.0 million term loan advanced
upon the closing of the Credit Facility and (ii) a $12.0 million term loan that the Company had the
right to access until September 15, 2008, subject to conditions specified in the credit agreement.
The Company did not access the second $12.0 million term loan prior to September 15, 2008, at which
time it expired in accordance with the terms of the agreement.
In connection with the Credit Facility, the Company granted the lender a perfected first
priority security interest in all existing and after-acquired assets of the Company, excluding: (i)
its intellectual property, which is subject to a negative pledge to GE Business Financial
Securities Inc.; (ii) royalty payments from Mylan Pharmaceuticals Inc. (Mylan) on its sales of
Pfizer Inc.s (Pfizer) generic version of Procardia XL 30 mg, if the Company pledges such royalty
payments to another lender; (iii) up to $3.0 million of equipment which the Company may, at its
election, pledge to another lender in connection with an equipment financing facility separate from
the Credit Facility; and (iv) the assets of the Companys trust described in Note 12. In addition,
the Company is precluded from paying cash dividends to its shareholders during the term of the
Credit Facility. The outstanding term loan has a term of 42 months from the date of advance of
March 13, 2007. Interest-only payments were due for the first nine months; interest plus monthly
principal payments equal to 1.67% of the loan amount were due for the period from the end of the
interest-only period through December 2008; and interest plus straight-line amortization payments
with respect to the remaining principal balance are due for the remainder of the term, through
its maturity date in September 2010.
9
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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
The interest rate of the outstanding term loan is fixed at 10.32%. At the time of the final
payment of the loan under the Credit Facility, the Company will pay an exit fee of 3.0% of the
original principal loan amount. Should any prepayment occur, the Company would be required to pay
a prepayment penalty of 1.0% of any prepaid amount.
As of September 30, 2009, all payments of the outstanding principal of $5.5 million under the
term loan are due in less than one year.
The Company accrued an exit fee as noted above of $360,000 in connection with the $12.0
million term loan advanced upon the closing of the Credit Facility. These costs, as well as other
debt issuance costs incurred by the Company in securing the Credit Facility, were deferred and are
included in the Companys condensed balance sheets as prepaid expenses and other current assets as
of September 30, 2009 and are included in deferred charges as of December 31, 2008. These costs
are being amortized over the term of the loan with such amortization included in interest expense
in the Companys condensed statements of operations.
8. Shareholders Equity
On September 26, 2008, the Company filed a registration statement on Form S-3 with the SEC, which
became effective on October 30, 2008. This shelf registration statement covers the issuance and
sale by the Company of any combination of common stock, preferred stock, debt securities and
warrants having an aggregate purchase price of up to $75 million. The shelf registration statement
is a replacement of the registration statement filed in July 2005 that was to expire in December
2008. As of November 9, 2009, no securities have been issued under the registration statement.
Private Placement
On March 11, 2008, the Company sold units representing an aggregate of 8,140,600 shares of its
Common Stock, together with warrants to purchase an aggregate of 4,070,301 shares of its Common
Stock, in a private placement, for a total purchase price of approximately $25.1 million. The
Company received net proceeds of approximately $23.1 million from this private placement, after
deducting the placement agents fees and other expenses.
The warrants are exercisable on or prior to March 11, 2013 at an exercise price of $3.62 per
share. The warrants may also be exercised under certain circumstances pursuant to cashless exercise
provisions. As of November 9, 2009, no warrants have been exercised.
Pursuant to the securities purchase agreement entered into in connection with the private
placement, the Company filed a registration statement with the SEC on April 10, 2008, registering
for resale the shares and shares issuable under the warrants. The registration statement was
declared effective by the SEC on April 28, 2008. The Company has agreed to use its reasonable best
efforts to maintain the registration statements effectiveness until the earlier of (i) the
twelve-month anniversary of the last date on which warrant shares are issued upon exercise of
warrants and (ii) the date all of the shares and warrant shares have been resold by the original
purchasers.
Share-Based Compensation
The Company recognized share-based compensation in its statements of operations as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Unaudited) (In thousands) | ||||||||||||||||
Selling, general and administrative |
$ | 304 | $ | 524 | $ | 2 | $ | 1,731 | ||||||||
Research and product development |
143 | 205 | 458 | 655 | ||||||||||||
Total |
$ | 447 | $ | 729 | $ | 460 | $ | 2,386 | ||||||||
The decrease in total share-based compensation expense in the three month period ended
September 30, 2009, compared with the three month period ended September 30, 2008, is primarily
attributable to lower average fair values associated with outstanding stock options and restricted
stock in the 2009 three month period, as a result of
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NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
decreases in the market price of the Companys common stock, and a reduction in the number of outstanding stock options in the 2009 three month
period, as a result of the forfeiture of employee stock options in the first quarter of 2009, due
to the January 2009 staff reductions (see Note 10).
The decrease in total share-based compensation expense in the nine month period ended
September 30, 2009, compared with the nine month period ended September 30, 2008, is primarily
attributable to credits of approximately $885,000 recorded in the first quarter of 2009 associated
with the forfeiture of employee stock options due to of the January 2009 staff reductions (see Note
10). Such forfeitures also resulted in decreased expense in the 2009 nine month period due to the
reduction in the number of outstanding stock options in such period. The decrease was also
partially attributable to lower average fair values associated with outstanding stock options and
restricted stock in the 2009 nine month period, primarily as a result of decreases in the market
price of the Companys common stock.
9. Cost of Revenues
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Unaudited) (In thousands) | ||||||||||||||||
Cost of royalties |
$ | 102 | $ | 47 | $ | 309 | $ | 112 | ||||||||
Cost of product sales |
136 | 42 | 461 | 223 | ||||||||||||
Cost of collaborative licensing and development revenue |
470 | 233 | 1,060 | 664 | ||||||||||||
Total cost of revenues |
$ | 708 | $ | 322 | $ | 1,830 | $ | 999 | ||||||||
Cost of royalties consists of the amortization of deferred royalty termination costs and the
amortization of certain patent costs associated with the Companys TIMERx technology. Cost of
product sales consists of the costs related to sales of formulated TIMERx material to the Companys
collaborators. Cost of collaborative licensing and development revenues consists of the Companys
expenses under its drug delivery technology collaboration agreements involving the development of
product candidates using the Companys TIMERx technology, and includes internal costs and outside
contract services.
10. Staff Reductions
In January 2009, the Company implemented staff reductions of approximately 18% of its
workforce as part of its efforts to aggressively manage its overhead cost structure. The terms of
the severance arrangements include severance pay and continuation of certain benefits, including
medical insurance, over the respective severance periods. In connection with these staff
reductions, the Company recorded a severance charge in its statement of operations for the three
month period ended March 31, 2009 in the amount of $550,000, of which $21,000 was unpaid as of
September 30, 2009 but will be paid over the remainder of 2009. Of such severance charge,
$464,000 was recorded as selling, general and administrative expense, and $86,000 was recorded as
research and development expense. In addition, as a result of these terminations, for the three
month period ended March 31, 2009, the Company recorded a non-cash credit of approximately $885,000
associated with the forfeiture of stock options held by these former employees. Of such amount,
$844,000 was recorded as a credit to selling, general and administrative expense, and $41,000 was
recorded as a credit to research and development expense. Also see Note 16 for additional staff
reductions announced in November 2009.
11. Income Taxes
The Companys effective tax rates for the three and nine month periods ended September 30,
2009 and 2008 were zero. The effective tax rates differ from the federal statutory rate of a 34%
benefit primarily due to valuation allowances recorded to offset deferred tax assets relating to
the Companys net operating losses.
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NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
12. Supplemental Executive Retirement Plan and Deferred Compensation Plan
The Company has a Supplemental Executive Retirement Plan (the SERP), a nonqualified plan,
which covers the former Chairman and Chief Executive Officer of the Company, Tod R. Hamachek.
Under the SERP, the Company is obligated to pay Mr. Hamachek approximately $12,600 per month over
the lives of Mr. Hamachek and his spouse. The actuarially determined liability for the SERP was
approximately $1,952,000 and $1,975,000 as of September 30, 2009 and December 31, 2008,
respectively, including the current portion of approximately $147,000 at September 30, 2009, and is
included in deferred compensation in the Companys condensed balance sheets. The Company has not
funded this liability and no assets are held by the SERP. The Company uses a measurement date of
December 31 for its SERP. The following disclosures summarize information relating to the SERP:
Components of net periodic benefit cost:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Unaudited) (In thousands) | ||||||||||||||||
Interest cost |
$ | 30 | $ | 30 | $ | 90 | $ | 89 | ||||||||
Amortization of prior service cost |
| | (1 | ) | 1 | |||||||||||
Net periodic benefit cost |
$ | 30 | $ | 30 | $ | 89 | $ | 90 | ||||||||
In addition, the Company has a Deferred Compensation Plan (the DCP), a nonqualified plan
which covers Mr. Hamachek. Under the DCP, the Company recognized interest expense of $11,000 and
$14,000 for the three month periods ended September 30, 2009 and 2008, respectively and $39,000 and
$43,000 for the nine month periods ended September 30, 2009 and 2008, respectively. The liability
for the DCP was approximately $593,000 and $700,000 as of September 30, 2009 and December 31, 2008,
respectively, including the current portion of approximately $147,000 at September 30, 2009, and is
included in deferred compensation on the Companys condensed balance sheets. The Company has not
funded this liability and no assets are held by the DCP. In connection with the resignation and
retirement of Mr. Hamachek, under the DCP, effective in May 2005, the Company commenced the payment
of benefits to Mr. Hamachek, which are to be paid in ten annual installments, each approximating
$140,000; however, these installments are recalculated annually based on market interest rates, as
provided for under the terms of the DCP.
The Company has two whole-life insurance policies held in a rabbi trust (the Trust), the
cash surrender value or death benefits of which are held in trust for the SERP and DCP liabilities.
Mr. Hamacheks SERP and DCP benefit payments are being made directly from the assets in the Trust.
In the three month period ended September 30, 2009, the Company recorded a non-cash credit it
received from its insurance policy issuer to selling, general and administrative expense in the
amount of $347,000 relating to the cash surrender value of these policies as a result of having
held the policies for 20 years. The cash surrender value of these life insurance policies totaled
$2,285,000 as of September 30, 2009 and $1,924,000 as of December 31, 2008. Trust assets,
including $40,000 and $299,000 held in a money market account at September 30, 2009 and December
31, 2008, respectively, are included in other assets in the Companys condensed balance sheets.
13. Comprehensive Income (Loss)
Accumulated other comprehensive income consists of the following:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(Unaudited) (In thousands) | ||||||||
Adjustment for funded status of post retirement plan |
$ | 257 | $ | 259 | ||||
The components of comprehensive income/(loss) are as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Unaudited) (In thousands) | ||||||||||||||||
Net income (loss) |
$ | 383 | $ | (7,277 | ) | $ | (2,717 | ) | $ | (24,502 | ) | |||||
Changes in unrealized net gains and losses on marketable securities |
| (3 | ) | | (6 | ) | ||||||||||
Adjustment for funded status of post retirement plan |
(1 | ) | | (2 | ) | 1 | ||||||||||
Comprehensive income (loss) |
$ | 382 | $ | (7,280 | ) | $ | (2,719 | ) | $ | (24,507 | ) | |||||
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NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
14. Collaborative and Licensing Agreements
The Company enters into collaborative and licensing agreements with pharmaceutical companies
to in-license, develop, manufacture and/or market products that fit within its business strategy or
to perform research and development for collaborators utilizing the Companys drug delivery
technology and formulation expertise.
Endo Pharmaceuticals Inc.
In September 1997, the Company entered into a strategic alliance agreement with Endo with
respect to the development of Opana ER, an extended release formulation of oxymorphone
hydrochloride using the Companys TIMERx technology. This agreement was amended and restated in
April 2002, and was further amended in January 2007, July 2008 and March 2009, as described below.
Under the agreement, the Company agreed to supply bulk TIMERx material to Endo, the selling
price of which is contractually determined and may be adjusted annually, and Endo agreed to
manufacture and market Opana ER in the United States. The Company also agreed with Endo that any
development and commercialization of Opana ER outside the United States would be accomplished
through licensing to third parties approved by both Endo and the Company, and that the Company and
Endo would divide equally any fees, royalties, payments or other revenue received by the parties in
connection with such licensing activities.
Under the terms of the agreement:
| Endo has agreed to pay the Company royalties on U.S. sales of Opana ER calculated based on a royalty rate starting at 22% of annual net sales of the product up to $150 million of annual net sales, with the royalty rate then increasing, based on agreed-upon levels of annual net sales achieved, from 25% up to a maximum of 30%. | ||
| No royalty payments were due to the Company for the first $41 million of royalties that would otherwise have been payable beginning from the time of the product launch in July 2006 (the Royalty Holiday). In the third quarter of 2008, the Royalty Holiday ended. The Company recognized royalties from Endo related to sales of Opana ER in the amount of $13.7 million for the nine month period ended September 30, 2009. | ||
| The Companys share of the development costs for Opana ER that it opted out of funding in April 2003 totaled $28 million and will be recouped by Endo through a temporary 50% reduction in royalties. Commencing in the third quarter of 2008, the Company began to receive reduced royalty payments from Endo, with such temporary reductions to continue until the $28 million is fully recouped. As of September 30, 2009, $9.3 million of the $28 million remains to be recouped by Endo. | ||
| Endo will pay the Company a percentage of any sublicense income it receives and milestone payments of up to $90 million based upon the achievement of agreed-upon annual net sales thresholds. |
The Company and Endo entered into a Second Amendment to the Amended and Restated Strategic
Alliance Agreement with respect to Opana ER, effective July 14, 2008 (the Second Amendment).
Under the terms of the Second Amendment, Endo agreed to directly reimburse the Company for costs
and expenses incurred by the Company in connection with patent enforcement litigation costs related
to Opana ER. If any of such costs and expenses are not reimbursed to the Company by Endo, the
Company may bill Endo for these costs and expenses through adjustments to the pricing of TIMERx
material that the Company supplies to Endo for use in Opana ER. In connection with the Second
Amendment, in July 2008, Endo reimbursed the Company for such costs and expenses incurred prior to
June 30, 2008, totaling approximately $470,000. The Company credited such reimbursement to
selling, general and administrative expense. Such costs incurred by the Company subsequent to June
30, 2008 were not significant and have been reimbursed to the Company by Endo.
In March 2009, the Company and Endo entered into a Third Amendment to the Amended and Restated
Strategic Alliance Agreement with respect to Opana ER, effective January 1, 2009 (the Third
Amendment). Under the
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NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
terms of the Third Amendment, Endo agreed to directly reimburse the Company
for costs and expenses incurred by the Company in connection with patent applications and patent
maintenance related to Opana ER. If any of such costs and expenses are not reimbursed to the
Company by Endo, the Company may bill Endo for these costs and expenses through adjustments to the
pricing of TIMERx material that the Company supplies to Endo for use in Opana ER. In connection
with the Third Amendment, Endo reimbursed the Company for such costs and expenses incurred prior to
December 31, 2008, which had been capitalized as patent assets, in the amount of $206,000. Such
payment, as well as reimbursement by Endo of an additional $23,000 in patent costs incurred prior
to the Third Amendment, was received by the Company in the second quarter of 2009. The Company
credited such reimbursements to its patent assets in the nine month period ended September 30,
2009. Such patent related costs and expenses incurred by the Company subsequent to the Third
Amendment have either been reimbursed or are expected to be reimbursed to the Company by Endo, with
such reimbursements recorded by the Company as offsets to its costs.
On May 7, 2009, the Company received notice from Draxis Specialty Pharmaceuticals Inc.
(Draxis), its contract manufacturer of TIMERx material, that as a result of Draxis decision to
cease manufacturing of solid dosage form products in the facility in which TIMERx is currently
manufactured, Draxis will not renew its manufacturing agreement with the Company upon the
expiration of the current term in November 2009. As a result, the Company intends to increase its
current inventory levels of TIMERx material and is working with Endo on the qualification of
another manufacturer. Draxis has agreed to honor outstanding purchase orders that the
Company has with Draxis for the Companys present requirements of TIMERx material. The Company expects that these
purchase orders will be fulfilled by approximately the end of the first quarter of 2010 and will
provide the Company with a sufficient amount of TIMERx material to satisfy its current forecasted
requirements until the Company has completed the qualification of another manufacturer.
On June 8, 2009, Endo and Valeant Pharmaceuticals (Valeant) signed an exclusive license
granting Valeant the right to develop and commercialize Opana ER in Canada, Australia and New
Zealand (the Valeant Agreement). Under the terms of the Valeant Agreement, Valeant paid Endo an
upfront fee of C$2 million, and agreed to make payments totaling up to C$1 million when certain
sales milestones are achieved in Canada, and AUS $1.1 million when certain regulatory and sales
milestones are achieved in Australia. In addition, Valeant has agreed to pay tiered royalties
ranging from 10% to 20% of annual net sales of Opana ER in each of the three countries, subject to
royalty reductions upon patent expiry or generic entry. The Valeant Agreement also includes rights
to Opana®, the immediate release formulation of oxymorphone developed by Endo. In connection with
the Valeant Agreement, the Company signed a supply agreement with Valeant, agreeing to supply bulk
TIMERx material to Valeant for its use in manufacturing Opana ER under the Valeant Agreement, the
selling price of which will approximate Penwests cost, as defined in the agreement, and may be
adjusted annually.
In connection with the Valeant Agreement and the Companys supply agreement with Valeant, on
June 8, 2009, the Company and Endo signed a consent agreement, consenting to these arrangements and
confirming the share of the payments to be made by Valeant that would be due to the Company. In
July 2009, the Company received payment from Endo in the amount of $764,000 for the Companys share
of the upfront payment received by Endo under the Valeant Agreement, which amount the Company
recorded as deferred revenue. The Company began to recognize revenue from this upfront payment in
the three month period ended September 30, 2009, and expects to recognize revenue on the remainder
of this payment ratably over the remaining estimated marketing period. The Company and Endo will
share equally in the royalties and sales milestones received from Valeant for Opana ER under the
terms of the Valeant Agreement.
Edison Pharmaceuticals, Inc.
On July 16, 2007, the Company entered into the Edison Agreement under which the Company and
Edison agreed to collaborate on the development of Edisons lead drug candidate, A0001, and up to
one additional candidate of Edisons. Under the terms of the Edison Agreement, the Company has exclusive
worldwide rights to develop and commercialize A0001 and an additional compound of Edisons, which
the Company had the option to select, for all indications, subject to the terms and conditions in
the Edison Agreement. The Company is currently developing A0001, a drug candidate that is initially
targeted for the treatment of inherited mitochondrial respiratory
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NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
chain diseases. A0001 has been granted orphan drug designation by the FDA for treatment of
inherited mitochondrial respiratory chain diseases.
As consideration for the rights granted to the Company under the Edison Agreement, the Company
paid Edison an upfront cash payment of $1.0 million upon entering into the Edison Agreement and
agreed to loan Edison up to an aggregate principal amount of $1.0 million solely to fund Edisons
research and development, with the right to draw upon such loan commitment in one or more
installments at any time prior to the earliest of July 16, 2012, the occurrence of an event of
default, a change in control of Edison or the termination of the Edison Agreement. The Company is
also required to make payments to Edison upon achievement of specified milestones set forth in the
Edison Agreement and to make royalty payments based on net sales of products containing A0001 and
any other compound as to which the Company has exercised its option.
On February 5, 2008, the Company loaned Edison $1.0 million pursuant to the loan agreement
provisions of the Edison Agreement. The loan bears interest at an annual rate of 8.14%, which rate
is fixed for the term of the loan. The loan matures on the earlier of July 16, 2012 and the
occurrence of an event of default, as defined in the Edison Agreement. All accrued and unpaid
interest is payable on the maturity date; however, interest accruing on any outstanding loan amount
after July 16, 2010 is due and payable monthly in arrears. During the first quarter of 2008, the
Company recorded an impairment charge of $1.0 million to selling, general and administrative
expense as a result of its collectability assessment of the loan to Edison. In addition, as a
result of the Companys continuing collectability assessment, the Company is not recognizing any
accrued interest income on the loan to Edison. The amount of such accrued interest income not
recognized by the Company approximated $23,000 and $67,000, respectively, for the three and nine
month periods ended September 30, 2009, and $21,000 and $54,000, respectively, for the three and
nine month periods ended September 30, 2008. Cumulatively, as of September 30, 2009, such accrued
interest not recognized by the Company approximated $143,000.
Under the Edison Agreement, the Company also agreed to pay Edison a total of $5.5 million over
the 18 months of the research period to fund Edisons discovery and research activities during the
period. The funding was made in the form of payments made in advance each quarter. As of
September 30, 2009, the Company had paid approximately $5.4 million of such amount, and no further
research and development funding is currently owed to Edison in accordance with the May 5, 2009
agreement with Edison, described below. Research and development expense associated with the
Edison collaboration, which included expenses relating to the development of A0001 and contract
research payments and milestones to Edison were approximately $1.3 and $2.3 million for the three
month periods ended September 30, 2009 and 2008, respectively, and $3.9 million and $5.9 million
for the nine month periods ended September 30, 2009 and 2008, respectively. The Company had the
option to extend the term of the research period for up to three consecutive six-month periods,
subject to the Companys funding of Edisons activities in amounts to be agreed upon, but the
Company did not exercise this option. During the research period, Edison agreed not to develop or
commercialize any compounds, by itself, or with or on behalf of any third party, for the treatment
of certain inherited mitochondrial diseases, other than under the collaboration with the Company,
or under specified circumstances. Until 60 days after the later of the presentation of a
development candidate by Edison, or the expiration of the research period, and in other specified
circumstances, including upon the selection of such development candidate by the Company, Edison
has agreed not to disclose or provide to another party, or enter into any agreement with another
party granting any options or rights to, any compound believed to have activity in the treatment of
certain inherited mitochondrial diseases . Edisons exclusivity in certain inherited mitochondrial
diseases will expire in the fourth quarter of 2009.
In the third quarter of 2009, Edison presented the Company with the additional compound and
the Company exercised its option to select this compound for all indications, subject to the terms
and conditions in the Edison Agreement. Upon the selection of this additional compound, the
Company became obligated to make a milestone payment to Edison, which it accrued and recorded in
research and product development expense in the third quarter of 2009, and paid to Edison in
October 2009.
The license for the compounds under the Edison Agreement ends, on a country-by-country and
product-by-product basis, when neither Edison nor the Company has any remaining royalty payment
obligations to the other with respect to such compound. Each partys royalty payment obligation ends upon the later of
the expiration of the last-to-expire claim of all licensed patents covering such partys product or
the expiration of the FDAs designation of such product as an orphan drug. The Edison Agreement may
be terminated by the Company with 120 days prior
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NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
written notice to Edison. The Edison Agreement may also be terminated by either party in the
event of the other partys uncured material breach or bankruptcy.
On May 5, 2009, the Company and Edison entered into an agreement under which Edison agreed
that the Company could offset $550,000, and following that, the loan amount of $1.0 million plus
accrued interest, against 50% of any future milestone and royalty payments which may be due to
Edison under the terms of the Edison Agreement. The loan amount is otherwise due and payable by
Edison according to the original loan terms under the loan agreement. In addition, the agreement
provides that the Company has no further contractual payment obligations in connection with the
research period. Following the milestone payment that the Company made to Edison in the fourth
quarter of 2009 as noted above, $300,000 remains of the $550,000 offset provided for under the May
5, 2009 agreement.
Mylan Pharmaceuticals Inc.
On March 2, 2000, Mylan announced that it had signed a supply and distribution agreement with
Pfizer to market generic versions of all three strengths (30 mg, 60 mg, 90 mg) of Pfizers generic
Procardia XL. In connection with that agreement, Mylan decided not to market Nifedipine XL, a
generic version of Procardia XL that the Company had developed in collaboration with Mylan. As a
result, Mylan entered into a letter agreement with the Company whereby Mylan agreed to pay Penwest
a royalty on all future net sales of Pfizers generic version of Procardia XL 30 mg. The royalty
percentage was comparable to the percentage called for in Penwests original agreement with Mylan
for Nifedipine XL 30 mg. Mylan has retained the marketing rights to Nifedipine XL 30 mg. Mylans
sales in the United States in 2008 of Pfizers generic version of Procardia XL 30 mg totaled
approximately $14.9 million. The term of the letter agreement continues until such time that Mylan
permanently ceases to market Pfizers generic version of Procardia XL 30 mg. In 2008, 2007 and
2006, royalties from Mylan were approximately $1.8 million, $2.6 million and $3.1 million,
respectively, or 21%, 77% and 89%, respectively, of the Companys total revenue in such years.
Royalties from Mylan were approximately $356,000 and $462,000 for the three month periods
ended September 30, 2009 and 2008, respectively, and $1.1 million and $1.4 million for the nine
month periods ended September 30, 2009 and 2008, respectively.
In October 2009, Mylan notified the Company that Mylan had informed Pfizer of Mylans intent
not to renew its supply and distribution agreement with Pfizer, which expires in March 2010. As a
result, the Company does not expect to receive royalties from Mylan on sales of Pfizers generic
version of Procardia XL 30 mg after the first half of 2010.
Drug Delivery Technology Collaborations
The Company enters into development and licensing agreements with third parties under which
the Company develops formulations of generic or third parties compounds, utilizing the Companys
TIMERx drug delivery technologies and its formulation expertise. In connection with these
agreements, the Company generally receives nonrefundable upfront payments which are recorded as
deferred revenue upon receipt and are recognized as revenue over the respective contractual
performance periods. Under these agreements, the Company may also be reimbursed for development
costs incurred up to amounts specified in each agreement. Additionally, under these agreements,
the Company may receive milestone payments upon the achievement of specified events. Finally,
these agreements may provide for the Company to receive payments from the sale of bulk TIMERx
material and royalties on product sales upon commercialization of the product. As of November 9,
2009, the Company is a party to four such drug delivery technology collaborations.
15. Contingencies
Substantial patent litigation exists in the pharmaceutical industry. Patent litigation
generally involves complex legal and factual questions, and the outcome frequently is difficult to
predict. An unfavorable outcome in any patent litigation involving the Company could cause the
Company to be liable for substantial damages, alter its products or
processes, obtain additional licenses and/or cease certain activities. Even if the outcome is
favorable to the Company, the Company could incur substantial costs in litigating such matters.
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NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
Impax ANDA Litigation
On October 3, 2007, the Company received a letter from IMPAX notifying the Company of the
filing by IMPAX of an Abbreviated New Drug Application (ANDA) containing a Paragraph IV
certification under 21 U.S.C. § 355(j) for Opana ER in four strengths, 5 mg, 10 mg, 20 mg and 40
mg. This Paragraph IV certification notice referred to the Companys patent, U.S. Patent No.
7,276,250, which covers the formulation of Opana ER and was listed in the Orange Book as of October
2, 2007. On October 4, 2007, IMPAX announced in a press release that the FDA had rescinded the
acceptance of IMPAXs ANDA filing. On November 5, 2007, the Company received a letter from IMPAX
notifying it of additional Paragraph IV certifications relating to the Companys patents, U.S.
Patent Nos. 5,622,933 and 5,958,456, which were listed in the Orange Book as of October 19, 2007.
On November 15, 2007, Endo and the Company filed a lawsuit against IMPAX in the U.S. District Court
of Delaware, or (U.S. Dist. Delaware). The lawsuit against IMPAX not only alleged infringement
of U.S. Patent Nos. 5,662,933 and 5,958,456 but also sought declaratory judgment that, among other
things, IMPAX had no legitimate basis to trigger the Hatch-Waxman ANDA patent litigation process
because the FDA, according to IMPAX, had rescinded its acceptance of IMPAXs ANDA. Endo and the
Company further asked the court to declare that the Paragraph IV certification notices that IMPAX
served on Endo and the Company are null, void and of no legal effect. On December 14, 2007, the
Company received a letter from IMPAX notifying the Company of a refiling of IMPAXs ANDA for Opana
ER which was accepted by the FDA as of November 23, 2007. The notice letter states that IMPAXs
ANDA contains Paragraph IV certifications for the three patents noted above and that the FDA had
required IMPAX to notify Endo and the Company of these certifications. In this notice, IMPAX also
stated that it would not withdraw its prior Paragraph IV certification notices because it believed
they were properly provided and because IMPAX was continuing to seek to convince the FDA to assign
an earlier filing date to its ANDA. As a result of the FDAs determination of IMPAXs ANDA filing
date and the receipt of the new Paragraph IV certification notice, on December 20, 2007, the
Company and Endo filed a notice of dismissal of the portion of its November 15, 2007 complaint
seeking declaratory judgment that, among other things, IMPAX had no basis to trigger the
Hatch-Waxman ANDA patent litigation process and that any Paragraph IV certification notices served
prior to November 23, 2007 were null, void and of no legal effect. The Company and Endo did not
dismiss the patent infringement claims because IMPAX refused to withdraw its prior Paragraph IV
certification notices. On January 25, 2008, Endo and the Company filed a lawsuit against IMPAX in
U.S. Dist. Delaware, alleging infringement of U.S. Patent Nos. 5,662,933 and 5,958,456 in response
to IMPAXs December notice. Given the FDAs acceptance of IMPAXs ANDA as of November 23, 2007,
the Company believes that it is entitled to a 30-month stay under the Hatch-Waxman Act beginning on
December 14, 2007.
On or around June 14, 2008, the Company and Endo each received a notice from IMPAX advising
the Company and Endo that IMPAX had amended its ANDA for Opana ER to include three additional
strengths, 7.5 mg, 15 mg and 30 mg. This ANDA amendment contained a Paragraph IV certification
against the Companys Orange Book listed patents, U.S. Patent Nos. 5,662,933, 5,958,456 and
7,276,250. On July 25, 2008, the Company and Endo filed a lawsuit against IMPAX in U.S. Dist.
Delaware, alleging infringement of U.S. Patent Nos. 5,662,933 and 5,958,456 in response to the
notice. The Company believes that it is entitled to a 30-month stay under the Hatch-Waxman Act
beginning on June 14, 2008 with respect to IMPAXs amended ANDA for 7.5 mg, 15 mg and 30mg.
In January 2009, the cases against IMPAX were reassigned to the U.S. District Court of New
Jersey ( U.S. Dist. NJ).
Actavis ANDA Litigation
On or around February 14, 2008, the Company received a notice from Actavis advising of the
filing by Actavis of an ANDA containing a Paragraph IV certification under 21 U.S.C. Section 355(j)
for Opana ER in four strengths, 5 mg, 10 mg, 20 mg and 40 mg. The Actavis Paragraph IV
certification notice refers to the Companys Orange Book listed patents, U.S. Patent Nos.
5,128,143, 5,662,933, 5,958,456 and 7,276,250, which cover the formulation of Opana ER. U.S.
Patent No. 5,128,143 expired in 2008 and the other patents expire in 2013, 2013 and 2023,
respectively. On March 28, 2008, Endo and the Company filed a lawsuit against Actavis in the
U.S. Dist. NJ, alleging infringement of U.S. Patent No. 5,958,456. On June 2, 2008, the Company
and Endo each received a notice from Actavis advising the Company and Endo that Actavis had amended
its ANDA for Opana ER to include two additional strengths, 7.5 mg and 15 mg. On July 2, 2008, the
Company and Endo each received a third notice from
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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
Actavis advising that Actavis had further amended its ANDA to include the 30mg strength. Each
ANDA amendment contained a Paragraph IV certification against the Companys Orange Book listed
patents, U.S. Patent Nos. 5,128,143, 5,662,933, 5,958,456 and 7,276,250. On July 11, 2008, the
Company and Endo filed a lawsuit against Actavis in the U.S. Dist. NJ alleging infringement of U.S.
Patent No. 5,958,456 based on these two additional Paragraph IV certification notices from Actavis.
The Company and Endo believe they are entitled to a 30-month stay with respect to Actavis ANDA
covering Opana ER 5 mg, 10 mg, 20 mg and 40 mg beginning February 14, 2008, with respect to
Actavis amended ANDA covering Opana ER 7.5 mg and 15 mg beginning June 2, 2008 and against its
amended ANDA covering Opana ER 30 mg beginning July 2, 2008.
On February 20, 2009, the Company and Endo settled all of the Actavis litigation. Both sides
agreed to dismiss their respective claims and counterclaims with prejudice. Under the terms of the
settlement, Actavis agreed not to challenge the validity or enforceability of the Companys four
Orange Book-listed patents. The Company and Endo agreed to grant Actavis a license under US Patent
No. 5,958,456 and a covenant not to sue for its generic formulation of Opana ER under the Companys
four Orange Book-listed patents. The license and covenant not to sue will take effect on July 15,
2011, and earlier under certain circumstances.
The settlement is subject to the review of the U.S. Federal Trade Commission and Department of
Justice.
Sandoz ANDA Litigation
On or around July 14, 2008, the Company and Endo each received a notice from Sandoz advising
the Company and Endo that Sandoz had filed with the FDA an ANDA for Opana ER in four strengths, 5
mg, 10 mg, 20 mg and 40 mg. This ANDA contained a Paragraph IV certification against our Orange
Book listed patents, U.S. Patent Nos. 5,662,933, 5,958,456 and 7,276,250. On August 22, 2008, the
Company and Endo filed a lawsuit against Sandoz in the U.S. Dist. Delaware, alleging infringement
of U.S. Patent No. 5,958,456 in response to this notice.
On or around November 20, 2008, the Company received a notice from Sandoz that it had filed an
amendment to its ANDA containing Paragraph IV certifications for the 7.5 mg, 15 mg and 30 mg dosage
strengths of oxymorphone hydrochloride extended release tablets. The notice covers Penwests U.S.
Patent Nos. 5,128,143, 7,276,250, 5,958,456 and 5,662,933. On December 30, 2008, the Company and
Endo, filed suit against Sandoz in the U.S. Dist. NJ. The lawsuit alleges infringement of an Orange
Book-listed U.S. patent that covers the Opana ® ER formulation. In response, Sandoz
filed an answer and counterclaims, asserting claims for declaratory judgment that the patents
listed in the Orange Book are invalid, not infringed and/or unenforceable. The Company cannot
predict the outcome of this litigation. The Company and Endo intend to pursue all available legal
and regulatory avenues in defense of Opana ® ER, including enforcement of the Companys
intellectual property rights and approved labeling.
In January 2009, the case against Sandoz was reassigned to the U.S. Dist. NJ.
Barr ANDA Litigation
On or around September 12, 2008, the Company and Endo each received a notice from Barr
advising the Company and Endo that Barr had filed with the FDA an ANDA for Opana ER in 40 mg
strength. On or around September 13, 2008, the Company and Endo received an additional notice that
Barrs ANDA was amended to include the strengths of 5 mg, 10 mg and 20 mg. Barrs ANDA, as amended,
contained a Paragraph IV certification against the Companys Orange Book listed patents, U.S.
Patent Nos. 5,662,933, 5,958,456 and 7,276,250. On October 20, 2008, the Company and Endo filed a
lawsuit against Barr in the U.S. Dist. Delaware, alleging infringement of U.S. Patent Nos.
5,662,933 and 5,958,456. In January 2009, the case against Barr was reassigned to the U.S. Dist.
NJ.
On or around June 2, 2009, the Company and Endo received an additional notice that Barrs ANDA
was amended to include the strengths of 7.5 mg, 15 mg and 30 mg. Barrs ANDA, as amended,
contained a Paragraph IV
certification against the Companys Orange Book listed patents, U.S. Patent Nos. 5,662,933,
5,958,456 and 7,276,250. On July 2, 2009, the Company and Endo filed a lawsuit against Barr in the
U.S. Dist. NJ, alleging infringement of U.S. Patent Nos. 5,662,933 and 5,958,456.
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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
Tang/Edelman Shareholder Claim
In March and April 2009, Tang Capital Partners, LP (Tang Capital) and Perceptive Life
Sciences Master Fund Ltd. (Perceptive), the Companys two largest shareholders, brought three
lawsuits against the Company; two in Thurston County, Washington, and one in King County,
Washington. Following the dismissal of the two Thurston County actions and the amendment of the
complaint in King County, as discussed below, one lawsuit remains pending. The lawsuits were
brought in connection with a proxy contest initiated by Tang Capital and Perceptive.
On March 12, 2009, Tang Capital and Perceptive brought suit against the Company in the
Superior Court of the State of Washington, Thurston County, (Tang Capital Partners, et al.
v. Penwest Pharmaceuticals Co., No. 09-2-00617-0), seeking declaratory and injunctive
relief to uphold their claims that their notice of nomination of directors had satisfied the
requirements set forth in the Companys bylaws and requesting that the court issue an order
preventing the Company from seeking to disallow or otherwise prevent or not recognize their
nominations, or the casting of votes in favor of their designees, on the basis that they had not
complied with the provisions of the Companys bylaws or applicable state law. On March 13, 2009,
Tang Capital and Perceptive moved for a preliminary injunction to enjoin the Company from mailing
any ballots to shareholders that contained provisions to vote for director nominees and enjoining
any shareholder vote on individuals nominated for the board of directors unless the three designees
of Tang Capital and Perceptive were permitted to be nominated and votes were permitted to be cast
in their favor, or a court resolved the merits of their declaratory judgment action described
above. On March 20, 2009, the Company confirmed in writing that Tang Capital and Perceptives
nomination notice had been timely received and that, assuming the accuracy and completeness of the
information contained in their notice, their notice in all other respects met the requirements of
the Companys bylaws in regard to notices of intention to nominate. On March 23, 2009, Tang Capital
and Perceptive withdrew their motion for injunctive relief, and on April 10, 2009, Tang Capital and
Perceptive voluntarily dismissed the suit.
On April 20, 2009, Tang Capital and Perceptive brought suit against the Company in the
Superior Court of the State of Washington, King County, (Tang Capital Partners, et al. v.
Penwest Pharmaceuticals Co.), No. 09-2-16472-0), seeking to enforce their alleged rights
under the Washington Business Corporation Act to inspect certain Company documents. The Companys
position is that certain of the requested documents are outside the scope of documents for which
the Washington Business Corporation Act permits a statutory inspection right and that certain of
the conditions to qualify for statutory inspection rights have not been satisfied.
On April 28, 2009, Tang Capital and Perceptive brought suit against the Company in the
Superior Court of the State of Washington, Thurston County, (Tang Capital Partners, et al. v.
Penwest Pharmaceuticals Co.), seeking either for the court to set the number of directors to be
elected at the 2009 annual meeting of shareholders at three rather than two, or for the court to
require the Company to waive the advance notice provisions of its bylaws to permit Tang Capital and
Perceptive to include a proposal in which the required percentage for board approval of certain
matters would be 81% or more, rather than 75% or more. On May 13, 2009, Plaintiffs dismissed this
Thurston County action, reasserting the same claims via an amended complaint in the King County
action. Plaintiffs sought preliminary injunctive relief on their claims before the 2009 annual
meeting of shareholders and the motion was denied by the court. Tang Capital and Perceptive then
filed a subsequent claim for a trial. Although these claims are still outstanding in King County,
the proposed bylaw amendment was not approved by the Companys shareholders at the 2009 annual
meeting. The trial on these claims is currently scheduled for October 4, 2010.
The Company is also a party from time to time to certain other types of claims and proceedings
in the ordinary course of business. The Company does not believe any of these matters will result,
individually or in the aggregate, in a material adverse effect upon its financial condition or
future results of operations.
16. Subsequent Events
In November 2009, the Company announced that it would be reducing its staff from 48 to 39 and
consolidating its Danbury, Connecticut headquarters into its Patterson, New York facility as of
January 1, 2010. In connection with these actions, the Company anticipates recording a
restructuring charge in the fourth quarter of 2009 of approximately $250,000, which amount is net
of a non-cash credit associated with the expected forfeiture of stock
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PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
options held by affected employees. This charge relates primarily to anticipated severance
arrangements and facility relocation costs, and will be recorded primarily to selling, general and
administrative expense.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a drug development company focused on identifying and developing products that address
unmet medical needs, primarily for rare disorders of the nervous system. We are currently
developing A0001, or alpha tocopherol quinone, a coenzyme Q analog drug candidate that we licensed
from Edison Pharmaceuticals, Inc., or Edison, for inherited mitochondrial respiratory chain
diseases. We are also applying our drug delivery technologies and drug formulation expertise to
the formulation of product candidates under licensing collaborations, which we refer to as drug
delivery technology collaborations.
Opana® ER is an extended release formulation of oxymorphone hydrochloride that we
developed with Endo Pharmaceuticals Inc., or Endo, using our proprietary TIMERx
® drug delivery technology. Opana ER was approved by the United States Food and Drug
Administration, or FDA, in June 2006 for twice-a-day dosing in patients with moderate to severe
pain requiring continuous, around-the-clock opioid therapy for an extended period of time, and is
being marketed by Endo in the United States. In 2008, we began to recognize royalties from Endo
related to sales of Opana ER. In the nine month period ended September 30, 2009, we recognized
$13.7 million in royalties from Endo related to sales of Opana ER. In June 2009, Endo signed an
agreement with Valeant Pharmaceuticals, or Valeant, to market Opana ER in Canada, Australia and New
Zealand.
In June 2009, we completed a Phase Ib multiple ascending dose safety study of A0001 in healthy
subjects. In the Phase Ib trial, the drug was well tolerated by subjects and no serious adverse
events were reported. In addition, we observed a dose-dependent increase in exposure following
repeat dosing, and were able to establish a maximum tolerated dose. Based on these results, we
plan to advance A0001 into Phase IIa studies in patients with mitochondrial diseases in the fourth
quarter of 2009. We intend to commence two Phase IIa trials of A0001 one trial focused on
patients with Friedreichs Ataxia and another trial focused on patients with the A3243G
mitochondrial DNA point mutation associated with MELAS syndrome. The goal of these trials will be
to determine if A0001 has biological activity. We expect data from both of these trials by the
third quarter of 2010. In September 2009, we exercised our option under our agreement with Edison,
the Edison Agreement, to acquire the right to a second drug candidate from Edison. We do not plan
to commence any additional development work on this compound until after we review the results of the Phase IIa studies of A0001.
We are a party to a number of collaborations involving the use of our extended release drug
delivery technologies as well as our formulation development expertise. Under these
collaborations, we are responsible for completing the formulation work on a product specified by
our collaborator. If we are successful, we transfer the formulation to our collaborator, who is
then responsible for the completion of the clinical development, and ultimately, the
commercialization of the product. Under the terms of these agreements, we generally receive
upfront fees, reimbursement of research and product development costs incurred, up to amounts
specified in each agreement, and potential milestone payments upon the achievement of specified
events. These agreements also provide for us to receive payments from the sale of bulk TIMERx
material and royalties on product sales upon commercialization of the product. As of September 30,
2009, we are a party to four such drug delivery technology collaborations.
Our strategy is to identify and develop products that address unmet medical needs, primarily
for rare disorders of the nervous system. In support of this strategy, we have operated under four
clearly defined goals in 2009:
| Maximizing the value of Opana ER, working closely with Endo. We are working with Endo to take steps to protect and prosecute the intellectual property around Opana ER and to explore licensing opportunities for Opana ER outside the United States. The agreement with Valeant resulted from these efforts. | ||
| Advancing the development of A0001 drug candidate. Through the completed Phase Ib trial and the planned Phase IIa trials, we are seeking to establish proof of concept with respect to both the safety and efficacy of A0001. | ||
| Monetizing the value of our proven drug delivery technologies and drug formulation expertise by executing additional deals. Our goal is to enter into at least two new collaborations in 2009. We believe that with two agreements, this aspect of our business can operate on a breakeven basis, fund a |
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portion of our overhead and provide us with a financial stake in products, should the collaborations advance into development and commercialization. In June 2009, we entered into a new collaboration with Otsuka Pharmaceuticals Co., Ltd., or Otsuka. In September 2009, we achieved a development milestone for achieving proof of principal in a Phase I pharmacokinetic study on the first collaboration signed with Otsuka. Achieving this milestone triggered a financial payment to us, which we expect to receive in the fourth quarter of 2009. | |||
| Managing overhead and other costs to ensure that our infrastructure is sized appropriately to our priorities. In the nine months ended September 30, 2009, we continued to reduce expenses and closely managed our cash expenditures, including staff reductions implemented in January 2009. We have reduced our selling, general and administrative, or SG&A, and research and product development, or R&D, expenses by 36% in total for the nine months ended September 30, 2009 as compared to the prior years nine month period. In addition, in November 2009, we announced additional cost reduction measures as discussed below. |
In January 2009, we implemented staff reductions of approximately 18% of our workforce as part
of our efforts to aggressively manage our overhead cost structure. The terms of the severance
arrangements we entered into with terminated employees include severance pay and continuation of
certain benefits, including medical insurance, over the respective severance periods. In
connection with these severance arrangements, we recorded a severance charge in our statement of
operations for the first quarter of 2009 of $550,000, of which $21,000 was unpaid as of September
30, 2009 but will be paid over the remainder of 2009. Of such severance charge, $464,000 and
$86,000 were recorded as SG&A expense and R&D expense, respectively, in the first quarter of 2009.
In addition, as a result of these terminations, in the first quarter of 2009, we recorded a
non-cash credit of $885,000 associated with the forfeiture of stock options held by these former
employees. Of such amount, $844,000 and $41,000 were recorded as credits to SG&A expense and R&D
expense, respectively, in the first quarter of 2009.
In November 2009, we announced that we would be reducing our staff from 48 to 39 and
consolidating our Danbury, Connecticut headquarters into our Patterson, New York facility as of
January 1, 2010. We expect an annualized cost reduction of approximately $2 million from the staff
reduction and facilities consolidation, including a reduction in SG&A
expense of approximately $1.2 million and a reduction in R&D
expense of approximately $800,000, all on an annualized basis. In
addition, we announced our decision to defer any new development work on A0001, other than the two
Phase IIa studies, pending review and analysis of the results of those studies. We anticipate
recording a restructuring charge in the fourth quarter of 2009 of approximately $250,000, which
amount is net of a non-cash credit associated with the expected forfeiture of stock options held by
affected employees. This charge relates primarily to anticipated severance arrangements and
facility relocation costs, and will be recorded primarily to selling, general and administrative
expense.
Products
Opana ER. Opana ER is an oral extended release opioid analgesic, which we developed with
Endo, using our proprietary TIMERx technology. In June 2006, the FDA approved for marketing Opana
ER, for twice-a-day dosing in patients with moderate to severe pain requiring continuous,
around-the-clock opioid treatment for an extended period of time. Under the terms of our
collaboration with Endo, Endo launched Opana ER in the United States in July 2006 in 5 mg, 10 mg,
20 mg and 40 mg tablets, and in March 2008 in 7.5 mg, 15 mg and 30 mg tablets.
Under the terms of our collaboration with Endo, Endo pays us royalties based on U.S. net sales
of Opana ER. No payments were due to us for the first $41 million of royalties otherwise payable
to us beginning from the time of the product launch in July 2006, a period we refer to as the
royalty holiday. In the third quarter of 2008, the royalty holiday ended and we began earning
royalties from Endo on sales of Opana ER. Endo has the right under our agreement to recoup the $28
million in development costs that Endo funded on our behalf prior to the approval of Opana ER,
through a temporary 50% reduction in royalties. For the three and nine month periods ended
September 30, 2009, we recognized $4.9 million and $13.7 million, respectively, in royalties from
Endo on sales of Opana ER. These royalty amounts reflect this temporary reduction. As of September
30, 2009, $9.3 million of the $28 million remains to be recouped by Endo.
In March 2009, Endo and we entered into a Third Amendment to the Amended and Restated
Strategic Alliance Agreement with respect to Opana ER, effective January 1, 2009, the Third
Amendment. Under the terms of the
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Third Amendment, Endo agreed to directly reimburse us for costs
and expenses incurred by us in connection with patent applications and patent maintenance costs
related to Opana ER. If any of such costs and expenses are not reimbursed to us by Endo, we may
bill Endo for these costs and expenses through adjustments to the pricing of TIMERx material that
we supply to Endo for use in Opana ER. In connection with the Third Amendment, Endo reimbursed us
for such costs and expenses incurred prior to December 31, 2008, which we had capitalized as patent
assets, in the amount of $206,000. We received such payment, as well as reimbursement by Endo of
an additional $23,000 in patent costs incurred prior to the Third Amendment, in the second quarter
of 2009, at which time we credited such reimbursements to our patent assets. Patent-related costs
and expenses that we incurred subsequent to the Third Amendment have either been reimbursed or are
expected to be reimbursed to us by Endo, with these reimbursements recorded by us as offsets to our
costs.
On May 7, 2009, we received notice from Draxis Specialty Pharmaceuticals Inc., or Draxis, our
contract manufacturer of TIMERx material, that as a result of Draxis decision to cease
manufacturing of solid dosage form products in the facility in which TIMERx is currently
manufactured, it will not renew its manufacturing agreement with us upon the expiration of the
current term in November 2009. As a result, we intend to increase our current inventory levels of
TIMERx material and are working with Endo on the qualification of another manufacturer. Draxis has
agreed to honor outstanding purchase orders we have with them for our present requirements of TIMERx material.
We expect that these purchase orders will be fulfilled by approximately the end of the first
quarter of 2010 and will provide us with a sufficient amount of TIMERx material to satisfy our current
forecasted requirements until we have completed the qualification of another manufacturer.
On June 8, 2009, Endo and Valeant signed an exclusive license, the Valeant Agreement, granting
Valeant the right to develop and commercialize Opana ER in Canada, Australia and New Zealand.
Under the terms of the Valeant Agreement, Valeant paid Endo an upfront fee of C$2 million, and
agreed to make payments totaling up to C$1.0 million when certain sales milestones are achieved in
Canada and AUS$1.1 million when certain regulatory and sales milestones are achieved in Australia.
In addition, Valeant has agreed to pay tiered royalties ranging from 10% to 20% of annual net sales
of Opana ER in each of the three countries, subject to royalty reductions upon patent expiry or
generic entry. The Valeant Agreement also includes rights to Opana®, the immediate release
formulation of oxymorphone developed by Endo. In connection with the Valeant Agreement, we signed a
supply agreement with Valeant, agreeing to supply bulk TIMERx material to Valeant for its use in
manufacturing Opana ER under the Valeant Agreement. The selling price to Valeant will approximate
Penwests costs, as defined in the agreement, and may be adjusted annually.
In connection with the Valeant Agreement and our supply agreement with Valeant, on June 8,
2009, Endo and we signed a consent agreement consenting to these arrangements and confirming the
share of the payments to be made by Valeant that would be due to us. In July 2009, we received
payment from Endo in the amount of $764,000 for our share of the upfront payment received by Endo
under the Valeant Agreement, which amount we recorded as deferred revenue. We began to recognize
revenue from this upfront payment in the three month period ended September 30, 2009, and expect to
recognize revenue on the remainder of this payment ratably over the remaining estimated marketing
period. Endo and we will share equally in the royalties and sales milestones received from Valeant
for Opana ER under the terms of the Valeant Agreement.
Opana ER is not approved for marketing outside the United States. Endo and we continue to
seek additional collaborations to develop and commercialize Opana ER in territories outside the
United States. Under the terms of our agreement with Endo, any fees, royalties, payments or other
revenues received by the parties in connection with any collaborator outside the United States will
be divided equally between Endo and us. A description of our agreement with Endo is included under
the caption Collaborative and Licensing Agreements in Part I. Item 1- Notes to Condensed
Financial Statements.
IMPAX Laboratories, Inc., or IMPAX, Actavis South Atlantic LLC, or Actavis, Sandoz, Inc., or
Sandoz, and Barr Laboratories, Inc., or Barr, have each filed abbreviated new drug applications, or
ANDAs, that, together with their respective amendments, cover all seven strengths of Opana ER.
These ANDA filings each contained paragraph IV certifications under 21 U.S.C. Section 355(j). Endo
and we have filed patent infringement lawsuits against each of IMPAX, Actavis, Sandoz and Barr in
connection with their respective ANDAs.
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We intend to pursue all available legal and regulatory avenues to defend Opana ER. We believe
that we are entitled to a 30-month stay under the Hatch Waxman Act against IMPAXs ANDA, Actavis
ANDA, Sandozs ANDA and Barrs ANDA. IMPAX has announced that it is seeking to reinstate an
earlier filing date of its ANDA covering Opana ER 5mg, 10 mg, 20 mg and 40 mg. If this occurs, or
if Endo and we are unsuccessful in these legal proceedings, Opana ER could be subject to generic
competition earlier than the end of the 30-month stay.
On February 20, 2009, Endo and we settled all of the Actavis litigation. Both sides agreed to
dismiss their respective claims and counterclaims with prejudice. Under the terms of the
settlement, Actavis agreed not to challenge the validity or enforceability of our four Orange
Book-listed patents. Endo and we agreed to grant Actavis a license under US Patent No. 5,958,456
and a covenant not to sue for Actaviss generic formulation of Opana ER under our four Orange
Book-listed patents. The license and covenant not to sue will take effect on July 15, 2011, or
earlier under certain circumstances.
The settlement is subject to the review of the U.S. Federal Trade Commission and Department of
Justice.
A description of the legal proceedings related to Opana ER and the settlement with Actavis are
included in Part II. Item 1 Legal Proceedings.
A0001. A0001, or alpha tocopherol quinone, is a coenzyme Q analog that we are developing
under our collaboration and licensing agreement with Edison. Coenzyme Q is a molecule intrinsic to
mitochondria and its production of energy in the body. We are developing A0001 for the treatment
of inherited mitochondrial respiratory chain diseases. We believe that impairment of mitochondrial
function is a significant factor in a number of inherited mitochondrial respiratory chain diseases.
As such, we believe that enhancing mitochondrial function may provide substantial clinical benefit
to patients suffering from mitochondrial respiratory chain disease. A0001 has shown strong
biological activity in cell assays developed by Edison to test the ability of compounds to rescue
cells from death caused by inherited mitochondrial diseases.
In May 2008, we submitted an Investigational New Drug application, or IND, for A0001 for the
treatment of symptoms associated with inherited mitochondrial respiratory chain diseases. In July
2008, we initiated a Phase Ia placebo-controlled, single ascending dose trial designed to evaluate
the safety and tolerability of A0001 in healthy subjects, and to collect pharmacokinetic data.
A0001 was well tolerated by all subjects across all dose groups and there were no drug-related
serious adverse events. In June 2009, we completed a Phase Ib multiple ascending dose safety study
of A0001 in healthy subjects. In the Phase Ib trial, the drug was well tolerated by subjects and
no serious adverse events were reported. In addition, we observed a dose-dependent increase in
exposure following repeat dosing and were able to establish a maximum tolerated dose. Based on
these results, we plan to advance A0001 into Phase IIa studies in patients with mitochondrial
diseases in the fourth quarter of 2009. We intend to commence two Phase IIa trials one trial
focused on patients with Friedreichs Ataxia and another trial focused on patients with the A3243G
mitochondrial DNA point mutation associated with MELAS syndrome. The goal of these trials will be
to determine if A0001 has biological activity. We expect data from both of these trials by the
third quarter of 2010. In parallel with the Phase Ib trial, we also conducted long-term animal
toxicology studies to support longer dosing in the clinical program, which we expect to complete by
the end of the fourth quarter of 2009.
Under the terms of the Edison Agreement, we have exclusive, worldwide rights to develop and
commercialize A0001 and one additional compound of Edisons, which we selected in September 2009,
for all indications, subject to the terms and conditions in the Edison Agreement. Upon our
selection of this additional compound, we became obligated to make a milestone payment to Edison,
which we recorded as R&D expense in the third quarter of 2009 and paid to Edison in October 2009.
On May 5, 2009, we and Edison entered into an agreement under which Edison agreed that we
could offset $550,000, and following that, the loan amount of $1.0 million plus accrued interest,
against 50% of any future milestone and royalty payments, which may be due to Edison under the
terms of the Edison Agreement. The loan amount is otherwise due and payable by Edison according to
the original loan terms under the loan agreement. In addition, the agreement provides that we have
no further contractual payment obligations in connection with the research period. Following the
milestone payment we made to Edison in the fourth quarter of 2009, as noted above, $300,000 remains
of the $550,000 offset provided for under the May 5, 2009 agreement.
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A description of the Edison Agreement is included under the caption Collaborative and
Licensing Agreements in Part I. Item 1. Notes to Condensed Financial Statements.
Nifedipine XL. Under a collaboration agreement with Mylan Pharmaceuticals Inc., or Mylan, we
developed Nifedipine XL, a generic version of Procardia XL based on our TIMERx technology, which
was approved by the FDA in December 1999. In March 2000, Mylan signed a supply and distribution
agreement with Pfizer Inc., or Pfizer, to market Pfizers generic versions of all three strengths
(30 mg, 60 mg, and 90 mg) of Procardia XL. In connection with that agreement, Mylan decided not to
market Nifedipine XL, and as a result, Mylan entered into a letter agreement with us and agreed to
pay us a royalty on all future net sales of the 30 mg strength of Pfizers generic Procardia XL.
The term of the letter agreement continues until such time that Mylan permanently ceases to market
Pfizers generic version of Procardia XL 30 mg. In October 2009, Mylan notified us that Mylan had
informed Pfizer of Mylans intent not to extend its supply and distribution agreement with Pfizer,
which expires in March 2010. As a result, we do not expect to receive royalties from Mylan on
sales of Pfizers generic version of Procardia XL 30 mg after the first half of 2010.
Net Loss and Profitability
We have incurred net losses since 1994 including net losses of $26.7 million, $34.5 million
and $31.3 million during 2008, 2007 and 2006, respectively. For the nine month period ended
September 30, 2009, our net loss was $2.7 million. As of September 30, 2009, our accumulated
deficit was approximately $236 million. We currently generate revenues primarily from royalties
received from Endo on Endos net sales of Opana ER and from Mylan on Mylans net sales of Pfizers
generic version of Procardia XL 30 mg, revenues from our drug delivery technology collaborations
and, to a lesser extent, from bulk sales of TIMERx material to Endo for use in Opana ER. For the
third quarter of 2009, we reported net income of $383,000, our first quarterly net profit from
continuing operations. We anticipate that, based upon our current operating plan, which includes
expected royalties from third parties, we will achieve profitability in the fourth quarter of 2009
and annual profitability in 2010. If we do not receive royalties from Endo for Opana ER in such
amounts as forecasted and provided to us by Endo, or if we are unable to maintain our current
operating expense level, which was reduced, compared with our 2008 level, we may not be able to
achieve profitability in the fourth quarter of 2009 or in the full year of 2010. However, even if
we are profitable in the fourth quarter of 2009 or the full year 2010, we may not be able to sustain
profitability on a quarterly or annual basis. Our future profitability will depend on numerous
factors, including:
| the commercial success of Opana ER, and the amount of royalties from Endos sales of Opana ER, which may be adversely affected by any potential generic competition; | ||
| our ability to successfully defend our intellectual property protecting our products; | ||
| our ability to access funding support for our development programs from third party collaborators; | ||
| the level of our investment in research and development activities, including the timing and costs of conducting clinical trials of our products; | ||
| the level of our general and administrative expenses; | ||
| the successful development and commercialization of product candidates in our portfolio and products being developed for collaborations; and | ||
| royalties from Mylans sales of Pfizers generic version of Procardia XL 30 mg. |
Our results of operations may fluctuate from quarter to quarter depending on the amount and
timing of royalties on Endos sales of Opana ER, Mylans sales of Pfizers generic version of
Procardia XL 30 mg, the volume and timing of shipments of formulated bulk TIMERx material,
including to Endo, the variations in payments under our collaborative agreements, and the amount
and timing of our investment in research and development activities.
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Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based
upon our condensed financial statements, which have been prepared in accordance with U.S. generally
accepted accounting principles. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and liabilities as of the date
of the financial statements, and the reported amounts of revenues and expenses during the reporting
periods. We base our estimates on historical experience and on various other factors that we
believe to be reasonable under the circumstances. We regard an accounting estimate underlying our
financial statements as a critical accounting estimate if the nature of the estimate or
assumption is material due to the level of subjectivity and judgment involved, or the
susceptibility of such matter to change, and if the impact of the estimate or assumption on our
financial condition or performance may be material. We evaluate these estimates and judgments on
an ongoing basis. Actual results may differ from these estimates under different assumptions or
conditions. Areas where significant judgments are made include, but are not limited to: revenue
recognition, research and development expenses, deferred taxes-valuation allowance, impairment of
long-lived assets and share-based compensation. For a more detailed explanation of the judgments
we make in these areas, refer to Managements Discussion and Analysis of Financial Condition and
Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2008.
Recent Accounting Pronouncements
A detailed description of recent accounting pronouncements is included under the caption
Recent Accounting Pronouncements in Part I. Item 1. Notes to Condensed Financial Statements.
Results of Operations for the Three and Nine month periods ended September 30, 2009 and 2008
Revenues
Three months | Three months | Nine months | Nine months | |||||||||||||||||||||
ended | Percentage | ended | ended | Percentage | ended | |||||||||||||||||||
September 30, | increase | September 30, | September 30, | increase | September 30, | |||||||||||||||||||
2009 | (decrease) | 2008 | 2009 | (decrease) | 2008 | |||||||||||||||||||
(In thousands, except percentages) | ||||||||||||||||||||||||
Royalties |
$ | 5,286 | 409 | % | $ | 1,039 | $ | 14,859 | 644 | % | $ | 1,998 | ||||||||||||
Product sales |
134 | 158 | 52 | 472 | (19 | ) | 581 | |||||||||||||||||
Collaborative
licensing and
development
revenue |
874 | 224 | 270 | 1,492 | 78 | 837 | ||||||||||||||||||
Total revenues |
$ | 6,294 | 362 | % | $ | 1,361 | $ | 16,823 | 392 | % | $ | 3,416 | ||||||||||||
Our royalties increased in the three and nine month periods ended September 30, 2009, as
compared to the three and nine month periods ended September 30, 2008, reflecting increased
royalties received from Endo on its net sales of Opana ER. We began to recognize royalties from
Endo on sales of Opana ER following the completion of the royalty holiday in the third quarter of
2008. For the three and nine month periods ended September 30, 2009, we recognized $4.9 million
and $13.7 million, respectively, in royalties from Endo as compared to $577,000 for each of the
three and nine periods ended September 30, 2008. Partially offsetting these increased revenues
were decreased royalties from Mylan due to a decrease in Mylans net sales of Pfizers generic
version of Procardia XL 30 mg. During the fourth quarter of 2009, we expect that our royalty rate
on Endos net sales of Opana ER will increase as we expect
aggregate net
sales for 2009 to exceed the $150 million annual net sales threshold, beyond which our royalty rate
increases from the current royalty rate, pursuant to our agreement with Endo. We expect royalties
to increase in 2010 because we expect that during the first quarter of 2010, Endo will recoup the
remainder of the $28 million in development costs that Endo funded on our behalf, which will result
in an end to the temporary 50% reduction in the royalty rate we earn under our agreement. In
October 2009, Mylan notified us that Mylan had informed Pfizer of Mylans intent not to renew its
supply and distribution agreement with Pfizer, which expires in March 2010. As a result, we do not
expect to receive royalties from Mylan on sales of Pfizers generic version of Procardia XL 30 mg
after the first half of 2010.
Our product sales in the three and nine month periods ended September 30, 2009 and 2008
consisted of sales of formulated TIMERx material to Endo for use in Opana ER. Under our agreement
with Endo, the selling price of formulated TIMERx material is determined periodically based on our approximate costs, which
may include patent
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enforcement litigation costs, and patent application and maintenance costs
related to Opana ER, if not otherwise reimbursed to us by Endo. Product sales increased in the
2009 three month period in comparison to the 2008 three month period due to increased volume of
TIMERx material sold to Endo. Product sales decreased in the 2009 nine month period in comparison
with the 2008 nine month period due to a lower selling price of TIMERx material to Endo during the
nine month period ended September 30, 2009, which resulted following the Second and Third
Amendments to our agreement with Endo. In connection with the Second Amendment, which we entered
into with Endo in July 2008, the selling price of TIMERx material to Endo was reduced for the
second half of 2008 to exclude the reimbursement of patent enforcement litigation costs we incurred
in connection with Opana ER, for which Endo agreed to separately reimburse us. In addition, in
connection with the Third Amendment, which we entered into with Endo in March 2009 as discussed
above, the selling price of TIMERx material to Endo was further reduced effective January 1, 2009
and for the remainder of 2009, to exclude the reimbursement of patent application and maintenance
costs we incurred in connection with Opana ER, for which Endo agreed to separately reimburse us.
Partially offsetting the decreased revenue resulting from the lower selling prices was an increase
in the volume of TIMERx material sold to Endo in the 2009 nine month period, compared with the 2008
nine month period.
Revenue from collaborative licensing and development consists of the recognition of revenue
relating to reimbursements of our expenses under our drug delivery technology collaborations,
milestones and upfront payments from these collaborations. In the three month period ended
September 30, 2009, we recognized a milestone payment due to us under our first development
collaboration with Otsuka Pharmaceutical Co., Ltd, or Otsuka. The increase in revenue for the
three and nine month periods ended September 30, 2009, compared with the three and nine month
periods ended September 30, 2008, reflects the recognition of the milestone payment due from Otsuka
and overall increased development activity under our four drug delivery technology collaborations
in the 2009 three and nine month periods, as described below under Cost of Revenues, resulting in
a related increase in revenue during the 2009 three and nine month periods.
Cost of Revenues
Three months | Percentage | Three months | Nine months | Percentage | Nine months | |||||||||||||||||||
ended | increase | ended | ended | increase | ended | |||||||||||||||||||
September 30, 2009 | (decrease) | September 30, 2008 | September 30, 2009 | (decrease) | September 30, 2008 | |||||||||||||||||||
(In thousands, except percentages) | ||||||||||||||||||||||||
Cost of royalties |
$ | 102 | 117 | % | $ | 47 | $ | 309 | 176 | % | $ | 112 | ||||||||||||
Cost of product sales |
136 | 224 | 42 | 461 | 107 | 223 | ||||||||||||||||||
Cost of collaborative
licensing and
development revenue |
470 | 102 | 233 | 1,060 | 60 | 664 | ||||||||||||||||||
Total cost of revenues |
$ | 708 | 120 | % | $ | 322 | $ | 1,830 | 83 | % | $ | 999 | ||||||||||||
Cost of royalties consists of the amortization of deferred royalty termination costs
associated with royalty termination agreements and the amortization of certain patent costs
associated with our TIMERx technology. The cost of royalties increased for each of the three and
nine month periods ended September 30, 2009, compared with the three and nine month periods ended
September 30, 2008, primarily as a result of increased amortization of the deferred royalty
termination costs as a result of increased royalty revenues recognized in the 2009 periods.
Cost of product sales consists of the costs related to sales of formulated TIMERx material,
primarily to Endo for use in Opana ER. Cost of product sales increased for the three and nine
month periods ended September 30, 2009 compared with the three and nine month periods ended
September 30, 2008, primarily as a result of an increase in the volume of TIMERx material sold to
Endo in the 2009 periods.
Cost of collaborative licensing and development revenue consists of our expenses under our
drug delivery technology collaborations, which are generally reimbursed by our collaborators, and
includes allocations of internal R&D costs, including compensation and overhead costs associated
with formulation activities under these collaborations, as well as contract and other outside
service fees. These costs increased for the three and nine month periods ended September 30, 2009,
compared with the three and nine month periods ended September 30, 2008,
reflecting overall increased development activity under our four drug delivery technology
collaborations during the 2009 periods as compared with the 2008 periods.
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Selling, General and Administrative Expenses
Three months | Three months | Nine months | Nine months | |||||||||||||||||||||
ended | Percentage | ended | ended | Percentage | ended | |||||||||||||||||||
September 30, | increase | September 30, | September 30, | increase | September 30, | |||||||||||||||||||
2009 | (decrease) | 2008 | 2009 | (decrease) | 2008 | |||||||||||||||||||
(In thousands, except percentages) | ||||||||||||||||||||||||
Selling,
general and
administrative
expenses |
$ | 1,758 | (22 | )% | $ | 2,247 | $ | 7,362 | (24 | )% | $ | 9,642 | ||||||||||||
The decrease in SG&A expenses for the three month period ended September 30, 2009, compared
with the three month period ended September 30, 2008 was primarily attributable to a non-recurring
credit we received from our insurance policy issuer in the amount of $347,000 in the 2009 three
month period, related to the cash surrender value of life insurance policies we hold for our
supplemental executive retirement and deferred compensation plans for our former CEO, as a result
of having held the policies for 20 years, lower compensation expense as a result of the staff
reductions that we implemented in January 2009 as discussed above, and lower share-based
compensation expense. The decrease in SG&A expenses for the nine month period ended September 30,
2009, compared with the nine month period ended September 30, 2008 was attributable to several
factors, including lower share-based compensation expense, which was due in part to a credit of
$844,000 recorded in the first quarter of 2009 and a reduction in the number of outstanding stock
options in the 2009 nine month period, both of which resulted from the forfeiture of stock options
held by former employees due to our January 2009 staff reductions. The reduction in share-based
compensation expense was also partially attributable to lower average fair values associated with
outstanding stock options and restricted stock in the 2009 nine month period, primarily as a result
of decreases in the market price of our common stock. The decrease in SG&A expense also reflects
lower compensation expense primarily due to our January 2009 staff reductions, the inclusion in
SG&A expense in the first quarter of 2008 of the impairment charge in the amount of $1.0 million
that we recorded to establish a reserve against the collectability of the loan that we made to
Edison in February 2008 under the Edison agreement and the credit recorded in the 2009 nine month
period related to the cash surrender value of our insurance policies discussed above. These
decreases were partially offset by $1.3 million of costs associated with the proxy contest
initiated by Tang Capital and Perceptive Life Sciences in connection with the 2009 annual meeting
of shareholders and the related litigation.
We expect SG&A expense for the fourth quarter of 2009 to increase, compared to the third
quarter of 2009, which included the non-recurring credit to the cash surrender value of our
insurance policies discussed above, and due to the restructuring charge we expect to record in the
fourth quarter of 2009 in connection with the staff reductions and
facilities consolidation announced in November 2009 as
discussed in the Overview above.
Research and Product Development Expenses
R&D expenses were $3.3 million and $9.7 million for the three and nine month periods ended
September 30, 2009, respectively, compared with $5.9 million and $16.8 million for the three and
nine month periods ended September 30, 2008, respectively. The decreases in the three and nine
month periods ended September 30, 2009, reflect that in 2009, we made no contractual payments to
Edison under the Edison Agreement, other than the milestone payment due to Edison for our selection
of a second compound under the Edison Agreement. The decreases also reflect that we had no
expenses in the three and nine month periods ended September 30, 2009 related to the development of
nalbuphine ER and PW4153, an extended release formulation of carbidopa/levodopa. In the 2009 three
and nine month periods, we also had lower compensation expenses due to staff reductions implemented
in the first quarter of 2008 and the first quarter of 2009, and we recorded increased allocations
of internal R&D costs related to our drug delivery technology collaborations, as noted above in
Cost of Revenues, to cost of collaborative licensing and development revenue. The decreased
costs for the 2009 nine month period, compared to the 2008 nine month period, were partially offset
by increased expenses for preclinical and clinical work conducted on A0001.
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In the table below, R&D expenses are set forth in the following categories:
Three months | Three months | Nine months | Nine months | |||||||||||||||||||||
ended | Percentage | ended | ended | Percentage | ended | |||||||||||||||||||
September 30, | increase | September 30, | September 30, | increase | September 30, | |||||||||||||||||||
2009 | (decrease) | 2008 | 2009 | (decrease) | 2008 | |||||||||||||||||||
(In thousands, except percentages) | ||||||||||||||||||||||||
A0001 and Edison Payments |
$ | 1,332 | (41 | )% | $ | 2,250 | $ | 3,852 | (35 | )% | $ | 5,884 | ||||||||||||
Nalbuphine ER |
| (100 | ) | 192 | | (100 | ) | 1,827 | ||||||||||||||||
Other Phase I Products and Internal Costs |
1,924 | (44 | ) | 3,446 | 5,835 | (36 | ) | 9,086 | ||||||||||||||||
Total Research and Product Development
Expenses |
$ | 3,256 | (45 | )% | $ | 5,888 | $ | 9,687 | (42 | )% | $ | 16,797 | ||||||||||||
In the preceding table, research and product development expenses are set forth in the following
categories:
| A0001 and Edison Payments These expenses reflect our direct external expenses relating to the development of A0001, and for the three and nine month periods ended September 30, 2008, in addition to our funding of Edisons research activities under the Edison agreement. These expenses approximated 41% and 40%, respectively, of our R&D expenses for the three and nine month periods ended September 30, 2009. | ||
In May 2008, we submitted an IND for A0001 for the treatment of symptoms associated with inherited mitochondrial respiratory chain diseases. In July 2008, we initiated a Phase Ia placebo-controlled, single ascending dose trial designed to evaluate the safety and tolerability of A0001 in healthy subjects, and to collect pharmacokinetic data. A0001 was well tolerated by all subjects across all dose groups and there were no drug-related serious adverse events. In June 2009, we completed a Phase Ib multiple ascending dose safety study of A0001 in healthy subjects. In the Phase Ib trial, the drug was well tolerated by subjects and no serious adverse events were reported. There was a dose-dependent increase in exposure approaching steady state following repeat dosing, and a maximum tolerated dose was established. Based on these results, we plan to advance A0001 into Phase IIa studies in patients with mitochondrial diseases in the fourth quarter of 2009. We intend to commence two Phase IIa trials one trial focused on patients with Friedreichs Ataxia and another trial focused on patients with the A3243G mitochondrial DNA point mutation associated with MELAS syndrome. The goal of these trials will be to determine if A0001 has biological activity in those indications. We expect data from both of these trials by the third quarter of 2010. In parallel with the Phase Ib trial, we also conducted long-term animal toxicology studies to support longer dosing in the clinical program, which we expect to complete by the end of the fourth quarter of 2009. | |||
In September 2009, Edison presented to us and we selected an additional compound that we were entitled to under the Edison Agreement. With the selection of this additional compound, we became obligated to make a milestone payment to Edison, which we accrued and recorded as research and development expense in the third quarter of 2009 and paid to Edison in October 2009. We cannot reasonably estimate or know the nature, timing or estimated costs of the efforts necessary to complete the development of A0001 or the additional compound selected, due to the numerous risks and uncertainties associated with developing and commercializing drugs. We expect our A0001 and Edison payments expenses to decline for 2009 compared with our costs for 2008, as the quarterly contract research payments to Edison were completed by the end of 2008. | |||
| Nalbuphine ER These expenses reflect our direct external expenses relating to the development of nalbuphine ER. In the three and nine month periods ended September 30, 2008, these expenses consisted primarily of payments to third parties in connection with clinical trials of nalbuphine ER, which were underway. After the completion of the Phase IIa trial in the first quarter of 2008, we determined to seek a collaborator for the further development and commercialization of nalbuphine ER, and not to conduct any additional development work until we enter into such a collaboration. As a result, we did not incur any R&D expenses in the three and nine month periods ended September 30, 2009, and we do not expect to incur any additional R&D expenses for nalbuphine ER, unless we find a collaborator to continue the development work. |
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| Other Phase I Products and Internal Costs These expenses reflect internal and external expenses not separately reported under a product development program noted above and include the areas of pharmaceutical development, clinical and regulatory. The types of expenses included in internal expenses primarily are salary and benefits, share-based compensation costs, depreciation on purchased equipment, and the amortization or any write-downs of patent costs, other than product patent write-offs charged directly to a separately reported product development program or amortization of patent costs relating to commercialized products, which are included in cost of revenues. The types of expenses included in external expenses are primarily related to preclinical studies, proof-of-principle biostudies conducted on our Phase I product candidates and payments to third parties for drug active. These costs decreased in the three and nine month periods ended September 30, 2009, compared with the three and nine month periods ended September 30, 2008, primarily as a result of lower compensation expense due to staff reductions implemented in March 2008 and in January 2009, allocations of internal costs related to our drug delivery technology collaborations to cost of collaborative licensing and development revenues, and lower Phase I product expenses, as we did not incur any external expenses on these product candidates. Partially offsetting these decreases was a patent impairment charge of $270,000 recorded in the 2009 three month period related to patents on technology that we no longer believe have commercial value and other patents we determined we would no longer prosecute and/or maintain. |
We evaluate product candidates on an ongoing basis and may terminate or accelerate development
of product candidates based on study results, product development risk, commercial opportunity,
perceived time to market and other factors. As a result of the staff reductions implemented in
January 2009 as discussed above, as well as other efforts to closely manage our cost structure,
including our focus on advancing the development of A0001, we expect both our internal and external
R&D expenses for the fourth quarter of 2009 to be lower than our
R&D expenses in the fourth quarter of 2008.
There can be no assurance that any of our product candidates will advance through or into the
clinical development process and be successfully developed, will receive regulatory approval, or
will be successfully commercialized. Completion of clinical trials and commercialization of these
product candidates may take several years, and the length of time can vary substantially according
to the type, complexity and novelty of a product candidate. Due to the variability in the length of
time necessary to develop a product, the uncertainties related to the estimated cost of the
development process and the uncertainties involved in obtaining governmental approval for
commercialization, accurate and meaningful estimates of the ultimate cost to bring our product
candidates to market are not available.
Share-Based Compensation
We recognized share-based compensation in our statements of operations as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In thousands) | ||||||||||||||||
Selling, general and administrative |
$ | 304 | $ | 524 | $ | 2 | $ | 1,731 | ||||||||
Research and product development |
143 | 205 | 458 | 655 | ||||||||||||
Total share-based compensation |
$ | 447 | $ | 729 | $ | 460 | $ | 2,386 | ||||||||
The decrease in total share-based compensation expense in the three month period ended
September 30, 2009, compared with the three month period ended September 30, 2008, is primarily
attributable to lower average fair values associated with outstanding stock options and restricted
stock in the 2009 three month period, as a result of decreases in the market price of our common
stock and a reduction in the number of outstanding stock options in the 2009 three month period, as
a result of the forfeiture of employee stock options in the first quarter of 2009, due to the
January 2009 staff reductions.
The decrease in total share-based compensation expense in the nine month period ended
September 30, 2009, compared with the nine month period ended September 30, 2008, is primarily
attributable to credits of approximately $885,000 recorded in the first quarter of 2009 associated
with the forfeiture of employee stock options due to of the January 2009 staff reductions. Such forfeitures also resulted in
decreased expense in the 2009
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nine month period due to a reduction in the number of outstanding
stock options in such period. The decrease was also partially attributable to lower average fair
values associated with outstanding stock options and restricted stock in the 2009 nine month
period, primarily as a result of decreases in the market price of the our common stock.
Tax Rates
Our effective tax rates for the three and nine month periods ended September 30, 2009 and 2008
were zero. Our effective tax rates differ from the federal statutory rate of a 34% benefit
primarily due to valuation allowances recorded to offset deferred tax assets relating to our net
operating losses.
Liquidity and Capital Resources
Sources of Liquidity
Since 1998, when we became a publicly owned company, we have funded our operations and capital
expenditures from the proceeds of the sale and issuance of shares of common stock, sales of
excipients, the sale of our excipients business, sales of formulated bulk TIMERx material,
royalties and milestone payments from Endo, Mylan and other collaborators, and advances under
credit facilities. As of September 30, 2009, we had cash, cash equivalents and short-term
investments of approximately $11.5 million.
Private Placement. On March 11, 2008, we sold units representing an aggregate of 8,140,600
shares of our common stock, $0.001 par value per share, together with warrants to purchase an
aggregate of 4,070,301 shares of our common stock, in a private placement, for a total purchase
price of approximately $25.1 million. We received net proceeds of approximately $23.1 million from
this private placement, after deducting the placement agents fees and other expenses. The
warrants are exercisable on or prior to March 11, 2013 at an exercise price of $3.62 per share.
The warrants may also be exercised pursuant to cashless exercise provisions under certain
circumstances.
Pursuant to the securities purchase agreement entered into in connection with the private
placement, we filed a registration statement with the Securities and Exchange Commission, or SEC,
on April 10, 2008, registering for resale the shares sold in the private placement and shares
issuable under the warrants. This registration statement was declared effective by the SEC on
April 28, 2008. We have agreed to use our reasonable best efforts to maintain the registration
statements effectiveness until the earlier of (i) the twelve month anniversary of the last date on
which warrant shares are issued upon exercise of warrants and (ii) the date all of the shares and
warrant shares have been resold by the original purchasers.
Senior Secured Credit Facility. On March 13, 2007, we entered into a $24.0 million senior
secured credit facility with Merrill Lynch Capital, a division of Merrill Lynch Business Financial
Services Inc., which was acquired by GE Capital in February 2008, and is now known as GE Business
Financial Services Inc. The credit facility consists of: (i) a $12.0 million term loan advanced
upon the closing of the credit facility and (ii) a $12.0 million term loan that we had the right to
access until September 15, 2008, subject to conditions specified in the credit agreement. We did
not access the second $12.0 million term loan prior to September 15, 2008, at which time it expired
in accordance with the terms of the agreement.
Our outstanding term loan has a term of 42 months from the date of advance. Interest-only
payments were due for the first nine months; interest plus monthly principal payments equal to
1.67% of the loan amount were due for the period from the end of the interest-only period through
December 2008; and interest plus straight line amortization payments with respect to the remaining
principal balance are due for the remainder of the term, through its maturity date in September
2010.
The interest rate on our outstanding term loan is fixed at 10.32%. At the time of final
payment of the loan, we will pay an exit fee of 3.0% of the original principal loan amount. Should
any prepayment occur, we would be required to pay a prepayment penalty of 1.0% of any prepaid
amount. As of September 30, 2009, $5.5 million of the term loan was outstanding. Beginning
January 2008, we began making monthly principal payments on this loan, in addition to the monthly
interest payments. Beginning January 2009, the principal portion of our payments increased from
their 2008 level to reflect the straight-line amortization of the remaining principal amount
outstanding, as noted above. The principal payments are expected to total approximately $1.4 million for the fourth
quarter of 2009.
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Based on the terms of the credit facility, the loan amount currently outstanding
and the exit fee of $360,000, will be fully paid by September 2010.
Cash Flows
We had negative cash flow from operations for the nine month period ended September 30, 2009
of $1.3 million, primarily due to a net loss of $2.7 million in the period, which included non-cash
charges of $942,000 for depreciation and amortization, $460,000 for share based compensation and
$310,000 for patent impairment charges. Cash flow from operations also reflected an increase in
receivables of $836,000 related to increased accrued revenues and a $452,000 increase in deferred
revenue, which is largely attributable to the upfront payment we received from Endo in connection
with the Valeant Agreement described above.
Net cash used in investing activities was $536,000 for the nine month period ended September
30, 2009, primarily reflecting purchases of marketable securities, net of maturities, of $719,000.
Partially offsetting this use of cash were the reimbursements of patent costs by Endo in the
amount of $229,000. Net cash used by financing activities was $4.1 million, reflecting the
repayments of principal on our outstanding term loan described above.
Funding Requirements
We anticipate that, based upon our current operating plan, our existing capital resources,
together with expected royalties from third parties, will be sufficient to fund our operations on
an ongoing basis through at least 2010. If, however, we do not receive royalties from Endo for
Opana ER in such amounts as we anticipate, we may not be able to fund our ongoing operations
through at least 2010, without seeking additional funding from the capital markets.
We have taken measures to reduce our spending and to manage our costs more closely, including
the staff reductions that we implemented in January 2009 as described above, and the fourth
quarter 2009 staff reductions we recently announced, and we have operated based on a narrowed set
of priorities for 2009, in recognition of our limited financial resources and the challenging
environment in which we operate. We have however, incurred significant unplanned costs in
connection with the proxy contest associated with our 2009 annual meeting of shareholders and the
related litigation. These costs, including legal and other advisory fees, totaled $1.3 million and
were incurred during the six month period ended June 30, 2009, and included costs of litigation
relating to three lawsuits brought by the shareholders who initiated the proxy contest, one of
which lawsuits is still pending. Costs of litigation are difficult to project. As a result, our
legal expenses could increase depending on the course of the litigation.
We are also seeking to enter into collaboration and licensing agreements for the development
and marketing of Opana ER in territories outside the United States with our partner Endo, and for
nalbuphine ER, and to enter into additional drug delivery technology collaborations. These
collaborations may provide additional funding for our operations.
We expect that our capital expenditures for the full year 2009 will not exceed approximately
$75,000.
On May 7, 2009, we received notice from Draxis Specialty Pharmaceuticals Inc., or Draxis, our
contract manufacturer of TIMERx material, that as a result of its decision to cease manufacturing
of solid dosage form products in the facility in which TIMERx material is currently manufactured,
Draxis will not renew our manufacturing agreement upon the expiration of the current term in
November 2009. As a result, we plan to increase our existing inventory levels of TIMERx material
during the fourth quarter of 2009 and the first quarter of 2010, which will require additional use
of our cash resources, and we are working with Endo on the qualification of another
manufacturer. Draxis has agreed to honor outstanding purchase orders we have with
them for our present requirements of TIMERx material. We expect that these purchase orders will be fulfilled by
approximately the end of the first quarter of 2010 and will provide
us with a sufficient amount of TIMERx
material to satisfy our current forecasted requirements until we have completed the qualification
of another manufacturer.
We believe that there are a limited number of manufacturers that comply with cGMP regulations
who are capable of manufacturing our TIMERx materials. As Draxis has indicated that it intends to
discontinue with oral solid production, which includes our TIMERx material, we may not be able to obtain alternative
contract manufacturing
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or obtain such manufacturing on commercially reasonable
terms. We have
identified a potential manufacturer and are working on the
qualification of that manufacturer. Based on our preliminary technology
transfer activities with this potential manufacturer, we expect to
enter
into a commercial manufacturing agreement with this manufacturer on
terms that are comparable to our manufacturing agreement with Draxis.
In addition, if we are unable to enter
into longer-term manufacturing arrangements for our products on acceptable terms, particularly as
drug candidates advance through clinical development and move closer to regulatory approval, our
business, and the development and commercialization of our products could be materially adversely
affected.
Requirements for capital in our business are substantial. Our potential need to seek
additional funding will depend on many factors, including:
| the commercial success of Opana ER, and the amount of royalties from Endos sales of Opana ER, which may be adversely affected by any potential generic competition; | ||
| the prosecution, defense and enforcement of our patents and other intellectual property rights, such as our Orange Book listed patents for Opana ER, and the prosecution by us and Endo of additional patent applications with respect to Opana ER; | ||
| the timing and amount of payments received under collaborative agreements; | ||
| the timing and amount of our internal costs of development for drug candidates acquired under the Edison Agreement; | ||
| the progress of our existing development projects and any development projects we may undertake, funding obligations with respect to the projects and the related costs to us of clinical studies for our product candidates; | ||
| our ability to enter into new collaborations for Opana ER outside the United States and our drug delivery technologies, and the structure and terms of any such agreements; | ||
| our ability to access funding support for development programs from third party collaborators; | ||
| the level of our investment in capital expenditures for facilities or equipment; | ||
| the timing and amount of our costs of the shareholder lawsuits filed against us and our directors in connection with the proxy contest related to our 2009 annual meeting of shareholders and the costs of any future proxy contests which may occur; | ||
| our success in reducing our spending and managing our costs. |
If we accelerate the development of any of our own product candidates, we may need to seek
additional funding through collaborative agreements, the selling of assets, or public financings of
equity or debt securities.
We plan to meet our long-term cash requirements through our existing levels of cash and
marketable securities, our revenues from collaborative agreements, as well as through equity or
debt financings. On September 26, 2008, we filed a registration statement on Form S-3 with the
SEC, which became effective on October 30, 2008. This shelf registration statement covers the
issuance and sale by us of any combination of common stock, preferred stock, debt securities and
warrants having an aggregate purchase price of up to $75 million. No securities have been issued
under this shelf registration statement.
If we raise additional funds by issuing equity securities, further dilution to our
then-existing shareholders may result. Additional debt financing, such as the credit facility
noted above, may involve agreements that include covenants limiting or restricting our ability to
take specific actions, such as incurring additional debt, making capital expenditures or declaring
dividends. Any debt or equity financing may contain terms, such as liquidation and other
preferences, that are not favorable to us or our shareholders. If we raise additional funds
through collaboration and licensing arrangements, or research and development arrangements with
third parties, it may be necessary to relinquish valuable rights to our technologies, research programs or potential products, or
grant licenses on terms that may not be favorable to us.
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We cannot be certain that additional financing will be available in amounts or on terms
acceptable to us, if at all. In the current economic environment, market conditions have made it
very difficult for companies such as ours to obtain equity or debt financing. We believe that any
such financing that we could conduct would be on significantly unfavorable terms. If we seek but
are unable to obtain additional financing, we may be required to delay, reduce the scope of, or
eliminate one or more of our planned research, development and commercialization activities,
including our planned clinical trials, which could harm our financial condition and operating
results.
Contractual Obligations
Our outstanding contractual cash obligations include obligations under our operating leases
primarily for facilities in Danbury, CT and Patterson, NY, purchase obligations primarily relating
to preclinical and clinical development, drug delivery technology collaboration obligations,
payments due under our credit facility relating to interest, principal and exit fees, and
obligations under deferred compensation plans as discussed below. Following is a table summarizing
our contractual obligations as of September 30, 2009 (in thousands).
Less Than | 1-3 | 4-5 | After 5 | |||||||||||||||||
Total | One Year | Years | Years | Years | ||||||||||||||||
Operating leases |
$ | 206 | $ | 206 | $ | | $ | | $ | | ||||||||||
Purchase obligations |
2,885 | 2,885 | | | | |||||||||||||||
Payments due under credit facility |
6,153 | 6,153 | | | | |||||||||||||||
Deferred compensation |
2,545 | 294 | 587 | 587 | 1,077 | |||||||||||||||
Total |
$ | 11,789 | $ | 9,538 | $ | 587 | $ | 587 | $ | 1,077 | ||||||||||
The leases on our facilities in Danbury, CT and Patterson, NY currently expire on December 31,
2009. We have notified the property owner for our Danbury, CT facility that we will not be
renewing the lease when it expires. As discussed above under
Overview, we have determined to consolidate our
workforce into our Patterson, NY facility late in the fourth quarter of 2009. On November 3, 2009,
we signed an extension to our Patterson, NY facility lease for one year through December 31, 2010,
with a renewal option to us for an additional one-year period. Payments under this lease for 2010
will approximate $210,000 plus operating costs. Obligations under this lease extension are not
included in the table above.
Deferred compensation reflects the commitments described below:
| We have a Supplemental Executive Retirement Plan, or SERP, a nonqualified plan, which covers our former Chairman and Chief Executive Officer, Tod R. Hamachek. Under the SERP, effective in May 2005, we became obligated to pay Mr. Hamachek approximately $12,600 per month over the lives of Mr. Hamachek and his spouse. | ||
| We also have a Deferred Compensation Plan, or DCP, a nonqualified plan, which covers Mr. Hamachek. Under the DCP, effective in May 2005, we became obligated to pay Mr. Hamachek approximately $140,000 per year, including interest, in ten annual installments. However, these installments are recalculated annually based on market interest rates as provided for under the DCP. |
We do not fund these liabilities, and no assets are held by the plans. However, we have two
whole-life insurance policies in a rabbi trust, the cash surrender value or death benefits of which
are held in trust for the SERP and DCP liabilities. Mr. Hamacheks SERP and DCP benefit payments
are being made directly from the assets in the trust. As of September 30, 2009, the trust assets
consisted of the cash surrender value of these life insurance policies totaling $2,285,000 and
$40,000 held in a money market account.
Under the terms of the Edison Agreement, we are obligated to make milestone payments to Edison
upon the achievement of certain clinical and regulatory events. We will not be responsible for the
payment of future milestone and/or royalty payments in the event that the development program is
discontinued and the agreement is terminated prior to the achievement of these events. Preclinical
and clinical development of drug candidates is a long, expensive and uncertain process. At any
stage of the preclinical or clinical development process, we may decide to discontinue the
development of A0001 or other drug candidates under the Edison Agreement. The
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contractual obligations listed in the table above do not include any such future potential
milestone or royalty payments to Edison.
Net Operating Loss Carryforwards
We have determined that an ownership change occurred in 2008 under Section 382 of the Internal
Revenue Code. As a result, the utilization of our net operating loss, or NOL, carryforwards and
other tax attributes through the date of ownership change will be limited to approximately $2.8
million per year over the next 20 years into 2028. We also determined that we were in a Net
Unrealized Built-In Gain position (for purposes of Section 382 of the Internal Revenue Code) at the
time of the ownership change, which increases our annual limitation over the next five years into
2013 by approximately $3.4 million per year. Accordingly, we have reduced our NOL carryforwards,
and research and development tax credits to the amount that we estimate that we will be able to
utilize in the future, if profitable, considering the above limitations. In accordance with ASC
740 Income Taxes we have provided a valuation allowance for the full amount of our net deferred
tax assets because it is not more likely than not that we will realize future benefits associated
with deductible temporary differences and NOLs at September 30, 2009, and at December 31, 2008.
At December 31, 2008, we had NOL carryforwards for federal income tax purposes of
approximately $91.3 million, which expire at various dates beginning in 2018 through 2028. At
December 31, 2008, we had NOL carryforwards for state income tax purposes of approximately $90.4
million, which expire at various dates beginning in 2023 through 2028. In addition, we had federal
research and development tax credit carryforwards of approximately $485,000, which expire in 2028.
The NOLs incurred in 2008, subsequent to the 2008 ownership change of $18.8 million are not
limited on an annual basis. Pursuant to Section 382 of the Internal Revenue Code, subsequent
ownership changes could further limit this amount and other NOLs incurred subsequent to the 2008
ownership change. The use of the NOL carryforwards, and research and development tax credit
carryforwards are limited to our future taxable earnings.
For financial reporting purposes, at December 31, 2008 and 2007, respectively, valuation
allowances of $40.6 million and $72.6 million have been recognized to offset net deferred tax
assets, primarily attributable to our NOL carryforwards. As previously noted, in 2008, we reduced
our tax attributes (NOLs and tax credits) as a result of our ownership change under Section 382 of
the Internal Revenue Code and the limitation placed on the utilization of our tax attributes, as a
substantial portion of the NOLs and tax credits generated prior to the ownership change will likely
expire unused. Accordingly, the NOLs were reduced by $123.3 million and the tax credits were
reduced by $6.6 million upon the ownership change in 2008. The change in the valuation allowance
for the year ended December 31, 2008 was a decrease of approximately $32.0 million due primarily to
the limitations placed on the utilization of our tax attributes as noted above.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk and Risk Management Policies
Market risk is the risk of loss to future earnings, to fair values or to future cash flows
that may result from changes in the price of a financial instrument. The value of a financial
instrument may change as a result of changes in interest rates, foreign currency exchange rates and
other market changes. Market risk is attributed to all market sensitive financial instruments,
including debt instruments. Our operations are exposed to financial market risks, primarily changes
in interest rates. Our outstanding term loan under our credit facility is at a fixed rate of
interest and therefore, we do not believe that there is significant exposure to changes in interest
rates under the term loan. Our interest rate risk primarily relates to our investments in
marketable securities.
The primary objectives for our investment portfolio are liquidity and safety of principal.
Investments are made to achieve the highest rate of return, consistent with these two objectives.
Our investment policy limits investments to specific types of instruments issued by institutions
with investment grade credit ratings and places certain restrictions on maturities and
concentration by issuer.
At September 30, 2009, our marketable securities consisted of certificates of deposit and
approximated $719,000. These marketable securities had maturity dates of up to four months. Due
to the relatively short-term maturities of these securities, management believes they have minimal
market risk. At September 30, 2009, market values
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approximated carrying values. Due to the nature of our cash equivalents, which were money
market accounts at September 30, 2009, management believes they have no significant market risk.
As of September 30, 2009, we had approximately $11.5 million in cash, cash equivalents and
marketable securities, and accordingly, a sustained decrease in the rate of interest earned of 1%
would have caused a decrease in the annual amount of interest earned of up to approximately
$115,000.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. Our management, with the participation
of our chief executive officer (who is also our acting chief financial officer), evaluated the
effectiveness of our disclosure controls and procedures as of September 30, 2009. The term
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (or the Exchange Act) means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SECs rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits under the Exchange
Act is accumulated and communicated to the companys management, including its principal executive
and principal financial officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. Based on the evaluation of our disclosure controls and procedures as of September
30, 2009, our chief executive officer concluded that, as of such date, our disclosure controls and
procedures were effective at the reasonable assurance level.
(b) Changes in Internal Control Over Financial Reporting. No change in our internal control
over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
occurred during the fiscal quarter ended September 30, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Impax ANDA Litigation
On October 3, 2007, we received a letter from IMPAX notifying us of the filing by IMPAX of an
ANDA containing a Paragraph IV certification under 21 U.S.C. § 355(j) for Opana ER in four
strengths, 5 mg, 10 mg, 20 mg and 40 mg. This Paragraph IV certification notice referred to our
patent, U.S. Patent No. 7,276,250, which covers the formulation of Opana ER and was listed in the
Orange Book as of October 2, 2007. On October 4, 2007, IMPAX announced in a press release that the
FDA had rescinded the acceptance of IMPAXs ANDA filing. On November 5, 2007, we received a letter
from IMPAX notifying it of additional Paragraph IV certifications relating to our patents, U.S.
Patent Nos. 5,622,933 and 5,958,456, which were listed in the Orange Book as of October 19, 2007.
On November 15, 2007, Endo and we filed a lawsuit against IMPAX in the U.S. Dist. Delaware. The
lawsuit against IMPAX not only alleged infringement of U.S. Patent Nos. 5,662,933 and 5,958,456 but
also sought declaratory judgment that, among other things, IMPAX had no legitimate basis to trigger
the Hatch-Waxman ANDA patent litigation process because the FDA, according to IMPAX, had rescinded
its acceptance of IMPAXs ANDA. Endo and we further asked the court to declare that the Paragraph
IV certification notices that IMPAX served on Endo and us are null, void and of no legal effect.
On December 14, 2007, we received a letter from IMPAX notifying us of a refiling of its ANDA for
Opana ER that was accepted by the FDA as of November 23, 2007. The notice letter states that
IMPAXs ANDA contains Paragraph IV certifications for the three patents noted above and that the
FDA had required IMPAX to notify Endo and us of these certifications. In this notice, IMPAX also
stated that it would not withdraw its prior Paragraph IV certification notices because it believed
they were properly provided and because IMPAX was continuing to seek to convince the FDA to assign
an earlier filing date to its ANDA. As a result of the FDAs determination of IMPAXs ANDA filing
date and the receipt of the new Paragraph IV certification notice, on December 20, 2007, Endo and
we filed a notice of dismissal of the portion of
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the November 15, 2007 complaint seeking declaratory judgment that, among other things, IMPAX
had no basis to trigger the Hatch-Waxman ANDA patent litigation process and that any Paragraph IV
certification notices served prior to November 23, 2007 were null, void and of no legal effect.
Endo and we did not dismiss the patent infringement claims because IMPAX refused to withdraw its
prior Paragraph IV certification notices. On January 25, 2008, Endo and we filed a lawsuit against
IMPAX in U.S. Dist. Delaware, alleging infringement of U.S. Patent Nos. 5,662,933 and 5,958,456 in
response to IMPAXs December notice. Given the FDAs acceptance of IMPAXs ANDA as of November 23,
2007, we believe that we are entitled to a 30-month stay under the Hatch-Waxman Act beginning on
December 14, 2007.
On or around June 14, 2008, Endo and we each received a notice from IMPAX advising us and Endo
that IMPAX had amended its ANDA for Opana ER to include three additional strengths, 7.5 mg, 15 mg
and 30 mg. This ANDA amendment contained a Paragraph IV certification against our Orange Book
listed patents, U.S. Patent Nos. 5,662,933, 5,958,456 and 7,276,250. On July 25, 2008, Endo and we
filed a lawsuit against IMPAX in U.S. Dist. Delaware, alleging infringement of U.S. Patent Nos.
5,662,933 and 5,958,456 in response to the notice. We believe that we are entitled to a 30-month
stay under the Hatch-Waxman Act, beginning on June 14, 2008 with respect to IMPAXs amended ANDA
for 7.5 mg, 15 mg and 30 mg.
In January 2009, the cases against IMPAX were reassigned to the U.S. Dist. NJ.
Actavis ANDA Litigation
On or around February 14, 2008, we received a notice from Actavis advising of a filing by
Actavis of an ANDA containing a Paragraph IV certification under 21 U.S.C. Section 355(j) for Opana
ER in four strengths: 5 mg, 10 mg, 20 mg and 40 mg. The Actavis Paragraph IV certification notice
refers to our Orange Book listed patents, U.S. Patent Nos. 5,128,143, 5,662,933, 5,958,456 and
7,276,250, which cover the formulation of Opana ER. These patents expire(d) in 2008, 2013, 2013
and 2023, respectively. On March 28, 2008, Endo and we filed a lawsuit against Actavis in the U.S.
Dist. NJ, alleging infringement of U.S. Patent No. 5,958,456. On June 2, 2008, Endo and we each
received a notice from Actavis advising us and Endo that Actavis had amended its ANDA for Opana ER
to include two additional strengths, 7.5 mg and 15 mg. On July 2, 2008, Endo and we each received
a third notice from Actavis advising that Actavis had further amended its ANDA to include the 30 mg
strength. Each ANDA amendment contained a Paragraph IV certification against our Orange Book
listed patents, U.S. Patent Nos. 5,128,143, 5,662,933, 5,958,456 and 7,276,250. On July 11, 2008,
Endo and we filed a lawsuit against Actavis in the U.S. Dist. NJ alleging infringement of U.S.
Patent No. 5,958,456 based on these two additional Paragraph IV certification notices from Actavis.
We believe we are entitled to a 30-month stay with respect to Actavis ANDA covering Opana ER 5
mg, 10 mg, 20 mg and 40 mg beginning February 14, 2008, with respect to Actavis amended ANDA
covering Opana ER 7.5 mg and 15 mg beginning June 2, 2008 and against its amended ANDA covering
Opana ER 30 mg beginning July 2, 2008.
On February 20, 2009, Endo and we settled all of the Actavis litigation. Both sides agreed to
dismiss their respective claims and counterclaims with prejudice. Under the terms of the
settlement, Actavis agreed not to challenge the validity or enforceability of our four Orange
Book-listed patents. Endo and we agreed to grant Actavis a license under US Patent No. 5,958,456
and a covenant not to sue for its generic formulation of Opana ER under our four Orange Book-listed
patents. The license and covenant not to sue will take effect on July 15, 2011, and earlier under
certain circumstances.
The settlement is subject to the review of the U.S. Federal Trade Commission and Department of
Justice.
Sandoz ANDA Litigation
On or around July 14, 2008, Endo and we each received a notice from Sandoz advising us and
Endo that Sandoz had filed with the FDA an ANDA for Opana ER in four strengths: 5 mg, 10 mg, 20 mg
and 40 mg. This ANDA contained a Paragraph IV certification against our Orange Book listed
patents: U.S. Patent Nos. 5,662,933, 5,958,456 and 7,276,250. On August 22, 2008, Endo and we
filed a lawsuit against Sandoz in the U.S. Dist. Delaware, alleging infringement of U.S. Patent No.
5,958,456 in response to this notice.
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On or around November 20, 2008, Endo and we received a notice from Sandoz that it had filed an
amendment to its ANDA containing Paragraph IV certifications for the 7.5 mg, 15 mg and 30 mg dosage
strengths of oxymorphone hydrochloride extended release tablets. The notice covers our U.S. Patent
Nos. 5,128,143, 7,276,250, 5,958,456 and 5,662,933. On December 30, 2008, Endo and we filed suit
against Sandoz in the U.S. Dist. NJ. The lawsuit alleges infringement of an Orange Book-listed U.S.
patent that covers the Opana ® ER formulation. In response, Sandoz filed an answer and
counterclaims, asserting claims for declaratory judgment that the patents listed in the Orange Book
are invalid, not infringed and/or unenforceable. We cannot predict the outcome of this litigation.
Endo and we intend to pursue all available legal and regulatory avenues in defense of Opana
® ER, including enforcement of our intellectual property rights and approved labeling.
In January 2009, the case against Sandoz was reassigned to the U.S. Dist. NJ.
Barr ANDA Litigation
On or around September 12, 2008, Endo and we each received a notice from Barr advising us and
Endo that Barr had filed with the FDA an ANDA for Opana ER in 40 mg. On September 13, 2008, Endo
and we received an additional notice that Barrs ANDA was amended to include the strengths of 5 mg,
10 mg and 20 mg. Barrs ANDA as amended contained a Paragraph IV certification against our Orange
Book listed patents, U.S. Patent Nos. 5,662,933, 5,958,456 and 7,276,250. On October 20, 2008,
Endo and we filed a lawsuit against Barr in the U.S. Dist. Delaware, alleging infringement of U.S.
Patent Nos. 5,662,933 and 5,958,456. In January 2009, the cases against Barr were reassigned to
the U.S. Dist. NJ.
On or around June 2, 2009, Endo and we received an additional notice that Barrs ANDA was
amended to include the strengths of 7.5 mg, 15 mg and 30 mg. Barrs ANDA, as amended, contained a
Paragraph IV certification against our Orange Book listed patents, U.S. Patent Nos. 5,662,933,
5,958,456 and 7,276,250. On July 2, 2009, Endo and we filed a lawsuit against Barr in the U.S.
Dist. NJ, alleging infringement of U.S. Patent Nos. 5,662,933 and 5,958,456.
In January 2009, the case against Barr was reassigned to the U.S. Dist. NJ.
Tang/Edelman Shareholder Claim
Tang Capital and Perceptive, our two largest shareholders and each of which owns more than 5%
of our outstanding securities, have brought three lawsuits against us: two in Thurston County,
Washington and one in King County, Washington. Following the dismissal of the two Thurston County
actions and the amendment of the complaint in King County, as discussed below, one suit remains
pending.
On March 12, 2009, Tang Capital and Perceptive brought suit against us in the Superior Court
of the State of Washington, Thurston County (Tang Capital Partners, et al. v. Penwest
Pharmaceuticals Co., No. 09-2-00617-0), seeking declaratory and injunctive relief to uphold
their claims that their nomination notice had satisfied the requirements set forth in our bylaws
and requesting that the court issue an order preventing us from seeking to disallow or otherwise
prevent or not recognize their nominations, or the casting of votes in favor of their designees, on
the basis that they had not complied with the provisions of our bylaws or applicable state law. On
March 13, 2009, Tang Capital and Perceptive moved for a preliminary injunction to enjoin us from
mailing any ballots to shareholders that contain provisions to vote for director nominees and
enjoining any shareholder vote on individuals nominated for the board of directors unless the three
designees of Tang Capital and Perceptive are permitted to be nominated and votes are permitted to
be cast in their favor, or a court resolves the merits of their declaratory judgment action
described above. On March 20, 2009, we confirmed in writing that Tang Capital and Perceptives
nomination notice had been timely received and that, assuming the accuracy and completeness of the
information contained in their notice, their notice in all other respects met the requirements of
our bylaws in regard to notices of intention to nominate. On March 23, 2009, Tang Capital and
Perceptive withdrew their motion for injunctive relief, and on April 10, 2009, they voluntarily
dismissed the suit.
On April 20, 2009, Tang Capital and Perceptive brought suit against us in the Superior Court
of the State of Washington, King County, (Tang Capital Partners, et al. v. Penwest
Pharmaceuticals Co.), seeking to enforce their alleged rights under the Washington Business
Corporation Act to inspect certain Company documents. Our position
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is that certain of the requested documents are outside the scope of documents for which the
Washington Business Corporation Act permits a statutory inspection right and that certain of the
conditions to qualify for statutory inspection rights have not been satisfied.
On April 28, 2009, Tang Capital and Perceptive brought suit against us in the Superior Court
of the State of Washington, Thurston County (Tang Capital Partners, et al. v. Penwest
Pharmaceuticals Co.), seeking either for the court to set the number of directors to be elected
at the 2009 annual meeting of shareholders at three rather than two, or for the court to require us
to waive the advance notice provisions of our bylaws to permit Tang Capital and Perceptive to
include a proposal in the proxy statement in which the required percentage for board approval of
certain matters would be 81% or more, rather than 75% or more. On May 13, 2009, Plaintiffs
dismissed this Thurston County action reasserting the same claims via an amended complaint in the
King County action. Plaintiffs sought preliminary injunctive relief on their claims before the
2009 Annual Meeting of Shareholders and the motion was denied by the court. Tang Capital and
Perceptive then filed a subsequent claim for a trial. Although this claim is still outstanding in
King County, the proposed bylaw amendment and bylaw proposal was not passed by our shareholders at
the annual meeting. The trial is currently scheduled for October 4, 2010.
Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk, and you should carefully
consider the risks and uncertainties described below in addition to the other information included
or incorporated by reference in this quarterly report on Form 10-Q. If any of the following risks
actually occurs, our business, financial condition or results of operations would likely suffer,
possibly materially. In that case, the trading price of our common stock could fall.
The
following discussion includes six revised risk factors (We have a history of net losses
and may not be able to achieve or maintain profitability on an annual basis; We may require
additional funding, which may be difficult to obtain; We are dependent on our collaborators to
manufacture and commercialize our products;
We face significant competition, which may result in others
discovering, developing or commercializing products before us or more
successfully than we do;
We have only limited manufacturing capabilities and
will be dependent on third party manufacturers; and The market price of our common stock may be
volatile) that reflect material developments subsequent to the discussion of risk factors included
in our quarterly report on Form 10-Q filed on August 10, 2009.
We have a history of net losses and may not be able to achieve or maintain profitability on an
annual basis
We have incurred net losses since 1994, including net losses of $26.7 million, $34.5 million
and $31.3 million during 2008, 2007 and 2006, respectively. For the nine month period ended
September 30, 2009, our net loss was $2.7 million. As of September 30, 2009, our accumulated
deficit was approximately $236 million.
We were profitable in the third quarter of 2009, with a net profit of $383,000, our first
quarterly net profit from continuing operations. If we do not receive royalties from Endo for
Opana ER in such amounts as forecasted and provided to us by Endo, or if we are unable to maintain
our current operating expense level, which was reduced, compared with our 2008 level, we may not be
able to achieve profitability for the fourth quarter of 2009 or the full year 2010. We may not
be able to achieve profitability on a quarterly or annual basis in future periods, and even if we
are able to achieve profitability, we may not be able to maintain it.
Developing drug candidates to treat rare disorders of the nervous system will require us to
incur substantial costs and expenses associated with preclinical and clinical trials, regulatory
approvals and commercialization. For instance, if we determine to advance A0001 into later stage
clinical trials in 2010, such costs and expenses are likely to increase. As a result, these
expenses may affect our profitability. Net losses have had and will continue to have an adverse
effect on our shareholders equity, total assets and working capital.
Our future profitability will depend on numerous factors, including:
| the commercial success of Opana ER, and the amount of royalties from Endos sales of Opana ER, which may be adversely affected by any potential generic competition; | ||
| our ability to successfully defend our intellectual property protecting our products; |
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| our ability to access funding support for development programs from third party collaborators; | ||
| the level of our investment in research and development activities, including the timing and costs of conducting clinical trials of our products; | ||
| the level of our general and administrative expenses; | ||
| the successful development and commercialization of product candidates in our portfolio and products being developed for collaborations; and | ||
| royalties from Mylans sales of Pfizers generic version of Procardia XL 30 mg. |
We may require additional funding, which may be difficult to obtain
As of September 30, 2009, we had cash, cash equivalents and marketable securities of
approximately $11.5 million. We anticipate that, based upon our current operating plan, our
existing capital resources, together with expected royalties from third parties, will be sufficient
to fund our operations on an ongoing basis through at least 2010. If we do not receive royalties
from Endo for Opana ER in such amounts as we anticipate, we may not be able to fund our ongoing
operations through 2010 without seeking additional funding from the capital markets.
We have taken measures to reduce our spending and to manage our costs more closely, including
staff reductions that we implemented in March 2008 and January 2009, and the staff reductions we
announced in the fourth quarter of 2009. We are operating based on a narrowed set of priorities in
2009 and we recognize our limited financial resources and the challenging environment in which we
operate. We have however, incurred significant unplanned costs in connection with the shareholder
proxy contest related to our 2009 annual meeting of shareholders and the related litigation. These
costs incurred in connection with the proxy solicitation, including legal and other advisory fees,
totaled $1.3 million in the nine month period ended September 30, 2009, and included costs of
litigation relating to three lawsuits brought by the dissident shareholders, one of which is still
pending. The costs of litigation are difficult to project. As a result, our legal expenses could
increase depending on the course of the litigation.
We are also seeking to enter into collaboration and licensing agreements for the development
and marketing of Opana ER in territories outside the United States with our partner Endo, and to
enter into additional drug delivery technology collaborations. These collaborations may provide
additional funding for our operations.
Requirements for capital in our business are substantial. Our potential need to seek
additional funding will depend on many factors, including:
| the commercial success of Opana ER, and the amount of royalties from Endos and Valeants sales of Opana ER, which may be adversely affected by any potential generic competition; | ||
| the prosecution, defense and enforcement of our patents and other intellectual property rights, such as our Orange Book listed patents for Opana ER, and the prosecution by us and Endo of additional patent applications with respect to Opana ER; | ||
| the timing and amount of payments received under collaborative agreements, including our agreement with Mylan with respect to Pfizers generic version of Procardia XL 30 mg and other drug delivery technology collaborations; | ||
| the timing and amount of our internal costs of development for drug candidates for which we acquire rights under the Edison Agreement; | ||
| the progress of our existing development projects and any development projects we may undertake, funding obligations with respect to the projects and the related costs to us of clinical studies for our product candidates; |
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| our and Endos ability to enter into collaborations for Opana ER outside the United States and our drug delivery technologies, and the structure and terms of any such agreements; | ||
| our ability to access funding support for development programs from third party collaborators; | ||
| the level of our investment in capital expenditures for facilities and equipment; | ||
| the timing and amount of our costs in connection with any future proxy contest in connection with our annual meetings of shareholders and the shareholder lawsuits filed against us and our directors; and | ||
| our success in reducing our spending and managing our costs. |
Under the current economic environment, market conditions have made it very difficult for
companies like ours to obtain equity or debt financing. We believe that any such financing that we
could obtain would be on significantly unfavorable terms. If we raise additional funds by issuing
equity securities, further dilution to our then-existing shareholders may result. Additional debt
financing, such as the credit facility noted above, may involve agreements that include covenants
limiting or restricting our ability to take specific actions, such as incurring additional debt,
making capital expenditures or declaring dividends. Any debt or equity financing may contain
terms, such as liquidation and other preferences, that are not favorable to us or our shareholders.
If we raise additional funds through collaboration and licensing arrangements, or research and
development arrangements with third parties, it may be necessary to relinquish valuable rights to
our technologies, research programs or potential products, or grant licenses on terms that may not
be favorable to us. If we seek but are unable to obtain additional financing, we may be required
to delay, reduce the scope of, or eliminate our planned development activities, including our
planned clinical trials, which could harm our financial condition and operating results.
Our ability to generate revenues depends heavily on the success of Opana ER
We made a significant investment of our financial resources in the development of Opana ER.
In the near term, our ability to generate significant revenues will depend primarily on the growth
of Opana ER sales by Endo. Opana ER competes with a number of approved drugs manufactured and
marketed by major pharmaceutical companies and generic versions of some of these drugs. Opana ER
may have to compete against new drugs and generic versions of Opana ER that may enter the market in
the future.
The degree of market success of Opana ER depends on a number of factors, including:
| the safety and efficacy of Opana ER as compared to competing products; | ||
| Endos ability to educate the medical community about the benefits, safety and efficacy of Opana ER; | ||
| the effectiveness of Endos sales and marketing activities; | ||
| the potential impact of tamper resistant opioids newly available in the market; | ||
| Endos ability to manufacture and maintain suitable inventory for sale on an ongoing basis; | ||
| the reimbursement policies of government and third party payors with respect to Opana ER; | ||
| the pricing of Opana ER; | ||
| the level of stocking of Opana ER by wholesalers and retail pharmacies; | ||
| the required risk evaluation management strategy currently being considered by FDA; and | ||
| the availability of generic versions of Opana ER and the timing of generic competition. |
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IMPAX, Actavis, Sandoz and Barr have each filed an ANDA that, together with their respective
amendments, cover all seven strengths of Opana ER. Endo and we have filed patent infringement
lawsuits against each of IMPAX, Sandoz and Barr in connection with their respective ANDAs and have
settled our litigation with Actavis. Descriptions of these lawsuits are included in Part II.
Item 1. Legal Proceedings.
Endo and we intend to pursue all available legal and regulatory avenues defending Opana ER.
The new dosage form exclusivity for Opana ER granted by the FDA in connection with its approval of
Opana ER expired in June 2009. In addition, we believe that we are entitled to a 30-month stay
against IMPAXs ANDA, Actavis ANDA, Sandozs ANDA and Barrs ANDA under the Hatch-Waxman Act.
IMPAX has announced that it is seeking to reinstate an earlier filing date of its ANDA covering
Opana ER 5 mg, 10 mg, 20 mg and 40 mg. If this occurs or if Endo and we are unsuccessful in our
Hatch-Waxman patent lawsuits, Opana ER could be subject to generic competition earlier. We expect
that competition from one or more of these generic companies could cause significant erosion to the
pricing of Opana ER, which in turn would adversely affect the royalties that we receive from Endo
and our results of operations and financial condition.
If Opana ER sales do not grow steadily or substantially, it would have a material adverse
effect on our business, financial condition and results of operations.
In the event that we are able to obtain regulatory approval of any of our other products
candidates, the success of those products would also depend upon their acceptance by physicians,
patients, third party payors or the medical community in general. There can be no assurance as to
market acceptance of our drug products or our drug delivery technologies.
Our success depends on our ability, or our collaborators ability, to protect our patents and
other intellectual property rights
Our success depends in significant part on our ability, or our collaborators ability, to
obtain patent protection for our products, both in the United States and in other countries, or on
our collaborators ability to obtain patents with respect to products on which we are collaborating
with them. Our success also depends on our and our collaborators ability to enforce these
patents. Patent positions can be uncertain and may involve complex legal and factual questions.
Endo and we have filed additional patent applications with respect to Opana ER which, if issued,
could delay generic competition. However, patents may not be issued from these patent applications
or any other patent applications that we own or license. If patents are issued, the claims allowed
may not be as broad as we have anticipated and may not sufficiently cover our drug products or our
technologies. In addition, issued patents that we own or license may be challenged, invalidated or
circumvented and we may not be able to bring suit to enforce these patents.
We have four issued U.S. patents listed in the Orange Book for Opana ER, the earliest of which
patents expired in September 2008 and the other of which patents expire in 2013, 2013 and 2023,
respectively. As the owner of the patents listed in the Orange Book for Opana ER, we have become a
party to ongoing Hatch-Waxman patent litigation. Endo and we filed patent infringement suits
against IMPAX, Sandoz and Barr in connection with their respective ANDAs for Opana ER, and we
settled our litigation with Actavis. We believe that we are entitled to the 30-month stay
available under the Hatch-Waxman Act against each of IMPAX, Sandoz and Barr because we initiated
the suit within 45 days of our receipt of their respective notice letters. However, IMPAX has
publicly disclosed that it is seeking to reinstate an earlier filing date of its ANDA covering
Opana ER 5 mg, 10 mg, 20 mg and 40 mg. If IMPAX is successful, we will not be entitled to the
30-month stay against IMPAX in these four strengths. If we proceed with the Hatch-Waxman
litigation, we may not prevail on defending our patents. Litigation is inherently unpredictable
and unfavorable rulings do occur. An unfavorable ruling or loss of the 30-month stay could subject
Opana ER to earlier generic competition. We expect that generic competition would adversely affect
the pricing of Opana ER, the royalties that we receive from Endo and the results of our operations
and financial condition.
Our research, development and commercialization activities or any products in development may
infringe or be claimed to infringe patents of competitors or other third parties. In such event,
we may be ordered to pay such third parties lost profits or punitive damages. We may have to seek
a license from a third party and pay license fees or royalties. Awards of patent damages can be
substantial. Licenses may not be available at all or available on
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acceptable terms, or the licenses may be nonexclusive, which could result in our competitors
gaining access to the same intellectual property. If we or our collaborators are not able to
obtain a license, we could be prevented from commercializing a product, or be forced to cease some
aspect of our business operations.
Our success also depends on our ability to maintain the confidentiality of our trade secrets.
We seek to protect such information by entering into confidentiality agreements with employees,
consultants, licensees and other companies. These agreements may be breached by such parties. We
may not be able to obtain an adequate remedy to such a breach. In addition, our trade secrets may
otherwise become publicly known or be independently developed by our competitors.
We are dependent on our collaborators to manufacture and commercialize our products
We have historically collaborated with partners to facilitate the manufacture and
commercialization of our products and product candidates. We continue to depend on our
collaborators to manufacture, market and sell our products. In particular, we are dependent on
Endo to manufacture, market and sell Opana ER in the United States and on Mylan to market and sell
Pfizers generic version of Procardia XL 30 mg. In October 2009, Mylan notified us that Mylan had
informed Pfizer of Mylans intent not to renew its supply and distribution agreement with Pfizer,
which expires in March 2010. As a result, we do not expect to receive royalties from Mylan on
sales of Pfizers generic version of Procardia XL 30 mg after the first half of 2010.
We have limited experience in manufacturing, marketing and selling pharmaceutical products.
Accordingly, if we cannot maintain our existing collaborations or establish new collaborations with
respect to our products, we will have to establish our own capabilities or discontinue
commercialization of the affected products. Developing our own capabilities may be expensive and
time consuming and could delay the commercialization of the affected products. There can be no
assurance that we will be successful in developing these capabilities.
Our existing collaborations may be subject to termination on short notice under certain
circumstances such as upon a bankruptcy event or if we breach the agreement. If any of our
collaborations are terminated, we may be required to devote additional internal resources to the
product, seek a new collaborator on short notice or abandon the product. The terms of any
additional collaborations or other arrangements that we establish may not be favorable to us.
We are also at risk that these collaborations or other arrangements may not be successful.
Factors that may affect the success of our collaborations include:
| Our collaborators may be pursuing alternative technologies or developing alternative products, either on their own or in collaboration with others, that may be competitive to the product on which we are collaborating, which could affect our collaborators commitment to our collaboration. | ||
| Our collaborators may reduce marketing or sales efforts, or discontinue marketing or sales of our products, which could reduce the revenues we receive on the products. | ||
| Our collaborators may pursue higher priority programs or change the focus of their commercialization programs, which could affect the collaborators commitment to us. Pharmaceutical and biotechnology companies re-evaluate their priorities from time to time, including following mergers and consolidations, which have been common in recent years in these industries. | ||
| Disputes may arise between us and our collaborators from time to time regarding contractual or other matters. In 2006, we were engaged in a dispute with Endo with regard to the sharing of marketing expenses during the period prior to when Opana ER reaches profitability, which we subsequently resolved. Any other such disputes with Endo or other collaborators could be time consuming and expensive, and could impact our anticipated rights under our agreements with those collaborators. |
We have limited experience in developing, manufacturing, marketing and selling pharmaceutical
products
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We have limited experience in developing, manufacturing, marketing and selling pharmaceutical
products. In the past, we have relied on our collaborators to manufacture, market and sell our
products. Under our collaboration with Edison, we are responsible for pharmaceutical and clinical
development, seeking regulatory approvals, manufacturing, and marketing of the products.
Accordingly, we will have to continue to develop our own capabilities in these areas, or seek a
collaborator.
If we cannot establish our own capabilities successfully and on a timely basis, we may not be
able to develop or commercialize these drug candidates. Developing our own capabilities may be
expensive and time consuming and could delay the commercialization of the products we are
developing.
The Drug Enforcement Agency, or DEA, limits the availability of the active drug substances used in
Opana ER. As a result, Endos procurement quota may not be sufficient to meet commercial demand
Under the Controlled Substances Act of 1970, the DEA regulates chemical compounds as Schedule
I, II, III, IV or V substances, with Schedule I substances considered to present the highest risk
of substance abuse and Schedule V substances the lowest risk. The active drug substance in Opana
ER, oxymorphone hydrochloride, is listed by the DEA as a Schedule II substance. Consequently, the
manufacture, shipment, storage, sale, prescribing, dispensing and use of Opana ER are subject to a
higher degree of regulation. For example, all Schedule II drug prescriptions must be written and
signed by a physician, physically presented to a pharmacist and may not be refilled without a new
prescription.
Furthermore, the DEA limits the availability of the active drug substance used in Opana ER.
As a result, Endos procurement quota of the active drug substance may not be sufficient to meet
commercial demands. Endo must apply to the DEA annually for the procurement quota in order to
obtain the substance. Any delay or refusal by the DEA in establishing the procurement quota could
cause trade inventory disruptions, which could have a material adverse effect on our business,
financial condition and results of operations.
Misuse and/or abuse of Opana ER, which contains a narcotic ingredient, could subject us to
additional regulations, including compliance with risk management programs, which may prove
difficult or expensive for us to comply with, and we may face lawsuits as a result
Opana ER contains a narcotic ingredient. Misuse or abuse of drugs containing narcotic
ingredients can lead to physical or other harm. In the past few years, for example, reported
misuse and abuse of OxyContin, a product containing the narcotic oxycodone, resulted in the
strengthening of warnings on its labeling. The sponsor of OxyContin also faced numerous lawsuits,
including class action lawsuits, related to OxyContin misuse or abuse. Misuse or abuse of Opana ER
could also lead to additional regulation of Opana ER and subject us to litigation.
We face significant competition, which may result in others discovering, developing or
commercializing products before us or more successfully than we do
The pharmaceutical industry is highly competitive and is affected by new technologies,
governmental regulations, healthcare legislation, availability of financing and other factors.
Many of our competitors have:
| significantly greater financial, technical and human resources than we have and may be better equipped to develop, manufacture and commercialize drug products; | ||
| more extensive experience than we have in conducting preclinical studies and clinical trials, obtaining regulatory approvals, and manufacturing and marketing pharmaceutical products; | ||
| competing products that have already received regulatory approval or are in late-stage development; or | ||
| collaborative arrangements in our target markets with leading companies and research institutions. |
We face competition based on the safety and effectiveness of our products, the timing and
scope of regulatory approvals, the availability and cost of supply, marketing and sales
capabilities, reimbursement coverage, pricing, patent position and other factors. Our competitors
may develop or commercialize more effective, safer or more
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affordable products, or obtain more effective patent protection. Accordingly, our competitors
may commercialize products more rapidly or effectively than we do, which would adversely affect our
competitive position, the likelihood that our product will achieve initial market acceptance and
our ability to generate meaningful revenues from our products. Even if our products achieve
initial market acceptance, competitive products may render our products obsolete or noncompetitive.
If our products are rendered obsolete, we may not be able to recover the expenses of developing
and commercializing those products.
Opana ER faces competition from products with the same indications. For instance, Opana ER
competes in the moderate to severe long acting opioid market with products such as OxyContin and MS
Contin, Duragesic patch, Avinza and Kadian and the generic versions of some of these drugs. Opana
ER may also be subject to competition from generic versions of the product, such as the generic
versions being developed by IMPAX, Actavis, Sandoz and Barr. Recently, tamper resistant
formulations of morphine have been approved by the FDA and we are aware of tamper resistant
formulations of oxycodone that are under development. We expect that these products will also compete against
Opana ER.
Products developed through our collaboration with Edison may compete against products being
developed by numerous private and public companies for at least some of the indications we may
pursue. Various companies and institutions are conducting studies in the area of inherited
mitochondrial disease. At least two companies have announced that they are pursuing programs based
upon mitochondrial disease pathways. Santhera Pharmaceuticals is currently conducting clinical
trials of the coenzyme Q analog, idebenone for the diseases of Friedreichs Ataxia, Duchennes
muscular dystrophy, and Lebers Hereditary Optic Neuropathy. Santhera recently received regulatory
approval in Canada for idebenone to be sold as a treatment for Friedreichs Ataxia under the brand
name Catena ®. Repligen, through the acquisition of an HDAC inhibitor, is also planning studies in
Friedreichs Ataxia. If these companies are able to receive regulatory approvals for their
products before we do, it may negatively impact our ability to receive regulatory approvals for our
products if these products have orphan drug exclusivity or to achieve market acceptance of our
products. If their products are more effective, safer or more affordable, our products may not be
market competitive.
Our drug delivery technologies and our efforts to enter into drug delivery technology
collaborations, face competition from numerous public and private companies and their extended
release technologies, including the oral osmotic pump (OROS) technology marketed by Johnson &
Johnson, multiparticulate systems marketed by Elan Corporation plc, Biovail Corporation and KV
Pharmaceutical Company, and traditional matrix systems marketed by SkyePharma plc, as well as a
gastroretentive system by Depomed.
If our clinical trials are not successful or take longer to complete than we expect, we may not be
able to develop and commercialize our products such as A0001
In order to obtain regulatory approvals for the commercial sale of our products, we or our
collaborators will be required to complete clinical trials in humans to demonstrate the safety and
efficacy of the products. However, we may not be able to commence or complete these clinical
trials in any specified time period, either because the FDA or other regulatory agencies object for
other reasons. With respect to our approved products, including Opana ER, we have relied on our
collaborators to conduct clinical trials and obtain regulatory approvals. We may develop the
product candidates we obtain under our collaboration with Edison independently, including
controlling the clinical trials and regulatory submissions with the FDA or European Medicines
Agency (EMEA). We have limited experience in conducting Phase II and Phase III clinical trials and
to date have not obtained approval for the marketing of a drug product. In 2005, we submitted an
NDA for a product we were developing, PW2101, but we received a non-approvable letter from the FDA
and terminated the development program.
Even if we complete a clinical trial of one of our potential products, the clinical trial may
not prove that our product is safe or effective to the extent required by the FDA, the EMEA, or
other regulatory agencies to approve the product. We or our collaborators may decide, or
regulators may require us or our collaborators, to conduct additional clinical trials. For
example, Endo received an approvable letter for Opana ER from the FDA in response to its NDA for
Opana ER, which required Endo to conduct an additional clinical trial and which significantly
delayed the approval of Opana ER. In addition, regulators may require post-marketing testing and
surveillance to monitor the safety and efficacy of a product.
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Some of the drug candidates we may develop will be in the early stages of development. There
will be limited information and understanding of the safety and efficacy of these drug candidates.
There may not be any clinical data available. We will have to conduct preclinical testing and
clinical studies to demonstrate the safety and efficacy of these drug candidates. The results from
preclinical testing of a product that is under development may not be predictive of results that
will be obtained in human clinical trials. In addition, the results of early human clinical trials
may not be predictive of results that will be obtained in larger scale advanced stage clinical
trials. Furthermore, we, our collaborators, and the Institutional Review Board or the FDA may
suspend clinical trials at any time if the healthy subjects or patients participating in such
trials are being exposed to unacceptable health risks or for other reasons. In the third quarter
of 2008, we terminated the development of PW4153 after the results of a Phase I study did not meet
our target profile.
The rate of completion of clinical trials is dependent in part upon the rate of enrollment of
patients. Patient accrual is a function of many factors, including the size of the patient
population, the proximity of patients to clinical sites, the eligibility criteria for the study and
the existence of competitive clinical trials. Delays in planned patient enrollment may result in
increased costs and program delays.
If clinical trials do not show any potential product to be safe or efficacious, if we are
required to conduct additional clinical trials or other testing of our products in development
beyond those that we currently contemplate or if we are unable to successfully complete our
clinical trials or other testing, we may:
| be delayed in obtaining marketing approval for our products; | ||
| not be able to obtain marketing approval for our products; or | ||
| not be able to obtain approval for indications that are as broad as intended. |
Our product development costs may also increase if we experience delays in testing or
approvals. In addition, significant delays in clinical trials could allow our competitors to bring
products to market before we do and impair our ability to commercialize our products.
We have received orphan drug designation for A0001 from the FDA for the treatment of inherited
mitochondrial respiratory chain diseases. We plan to file for orphan drug status for A0001 in the
European Union. The FDA and the European Union regulatory authorities grant Orphan Drug
designation to drugs intended to treat a rare disease or condition. In the United States, orphan
drug designation is generally for drugs intended to treat a disease or condition that affects fewer
than 200,000 or more than 200,000 individuals and for which there is no reasonable expectation that
the cost of developing and making available in the United States a product for this type of disease
or condition will be recovered from sales in the United States for the product. In the European
Union, orphan drug designation is for drugs intended to treat diseases affecting fewer than five in
10,000 individuals.
Generally, if a product with an orphan drug designation subsequently receives the first
marketing approval for the indication for which it has such designation, the product is entitled to
orphan drug exclusivity. Orphan drug exclusivity means that another application to market the same
drug for the same indication may not be approved for a period of up to 10 years in the European
Union, and for a period of seven years in the United States, except in limited circumstances set
forth in the U.S. Federal Food, Drug and Cosmetic Act. Obtaining orphan drug designations and
orphan drug exclusivity for our products for the treatment of inherited mitochondrial respiratory
chain diseases may be critical to the success of these products. If our competitor receives
marketing approval before we do for a drug that is considered the same as our drug candidate for
the same indication we are pursuing, we will be prevented from receiving marketing approval for our
drug candidate during the orphan drug exclusivity period of the competitor.
Even if we obtain orphan drug exclusivity for any of our potential products, we may not be
able to maintain it. If a competitor product, containing the same drug as our product and seeking
approval for the same indication, is shown to be clinically superior to our product, any orphan
drug exclusivity we have obtained will not block the approval of such competitor product. In
addition, if a competitor develops a different drug for the same indication as our approved
indication, our orphan drug exclusivity will not prevent the competitor drug from obtaining
marketing approval.
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Orphan drug designation does not convey any advantage in, or shorten the duration of, the
regulatory review and approval process. Obtaining orphan drug designation may not provide us with
a material commercial advantage.
Even if we are able to obtain regulatory approvals for any of our product candidates, if they
exhibit harmful side effects after approval, our regulatory approvals could be revoked or
otherwise negatively impacted, and we could be subject to costly and damaging product liability
claims
Even if we receive regulatory approval for A0001 or any other product candidate that we
develop, we will have tested them in only a small number of carefully selected patients during our
clinical trials. If our applications for marketing are approved and more patients from the general
population begin to use our products, new risks and side effects associated with our products may
be discovered. As a result, regulatory authorities may revoke their approvals. In addition, we
may be required to conduct additional clinical trials, make changes in labeling of our products,
reformulate our products or make changes and obtain new approvals for our and our suppliers
manufacturing facilities. We might have to withdraw or recall our products from the marketplace.
We may also experience a significant drop in the potential sales of our product if and when
regulatory approvals for such products are obtained, experience harm to our reputation in the
marketplace or become subject to lawsuits, including class actions. Any of these results could
decrease or prevent any sales of our approved products or substantially increase the costs and
expenses of commercializing and marketing our products.
Our controlled release drug delivery technologies rely on the ability to control the release of
the active drug substances, and our business would be harmed if it was determined that there were
circumstances under which the active drug substances from one of our extended release products
would be released rapidly into the blood stream
Our controlled release products and product candidates rely on our ability to control the
release of the active drug substance. Some of the active ingredients in our controlled release
products, including Opana ER, contain levels of active drug substance that could be harmful, even
fatal, if the full dose of active drug substance were to be released over a short period of time,
which is referred to as dose-dumping.
In 2005, Purdue Pharma voluntarily withdrew from the market its product Palladone®
(hydromorphone hydrochloride extended release capsules), after acquiring new information that
serious and potentially fatal adverse reactions can occur when the product is taken together with
alcohol. The data, gathered from a study testing the potential effects of the drug with alcohol
use, showed that when Palladone is taken with alcohol, the extended release mechanism can fail and
may lead to dose-dumping. In anticipation of questions from the FDA with respect to the potential
dose-dumping effect of Opana ER given the FDAs experience with Palladone, Endo conducted both in
vitro and human testing of the effect of alcohol on Opana ER. In the in vitro testing, Endo did
not find any detectible effect of alcohol on the time release mechanism of the product. In the
human testing in the presence of alcohol, there was evidence of an increase in blood levels. The
FDA received this data before approving the NDA and required that the Opana ER labeling
specifically warn against taking the drug with alcohol of any kind.
We are subject to extensive government regulation including the requirement of approval before our
products may be marketed. Even if we obtain marketing approval, our products will be subject to
ongoing regulatory review
We, our collaborators, our products, and our product candidates are subject to extensive
regulation by governmental authorities in the United States and other countries. Failure to comply
with applicable requirements could result in warning letters, fines and other civil penalties,
delays in approving or refusal to approve a product candidate, product recall or seizure,
withdrawal of product approvals, interruption of manufacturing or clinical trials, operating
restrictions, injunctions and criminal prosecution.
Our products cannot be marketed in the United States without FDA approval. Obtaining FDA
approval requires substantial time, effort and financial resources, and there can be no assurance
that any approval will be granted on a timely basis, if at all. We have had only limited
experience in preparing applications and obtaining regulatory approvals. If the FDA does not
approve our product candidates or does not approve them in a timely fashion, our business and
financial condition may be adversely affected. Furthermore, the terms of marketing approval of any
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application, including the labeling content, may be more restrictive than we desire and could
affect the marketability of our products.
Certain products containing our controlled release technologies require the submission of a
full NDA. A full NDA must include complete reports of preclinical, clinical and other studies to
prove adequately that the product is safe and effective. These studies may involve, among other
things, full clinical testing, which requires the expenditure of substantial resources. The drug
candidates we are developing in collaboration with Edison will also require submission of full
NDAs. In certain other cases when we seek to develop a controlled release formulation of an
FDA-approved drug with the same active drug substance, we may be able to rely on previous FDA
determinations of safety and efficacy of the approved drug to support a section 505(b)(2) NDA. We
can provide no assurance, however, that the FDA will accept a submission of a section 505(b)(2) NDA
for any particular product. Even if the FDA did accept such a submission, the FDA may not approve
the application in a timely manner or at all. The FDA may also require us to perform additional
studies to support the modifications of the reference listed drug.
In addition, both before and after regulatory approval, we, our collaborators, our products,
and our product candidates are subject to numerous FDA regulations, among other things, covering
testing, manufacturing, quality control, cGMP, adverse event reporting, labeling, advertising,
promotion, distribution and export of drug products. We and our collaborators are subject to
surveillance and periodic inspection by the FDA to ascertain compliance with these regulations.
The relevant law and regulations may also change in ways that could affect us, our collaborators,
our products and our product candidates. Failure to comply with regulatory requirements could have
a material adverse impact on our business.
We may become involved in patent litigation or other proceedings relating to our products or
processes, which could result in liability for damages or termination of our development and
commercialization programs
The pharmaceutical industry has been characterized by significant litigation, interference and
other proceedings regarding patents, patent applications and other intellectual property rights.
The types of situations in which we may become parties to such litigation or proceedings include:
| We or our collaborators may initiate litigation or other proceedings against third parties to enforce our intellectual property rights. | ||
| If our competitors file patent applications that claim technology also claimed by us, we or our collaborators may participate in interference or opposition proceedings to determine the priority of invention. | ||
| If third parties initiate litigation claiming that our processes or products infringe their patent or other intellectual property rights, we and our collaborators will need to defend our rights in such proceedings. |
An adverse outcome in any litigation or other proceeding could subject us to significant
liabilities and/or require us to cease using the technology that is at issue or to license the
technology from third parties. We may not be able to obtain any required licenses on commercially
acceptable terms, or at all.
The cost of any patent litigation or other proceeding, even if resolved in our favor, could be
substantial. We could incur significant costs in participating or assisting in the litigation.
In the case of the generic litigation involving Opana ER, our collaborator Endo is bearing all
litigation costs. However, on other products we develop, we may be required to incur these costs
to defend our patents. Our competitors may have substantially greater resources to sustain the
cost of such litigation and proceedings more effectively than we can. Uncertainties resulting from
the initiation and continuation of patent litigation or other proceedings could have a material
adverse effect on our ability to compete in the marketplace. Patent litigation and other
proceedings may also absorb significant management time.
We have only limited manufacturing capabilities and will be dependent on third party manufacturers
We lack commercial-scale facilities to manufacture our TIMERx materials or other products we
are developing. We currently rely on Draxis Specialty Pharmaceuticals Inc. for the bulk
manufacture of our TIMERx materials
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under a manufacturing and supply agreement with an initial term that expires in November 2009. On May 7, 2009, we received notice from Draxis, our contract manufacturer of TIMERx material, that as a result of its decision to cease manufacturing of solid dosage form products in the facility in which TIMERx is currently manufactured, it will not renew the manufacturing agreement with us upon the expiration of the current term in November 2009. As a result, we intend to increase our current inventory levels of TIMERx material and are working with Endo on the qualification of another manufacturer. We believe that there are a limited number of manufacturers that comply with cGMP regulations and are capable of manufacturing our TIMERx materials. We have identified a potential manufacturer and are working on the qualification of that manufacturer. Based on our preliminary technology transfer activities with this potential manufacturer, we expect to enter into a commercial manufacturing agreement with this manufacturer on terms that are comparable to our manufacturing agreement with Draxis. However, we may not be able to qualify the manufacturer or to enter into a commercial manufacturing agreement on terms acceptable to us. Although we have qualified alternate suppliers with respect to the xanthan gum and locust bean gum used to manufacture our TIMERx materials, we currently do not have a second supplier of TIMERx materials. If we are unable to obtain alternative contract manufacturing or obtain such manufacturing on commercially reasonable terms, we may not be able to comply with our supply obligations to Endo and Valeant with respect to Opana ER, and our business could be materially adversely affected. |
We are not a party to any agreements with our third-party manufacturers for A0001, except for
purchase orders or similar arrangements. If we are unable to enter into longer-term manufacturing
arrangements for A0001 on acceptable terms, particularly as it advances through clinical
development and moves closer to regulatory approval, our business and the development and
commercialization of A0001 could be materially adversely affected.
In addition, there can be no assurance that Draxis or any other third parties we rely on for
supply of our TIMERx materials or other products will perform. Any failures by third party
manufacturers may delay the development of products or the submission for regulatory approval,
impair our or our collaborators ability to commercialize products as planned and deliver products
on a timely basis, require us or our collaborators to cease distribution, or recall some or all
batches of products or otherwise impair our competitive position, which could have a material
adverse effect on our business, financial condition and results of operations.
If our third party manufacturers fail to perform their obligations, we may be adversely
affected in a number of ways, including:
| we or our collaborators may not be able to meet commercial demands for Opana ER or our other products; | ||
| we may not be able to initiate or continue clinical trials for products that are under development; and | ||
| we may be delayed in submitting applications for regulatory approvals of our products. |
We may not be able to successfully develop our own manufacturing capabilities. If we decide
to develop our own manufacturing capabilities, we will need to recruit qualified personnel, and
build or lease the requisite facilities and equipment we currently do not have. Moreover, it may
be very costly and time consuming to develop such capabilities.
The manufacture of our products is subject to regulations by the FDA and similar agencies in
foreign countries. Any delay in complying or failure to comply with such manufacturing regulations
could materially adversely affect the marketing of our products and our business, financial
condition and results of operations.
We are dependent upon a limited number of suppliers for the gums used in our TIMERx materials
Our TIMERx drug delivery systems are based on a hydrophilic matrix combining a heterodispersed
mixture primarily composed of two polysaccharides, xanthan gum and locust bean gum, in the presence
of dextrose. These gums are also used in our Geminex, gastroretentive and SyncroDose drug delivery
systems. We and Draxis purchase these gums from a primary supplier. We have qualified alternate
suppliers with respect to such materials, but we can provide no assurance that interruptions in
supplies will not occur in the future. Any interruption in these supplies could have a material
adverse effect on our ability to manufacture bulk TIMERx materials for delivery to our
collaborators.
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If we or our collaborators fail to obtain an adequate level of reimbursement by governmental or
third party payors for Opana ER or any other products we develop, we may not be able to
successfully commercialize the affected product
The availability of reimbursement by governmental and other third party payors affects the
market for any pharmaceutical products, including Opana ER. These third party payors continually
attempt to contain or reduce the costs of health care by challenging the prices charged for
pharmaceutical products. In certain foreign countries, particularly the countries of the European
Union, the pricing of prescription pharmaceuticals is subject to governmental control.
In both the United States and certain foreign jurisdictions, there have been a number of
legislative and regulatory proposals to change the healthcare system. Further proposals are
likely. The final adoption of these proposals may affect our or our collaborators ability to set
prices which provide an adequate return on our investment.
We expect Endo to experience pricing pressure with respect to Opana ER. We may experience
similar pressure for other products for which we obtain marketing approvals in the future due to
the trend toward managed healthcare, the increasing influence of health maintenance organizations
and additional legislative proposals. Neither we nor our collaborators may be able to sell
products profitably if access to managed care or government formularies is restricted or denied, or
if reimbursement is unavailable or limited in scope or amount.
We will be exposed to product liability claims and may not be able to obtain adequate product
liability insurance
Our business exposes us to potential product liability risks that are inherent in the testing,
manufacturing, marketing and sale of pharmaceutical products. Product liability claims might be
made by consumers, healthcare providers, other pharmaceutical companies, or third parties that sell
our products. These claims may be made even with respect to those products that are manufactured
in regulated facilities or that otherwise possess regulatory approval for commercial sale.
We are currently covered by primary product liability insurance in the amounts of $15 million
per occurrence and $15 million annually in the aggregate on a claims-made basis, and by excess
product liability insurance in the amounts of $5 million per occurrence and $5 million annually in
the aggregate. This coverage may not be adequate to cover all product liability claims. Product
liability coverage is expensive. In the future, we may not be able to maintain or obtain such
product liability insurance at a reasonable cost or in sufficient amounts to protect us against
potential liability claims. Claims that are not covered by product liability insurance could have
a material adverse effect on our business, financial condition and results of operations.
If we are unable to retain our key personnel and continue to attract additional professional
staff, we may not be able to maintain or expand our business
Because of the scientific nature of our business, our ability to develop products and compete
with our current and future competitors will remain highly dependent upon our ability to attract
and retain qualified scientific, technical and managerial personnel. The loss of key scientific,
technical or managerial personnel, or the failure to recruit additional key personnel, could have a
material adverse effect on our business. We do not have employment agreements with our key
executives and we cannot guarantee that we will succeed in retaining all of our key personnel.
There is intense competition for qualified personnel in our industry, and there can be no assurance
that we will be able to continue to attract and retain the qualified personnel necessary for the
success of our business.
The market price of our common stock may be volatile
The market price of our common stock, like the market prices for securities of other
pharmaceutical, biopharmaceutical and biotechnology companies, has been volatile. For example, the
high and low closing prices of our common stock were $3.17 per share and $0.37 per share,
respectively, during the twelve months ended September 30, 2009. On November 3, 2009, the closing
market price of our common stock was $2.24. The market from time to time experiences, significant
price and volume fluctuations that are unrelated to the operating performance of particular
companies. The market price of our common stock may also fluctuate as a result of our operating
results, sales of Opana ER, future sales of our common stock, announcements of technological
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innovations, new therapeutic products or new generic products by us or our competitors,
announcements regarding collaborative agreements, clinical trial results, government regulations,
developments in patent or other proprietary rights, public concern as to the safety of drugs
developed by us or others, changes in reimbursement policies, comments made by securities analysts
and other general market conditions.
Specific provisions of our Shareholder Rights Plan, Articles of Incorporation and Bylaws and the
laws of Washington State make a takeover of Penwest or a change in control or management of our
Company more difficult
We have adopted a shareholder rights plan, often referred to as a poison pill. The rights
issued under the plan will cause substantial dilution to a person or group that attempts to acquire
us on terms that are not approved by our board of directors, unless the board first determines to
redeem the rights. Various provisions of our Articles of Incorporation, our Bylaws and the laws of
the State of Washington may also have the effect of deterring hostile takeovers, or delaying or
preventing changes in control or management of our company, including transactions in which our
shareholders might otherwise receive a premium for their shares over then current market prices.
In addition, these provisions may limit the ability of shareholders to approve transactions that
they may deem to be in their best interest. We may in the future adopt measures that may have the
effect of deterring hostile takeovers, or delaying or preventing changes in control or management
of our company.
Proxy contests pursued by dissident shareholders may be costly and disruptive to our business
operations
Campaigns by significant investors to effect changes at publicly traded companies have
increased in recent years. Representatives of Perceptive and Tang Capital, which currently
beneficially own approximately 42% of our outstanding common stock in the aggregate, were elected
to our board of directors at our 2009 annual meeting of shareholders, following a proxy contest
initiated by them. As part of the proxy contest, they also brought three lawsuits against us and
our directors, one of which is still pending.
This proxy contest and related litigation resulted in substantial expense to us and consumed
significant attention of our management and board of directors. These costs in total were
approximately $1.3 million for the nine months ended September 30, 2009, which includes costs of
litigation relating to lawsuits brought by the dissident shareholders. The costs of litigation are
difficult to project. As a result, our legal expenses could increase depending on the course of
the outstanding litigation.
Moreover, our operations and our ability to achieve our strategic goals could be disrupted due
to the uncertainty created for our employees, and current and prospective suppliers, manufacturers
and collaborators as a result of the election of the two nominees, Perceptive and Tang Capital, to
our board of directors and the passage, at our 2009 annual meeting of shareholders, of a resolution
that Perceptive and Tang Capital proposed, requesting that our board of directors take prompt and
thoughtful action to wind down substantially all of our operations.
Item 6. Exhibits
See exhibit index below for a list of the exhibits filed as part of this Quarterly Report on
Form 10-Q, which exhibit index is incorporated herein by reference.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
PENWEST PHARMACEUTICALS CO. |
||||
Date: November 9, 2009 | /s/ Jennifer L. Good | |||
Jennifer L. Good | ||||
President and Chief Executive Officer |
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EXHIBIT INDEX
Exhibit | ||
Number | Description | |
31
|
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002. | |
32
|
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
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