UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2010
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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 333-153896
AXCAN INTERMEDIATE HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
74-3249870
(IRS Employer Identification Number)
22 Inverness Center Parkway
Suite 310
Birmingham, AL 35242
(Address of Principal Executive Offices) (Zip Code)
Registrants telephone number, including area code: (205) 991-8085
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes No þ
Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
Yes þ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes No þ Registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934, but is not required to file such reports under such
sections.
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (paragraph 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 No (Registrant is not subject to the requirements of Rule 405 of Regulation S-T at this
time).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
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 definitions of
large accelerated filer, accelerated filer and small reporting company in Rule 12b-2 of
the Exchange Act.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
(Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes No þ
As of March 31, 2010, the last business day of the registrants most recently completed
second fiscal quarter, there was no established public trading market for any of the common stock
of the registrant and therefore, an aggregate market value of common stock of the registrant based
on sales or bid and asked prices is not determinable. As of December 16, 2010, there were 100
shares of common stock of the registrant outstanding, all of which were owned by Axcan MidCo Inc.
Documents incorporated by reference: None.
TABLE OF CONTENTS
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Forward-Looking Statements |
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Part I |
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Item 1. Business |
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Item 1a. Risk Factors |
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Item 1b. Unresolved Staff Comments |
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45 |
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Item 2. Properties |
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Item 3. Legal Proceedings |
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Item 4. (Removed And Reserved) |
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Part II |
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Item 5. Market For Registrants Common Equity, Related Stockholder Matters And Issuer Purchases Of
Equity Securities |
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Item 6. Selected Financial Data |
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Item 7. Managements Discussion And Analysis Of Financial Condition And Results Of Operations |
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53 |
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Item 7a. Quantitative And Qualitative Disclosures About Market Risk |
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81 |
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Item 8. Financial Statements And Supplementary Data |
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Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure |
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130 |
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Item 9a. Controls And Procedures |
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Item 9b. Other Information |
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130 |
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Part III |
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131 |
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Item 10. Directors, Executive Officers And Corporate Governance |
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131 |
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Item 11. Executive Compensation |
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134 |
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Item 12. Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder
Matters |
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151 |
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Item 13. Certain Relationships And Related Transactions, And Director Independence |
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Item 14. Principal Accounting Fees And Services |
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154 |
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Part IV |
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155 |
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Item 15. Exhibits And Financial Statement Schedules |
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Signatures |
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes assumptions, expectations, projections, intentions
and beliefs about future events. These statements are intended as forward-looking statements. We
caution that assumptions, expectations, projections, intentions and beliefs about
future events may and often do vary from actual results and the differences can be material.
All statements in this document that are not statements of historical fact are forward-looking
statements as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. Forward-looking statements include, but are not
limited to, such matters as
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delays in obtaining, or a failure to obtain and maintain, regulatory approval for
our product candidates, including, but not limited to, our pancreatic enzyme products
in the United States; |
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our ability to successfully regain market share for our pancreatic enzyme products
in the United States; |
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our ability to market, commercialize and achieve market acceptance for any of the
products that we are developing, commercializing or may develop or commercialize in
the future, including the growth, establishment or acquisition of specialty sales,
marketing and distribution capabilities to commercialize products; |
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the expected timing, costs, progress or success of any of our preclinical and
clinical development programs, regulatory approvals, or commercialization efforts; |
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our ability to continue to successfully manufacture and commercialize our existing
products; |
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the potential advantages of our products or product candidates over other existing
or potential products; |
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our ability to enter into any new co-development or licensing agreements or to
maintain any existing co-development or licensing agreements with respect to our
product candidates or products; |
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our ability to effectively maintain existing licensing relationships and establish
new licensing relationships; |
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the expense, time and uncertainty involved in the development of our product
candidates, some or all of which may never reach the regulatory approval stage; |
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our reliance on collaboration partners and licensees, to obtain and maintain
regulatory approval for certain of our products and product candidates and to
manufacture and commercialize such products; |
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our ability to compete in the pharmaceutical industry against other branded or
generic products; |
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our ability to obtain reimbursement for the products we commercialize; |
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our ability to protect our intellectual property and know-how and operate our
business without infringing the intellectual property rights or regulatory exclusivity
of others; |
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a loss of rights to develop and commercialize our products under our license and
sublicense agreements; |
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a loss of any of our key scientists or management personnel; |
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our estimates of market sizes and anticipated uses of our product candidates; |
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our estimates of future performance; and |
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our estimates regarding anticipated future revenue, expenses, operating losses,
capital requirements and our needs for additional financing. |
When used in this document, the words anticipate, believe, intend, estimate,
project, forecast, plan, potential, will, may, should and expect reflect
forward-looking statements. Such statements reflect our current views and assumptions and all
forward-looking statements are subject to various risks and uncertainties that could cause actual
results to differ materially from expectations. The factors that could affect our future financial
results are discussed more fully under Item 1A. Risk Factors, as well as elsewhere in this
Annual Report on Form 10-K and in our other filings with the U.S. Securities and Exchange
Commission, referred to herein as the SEC. We caution readers of this Annual Report on Form 10-K,
also referred to herein as the Annual Report, not to place undue reliance on these forward-looking
statements, which speak only as of their dates. We undertake no obligation to publicly update or
revise any forward-looking statements, except as required by law.
CANASA, CARAFATE, CITRAFLEET, DELURSAN, FLEET PHOSPHO SODA, LACTEOL, PANZYTRAT, PHOTOFRIN,
PHOTOBARR, PYLERA, SALOFALK, SULCRATE, ULTRASE, URSO/URSO 250, URSO FORTE, URSO DS and VIOKASE are
trademarks or registered trademarks owned or used under license by Axcan Pharma Inc. and/or its
affiliated companies.
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PART I
ITEM 1. BUSINESS
Axcan Intermediate Holdings Inc., a Delaware corporation, is a leading specialty
pharmaceutical company concentrating in the field of gastroenterology, with operations in the
United States (U.S.), Canada and the European Union (EU).
Our website address is www.axcan.com. Information on our website is not incorporated herein by
reference. Our reports filed with the Securities and Exchange Commission, or SEC, are available
free of charge on the SECs website, http://www.sec.gov, or at the SECs Public Reference Room at
100 F Street, NE, Washington, DC 20549. You may also obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. These reports may also be accessed
through, the Investor Relations section of the Companys website as soon as reasonably
practicable after we file or furnishe such material with or to the SEC. In addition, copies of
these reports will be made available free of charge, upon written request to Isabelle Adjahi,
Senior Director, Investor Relations and Communications, Axcan Pharma, 597 Laurier Blvd.,
Mont-Saint-Hilaire, Quebec, Canada J3H 6C4. Axcan Intermediate Holdings Inc.s corporate office is
located at 22 Inverness Center Parkway, Suite 310, Birmingham, AL 35242.
Unless the context requires otherwise, references in this Annual Report on Form 10-K to we,
our, us, the Company, AIH and Axcan means Axcan Intermediate Holdings Inc. and all of its
subsidiaries.
Overview
Axcan is a specialty pharmaceutical company focused on marketing and selling pharmaceutical
products used in the treatment of a variety of gastrointestinal, or GI, diseases and disorders,
which are those affecting the digestive tract. Our vision is to become the reference
gastrointestinal company, and we hope to achieve this through our mission: to improve the quality
of care and health of patients suffering from gastrointestinal diseases and disorders by providing
effective therapies for patients and specialized caregivers.
In addition to our marketing activities, we carry out research and development activities on
products at late stages of development as further described below in the section Products in
Development. These activities are carried out primarily with respect to products we currently
market in connection with lifecycle management initiatives, as well as product candidates in late
stage of development that we acquired or licensed from third parties. Our focus on products in
late-stage development enables us to reduce risks and expenses typically associated with new drug
development.
Subsequent Event
On December 1, 2010, Axcan Holdings Inc. (Axcan Holdings), our indirect parent, and Axcan
Pharma Holding B.V. (Axcan Pharma), our subsidiary, announced that they had entered into a
definitive agreement with Eurand N.V. (Eurand), a global specialty pharmaceutical company with
headquarters in the Netherlands, under which Axcan Holdings will acquire all of the outstanding
shares of Eurand for $12.00 per share in cash, resulting in a purchase price of approximately $583
million. The transaction is subject to a condition that a minimum of 80% of Eurand shares be
tendered, as well as receipt of antitrust approval. We have secured committed debt financing from
BofA Merrill Lynch, Barclays Capital, RBC Capital Markets and HSBC Securities (USA) for the transaction.
INDUSTRY AND COMPANY
Industry Overview
Gastrointestinal disorders are quite diverse affecting not only the GI tract but also
different parts of the alimentary tract such as the pancreas, oropharynx, the liver and biliary
systems and the alimentary canal. Disorders of the gastrointestinal tract are fairly common and
occur in people of all ages. Causes of these disorders vary and could include genetic anomalies,
the effect of certain toxins and drugs, infections, cancer and often unknown causes. GI disorders
take up a significant share of the disease burden in developed economies and the gravity of the
problem is further accentuated by the difficulty that they pose in effective management. The GI
tract therapeutic area consists of some indications that can be treated through pharmacologic
interventions, though significant unmet needs still exist, particularly for indications such as
irritable bowel syndrome (IBS), Crohns disease (CD) and ulcerative colitis (UC).
According to a report entitled The Gastrointestinal Market Outlook To 2014: Market Dynamics,
Competitive Landscape, Emerging Therapies (published by
Business Insights, December 2009 and retrieved from Research and Markets, a leading source for
international market research and market data), the gastrointestinal market was valued at $49.9
billion in 2008 and U.S. took the largest share of this market (37.8%) with sales amounting to
$18.8 billion.
According to a report entitled Opportunities & Challenges in Digestive Diseases Research
(U.S. Department of Health and Human Services, National Institutes of Health March 2009), at
least 60 to 70 million Americans are affected each year by digestive diseases, placing a burden on
society that exceeds $100 billion in direct medical costs in the U.S. Annually, in the U.S., about
14 million hospitalizations 10% of the total and 15% of all in-patient hospital procedures are
attributed to treatment of digestive diseases. In addition, in the U.S., 105 million visits to
doctors offices occur each year for digestive diseases, frequently in response to symptoms such as
abdominal pain, diarrhea, vomiting or nausea. Prescription drugs for the treatment of certain
digestive diseases such as gastroesophageal reflux disease (GERD) rank among the
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most commonly used pharmaceutical drugs in the U.S. Even more worrying, digestive diseases are associated with
significant mortality, morbidity and loss of quality of life.
Digestive diseases, including cancer, are named as a primary cause of
approximately 236,000 deaths in the U.S.
each year. Moreover, digestive disorders, even conditions that are not immediately
life-threatening, can severely
affect patients quality of life and cause significant disability even for conditions that are
not immediately life-threatening. Debilitating symptomssuch as chronic pain, discomfort,
bloating, diarrhea, constipation, and incontinence, not to mention social stigma or embarrassment
associated with many GI disorders can affect patients ability to work or engage in daily
activities. Collectively, these diseases account for over $44 billion in indirect costs associated
with disability and mortality each year in the U.S.
Competitive Strengths
We believe we have a number of competitive strengths that will enable us to further enhance
our position in the gastroenterology market.
Diversified Portfolio of Branded Products. We currently market branded products in various
product categories that treat a broad range of GI diseases and disorders. During fiscal year 2010,
two product lines contributed 47% of our revenues, but no single product line accounted for more
than 25% of our revenues. Our portfolio of products is also geographically diverse, with
approximately 28% of our revenues being generated from sales outside the U.S. in fiscal year 2010.
Leading Competitive Positions in Attractive Gastroenterology Markets. We have a strong track
record of leveraging a product lines unique market position to drive performance. CANASA and
CARAFATE are our main products in the U.S.; CANASA is used to treat ulcerative proctitis and
colitis and accounted for 66.0% of the U.S. market for rectally-administered mesalamine products in
terms of sales in fiscal year 2010; CARAFATE is the only branded suspension-form sucralfate product
in its market in the U.S. It accounted for 45.8% of the U.S. market sales for sucralfate products
in fiscal year 2010. We believe that certain of our products are often the first line of treatment
prescribed by physicians for these diseases and disorders. Additionally, many of the GI diseases
and disorders that our products are used to treat are chronic, and as a result, we believe that
physicians tend to be reluctant to change a patients treatment program once the patient has been
treated with and becomes accustomed to a particular product. As a result, we believe that our
products experience a high degree of patient loyalty, allowing us to maintain leading competitive
positions in the markets in which we participate.
Non-Patent Hurdles to Entry. Despite having no long-term patent protection, we believe that
our core product lines benefit from a variety of regulatory, clinical, sourcing and manufacturing
hurdles to entry, including, depending upon the product line and the product, the requirement to
conduct clinical trials, availability of various forms of regulatory exclusivity and the know-how
required to manufacture certain dosage forms. We believe that these hurdles make it more difficult
for generic competitors to introduce and market generic versions of certain of our products,
including products from our CANASA, CARAFATE, ULTRASE MT and VIOKASE product lines. See Item 1A.
Risk FactorsRisks Related to Our Business.
Focused Sales Force with Market-Leading Performance. By focusing on establishing strong
relationships with gastroenterologists, hepatologists and cystic fibrosis centers, we are able to
effectively penetrate the gastroenterology market. As of September 30, 2010, our sales force
numbers 168 representatives, located in the U.S., Canada and in the EU (including a contracted
sales force in Germany devoted exclusively to selling our products and one sales representative in
the U.K).
Consistently High Free Cash Flow Generation. Historically, our business is characterized by
strong free cash flows due to our robust operating history and minimal capital intensity. In
addition, our capital expenditure requirements have historically been minimal, providing for strong
free-cash-flow conversion. Over the last five fiscal years, we have generated cumulative free cash
flow of approximately $367.8 million. For information regarding the risks we and our business face,
please see Item 1A. Risk Factors.
Proven Track Record in Acquiring Products and Building Market Share. Our business development
effort is focused on expanding our product portfolio by capitalizing on our core knowledge of
gastrointestinal markets. Our experienced business development team uses a rigorous and disciplined
approach to identify and acquire products that can be grown by our sales force using the strong
relationships we have with gastroenterology practitioners. We have a strong record of acquiring and
developing products and growing their market share, as evidenced by our leading position in a
number of the markets in which we participate.
Experienced and Dedicated Management Team. We have a highly experienced management team at
both the corporate and operational levels. Our team is led by President and Chief Executive Officer
Frank Verwiel, M.D., formerly of Merck & Co., Inc., who has over 20 years experience in the
health-care industry. Dr. Verwiel joined Axcan Pharma as President and CEO in July 2005. David
Mims, formerly with Scandipharm, Inc., is our Executive Vice President and Chief Operating Officer.
He joined Axcan Pharma in that capacity in February 2000, when we acquired Scandipharm, Inc. Mr.
Mims has more 20 years of experience in the health-care industry. Steve Gannon, our Senior Vice
President and Chief Financial Officer, joined Axcan Pharma in that capacity in April 2006, having
previously served as CFO of CryoCath Technologies Inc. and held various senior financial positions
at AstraZeneca and Mallinckrodt over the past 20 years. Dr. Alexandre LeBeaut rejoined us as Senior
Vice President and Chief Scientific Officer in September 2008 after holding the same position with
Axcan Pharma from May 2006 to February 2007 and various other executive positions in the
pharmaceutical industry, including Vice President, Medical Units, U.S. Medical Affairs of
Sanofi-Aventis Pharmaceuticals. Dr. LeBeaut has more than 20 years of experience in the health-care
industry. Nicholas Franco joined Axcan Pharma as Senior Vice President, International Commercial
Operations, in July 2007, having held various management positions at Novartis Pharma AG, including
President of the Global Ophthalmic Business Unit and Global Head of the Neuroscience Business
Franchise. Mr. Franco has more than 20 years of experience in the health-care industry. Theresa
Stevens joined Axcan Intermediate Holdings as Senior Vice President, Business Development, in June
2009, having previously held a number of executive positions at Novartis
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Pharmaceuticals as Executive Committee member and Vice President, U.S. Business Development and Licensing, Life Cycle
Management and Generics-Brands Strategies. Ms. Stevens has more than 25 years of experience in the
health-care industry. Richard DeVleeschouwer has been our Senior Vice President, Human Resources,
since March 2010, having served a number of senior human resources roles at Schering-Plough,
Pharmacia and Monsanto. Mr. DeVleeschouwer has more than 23 years of experience as a Human
Resources professional and more than 14 years of experience in the health-care industry. Richard
Tarte, formerly a partner with the law firm of Coudert Brothers, joined Axcan Pharma as Vice
President, Corporate Devel8opment, and General Counsel in 2001. Mr. Tarte has more than 10 years of
experience in the health-care
industry.
Business Strategy
We intend to enhance our position as the leading specialty pharmaceutical company
concentrating in the field of gastroenterology by pursuing the following strategic initiatives:
Grow Sales of Existing Products. We call on a targeted group of prescribing physicians to
build strong professional relationships. We also seek to leverage the unique value of our product
lines to drive performance by means of physician and caregiver programs and dialogue with payors
that help to differentiate Axcan from the competition and position our products as the drugs of
choice for many patients. As a result, our products are often the first line of treatment
prescribed by physicians. We seek to leverage this strong position as well as the high degree of
patient loyalty to our products to maintain our lead in the markets in which we compete.
Launch New Products. Over the years, the expertise of our R&D and sales and marketing teams
has allowed us to build strong relationships with the scientific and medical GI community. Thanks
to our in-depth knowledge of the gastrointestinal area, our team is able to present the benefits of
Axcans products to patients, health-care providers and payors and effectively launch new products.
We intend to leverage our knowledge and expertise to successfully launch innovative products by
strongly positioning them in selected markets, thus expanding our presence and reach.
Selectively Acquire or In-License Complementary Products. We plan to acquire or in-license new
products that complement the strategic focus of our existing product portfolio. Thanks to our
long-lasting presence, reputation, core knowledge of GI markets, R&D expertise, multinational sales
and marketing teams, market access and top-tier sales force, we are a preferred partner for
companies looking to sell or out-license their specialty products. Our experienced business
development team uses a rigorous and disciplined approach to ensure that the product lines we
acquire fit strategically within our portfolio. In recent years, we have successfully grown a
number of product lines that we acquired or developed to become leaders in their markets.
Pursue Growth Opportunities Through Developing Pipeline. We continue to invest in R&D to
develop the next generation of products to address unmet medical needs in the gastroenterology
market. Our internal development efforts focus primarily on clinical development, which includes
life-cycle management and medical market access initiatives. Our objective is to contribute in
establishing a valid value proposition for all our products across their life-cycle.
Expand Internationally. Our current infrastructures in the U.S., the EU and Canada form the
basis of our efforts to expand internationally by increasing our R&D and sales and marketing
footprint worldwide. We intend to continue to increase the geographic presence of our products
through our network of third-party distributors or strategic alliances with local partners.
Products
We focus on the field of gastroenterology. Our current product portfolio includes a number of
pharmaceuticals products for the treatment of a range of GI diseases and disorders such as
inflammatory bowel disease, cholestatic liver diseases, pancreatic insufficiency, and gastric and
duodenal ulcers.
The majority of our product sales are generated in the U.S., the EU and Canada. However, many
of our products have been commercialized in export markets through licensing and distribution
agreements with local marketing partners.
We also have various products in development. A discussion of these projects and the
regulatory process follows under the headings Products in Development and Government
Regulation.
Most of our products that we market do not benefit from any patent protection. We believe,
however, that certain of our products benefit from other hurdles to the entry of competitors or
generics. Our products nevertheless remain subject to brand competition and generic product entry.
Competition from generic products which are typically sold at a significant discount from branded
products could significantly and negatively affect our revenues. As of September 30, 2010, our main
product lines are CANASA, CARAFATE, URSO 250 / URSO FORTE and PYLERA in the U.S., SALOFALK in
Canada, and DELURSAN, PANZYTRAT and LACTEOL in the EU.
Our main product lines, their sales, patent/regulatory protection and certain other hurdles to
entry are discussed below.
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Mesalamine
CANASA
CANASA, a 1,000mg mesalamine suppository sold in the U.S., is indicated for the treatment of
distal ulcerative proctitis, an inflammatory bowel disease. CANASA is currently the only
FDA-approved mesalamine suppository available in the U.S.
We reported net sales of $80.9 million, $84.7 million and $72.1 million for CANASA in fiscal
years 2010, 2009 and 2008, respectively. The decline in sales in fiscal year 2010 as compared to
fiscal year 2009 resulted from temporary changes in wholesaler shipping patterns experienced in
fiscal year 2010, as well as increased promotional activity by Shire US Inc., following the launch
of LIALDA®, a new oral mesalamine products in the U.S. market that was partially offset
by price increases announced during fiscal year 2009.
CANASA competes directly with topical corticosteroids available in the form of enemas and
suppositories, as well as mesalamine enemas. In the U.S., CANASA primarily competes with
ROWASA® enemas sold by MEDA AB and with various generic mesalamine enemas. It
also indirectly competes with oral mesalamine products such as ASACOL® (Warner Chilcott
Company, LLC), PENTASA® and LIALDA® (Shire US Inc.), or APRISO and
COLAZAL® (Salix Pharmaceuticals, Inc.).
CANASA does not have any patent protection in the U.S. On November 5, 2007, clinical
investigation exclusivity previously granted pursuant to the Hatch-Waxman Act, covering a change in
the formulation of this drug from a 500 mg formulation to a 1,000 mg suppository formulation,
expired. As a result, if a generic mesalamine suppository were to be launched, it could have a
significant negative impact on sales of CANASA in the U.S.
In June 2007, the FDA published draft guidance on the requirements it expects manufacturers
seeking approval of a mesalamine suppository to meet in order to obtain approval of mesalamine
suppositories. This draft guidance specifies that a request for regulatory approval of a mesalamine
suppository product must be supported by placebo and reference-drug controlled clinical studies
with clinical endpoints demonstrating safety and effectiveness in patients with ulcerative
proctitis. We cannot provide assurances that the FDA requirements reflected in this draft guidance
will be applied by the FDA or will be formally adopted in their current form.
In a July 2010 posting on clinicaltrial.gov that was updated in November 2010, Sandoz Inc.
disclosed that it had initiated in June 2010 a clinical trial to establish therapeutic equivalence
of a 1,000 mg rectal mesalamine suppository product to CANASA rectal suppositories, for the
treatment of mild to moderate ulcerative proctitis. The disclosure states that the trial is being
conducted in India and has an estimated duration of 18 months. Cadila Healthcare Inc. also recently
disclosed that it is conducting a similar clinical study in India to establish therapeutic
equivalence of a 1,000 mg rectal mesalamine suppository product to CANASA.
As a result, if another mesalamine suppository was to be launched, it could have a significant
negative impact on sales of CANASA in the U.S. See Item 1A. Risk Factors Risks Related to Our
Business.
SALOFALK
SALOFALK is a mesalamine-based product line (tablets, suspensions and suppositories) that we
sell in Canada for the treatment of certain inflammatory bowel diseases, such as ulcerative
colitis, ulcerative proctitis and Crohns disease.
We reported net sales of $19.8 million, $19.0 million and $21.0 million for SALOFALK in fiscal
years 2010, 2009 and 2008, respectively. The decline in sales in fiscal years 2010 and 2009 as
compared to fiscal year 2008 resulted from the negative impact of currency fluctuations compared to
the preceding fiscal year (fiscal 2009 as compared to fiscal 2008), as the value of the Canadian
dollar depreciated against the U.S. dollar by 17.0%. SALOFALK sales were also negatively impacted
by the launch of new competitive products in the market.
In Canada, SALOFALK competes with several products containing mesalamine in controlled-release
tablets or capsules, including ASACOL (Warner Chilcott Company, LLC), DIPENTUM (UCB Pharma, Inc.)
and MEZAVANT® (Shire plc). Generics versions of the tablet and suspension formulations
are also available on the market.
SALOFALK has no patent protection, or regulatory exclusivity.
Sucralfate
CARAFATE and SULCRATE
Our CARAFATE and SULCRATE product lines are indicated for the treatment of gastric and duodenal
ulcers.
CARAFATE is sold in the U.S. as oral tablets and an oral suspension and SULCRATE as an oral
suspension in Canada. Neither formulation is actively promoted. Both product lines compete
primarily against generic sucralfate tablets.
We reported combined net sales of $86.5 million, $68.5 million and $52.5 million for CARAFATE
and SULCRATE in fiscal years 2010, 2009 and 2008, respectively. The increase in sales from fiscal
year 2009 to fiscal year 2010 mainly resulted from an increase in prescription volumes and from
price increases announced during fiscal year 2009.
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Neither CARAFATE nor SULCRATE have any patent protection or regulatory exclusivity in its
respective market. Patent protection for CARAFATE lapsed in fiscal year 2001.
We are not aware of any generic versions of CARAFATE and SULCRATE oral suspension that are
commercially available in the U.S. or Canada. However, in a recent public filing K-V Pharmaceutical
Company announced the sale of certain intellectual property and other assets related to its
Abbreviated New Drug Application, or ANDA, submitted with the U.S. Food and Drug Administration for
the approval to engage in the commercial manufacture and sale of 1gm/10mL sucralfate suspension,
the active pharmaceutical ingredient in our CARAFATE product. We do not have any information on the
status of this ANDA. If a generic version of CARAFATE was to be launched, it could have a
significant negative impact on sales of CARAFATE oral suspension in the U.S.
Ursodiol
URSO 250 and URSO FORTE (U.S.)
In the U.S., we market URSO 250, a 250-mg ursodiol tablet and URSO FORTE, a 500-mg ursodiol
tablet for the treatment of Primary Biliary Cirrhosis, or PBC, a chronic liver disease.
We reported net sales of $18.7 million, $50.0 million and $67.0 million for URSO 250/ URSO
FORTE in the U.S. in fiscal years 2010, 2009 and 2008, respectively. The decrease in sales in
fiscal years 2010 and 2009 as compared to fiscal year 2008 resulted from the entry of generic
versions of URSO 250 and URSO FORTE on the U.S. market, following approval by the Office of Generic
Drugs on May 13, 2009. This decrease was partially offset by price increases announced on our URSO
250 and URSO FORTE branded products, and by sales generated from the launch of an authorized
generic version of our ursodiol products. On July 2, 2009, we announced that we had entered into an
agreement with Prasco Laboratories under which Prasco markets and sells an authorized generic of
URSO 250 and URSO FORTE in the U.S. Despite measures taken to defend our URSO franchise in this
market, we expect future sales to continue to decline.
URSO and URSO DS (Canada)
In Canada, we market URSO, a 250-mg ursodiol tablet and URSO DS, a 500-mg ursodiol tablet for
the treatment of cholestatic liver diseases, which include PBC and primary sclerosing cholangitis
(PSC). URSO and URSO DS were covered by a patent relating to the use of ursodiol for the treatment
of PBC in Canada, which was to expire in 2010. However, in 2006, the generic product manufacturer,
Pharmascience Inc., successfully challenged the validity of this patent under Health Canadas
Notice of Compliance Regulation procedures. In May 2006, generic versions of URSO and URSO DS
received approval for sale in Canada and were launched in fiscal year 2007. The launch of these
generic products has had a negative impact on sales of URSO and URSO DS since fiscal year 2007.
We reported net sales of $2.5 million, $3.0 million and $3.9 million for URSO/URSO DS in
Canada for fiscal years 2010, 2009 and 2008, respectively.
URSO and URSO DS do not benefit from any other patent protection or other form of regulatory
exclusivity in Canada.
DELURSAN
DELURSAN, is 250mg ursodiol tablet marketed in France and indicated for the treatment of
cholestatic liver diseases, including PBC, PSC and liver disorders related to cystic fibrosis.
We reported net sales of $23.4 million, $20.8 million and $21.4 million for DELURSAN, in
fiscal years 2010, 2009 and 2008, respectively. The decline in sales in fiscal year 2009 as
compared to fiscal year 2008 resulted from the negative impact of currency fluctuations compared to
the preceding fiscal year, as the value of the euro depreciated against the U.S. dollar by 11.6%.
In local currency, net sales of DELURSAN, were 17.3 million, 15.4 million and 14.2 million in
fiscal years 2010, 2009 and 2008, respectively.
DELURSAN, mainly competes with URSOLVAN® (Sanofi-Aventis S.A.). However, we expect
another competing product to be launched in France by the end of calendar year 2011. An additional
request for marketing approval was submitted by another competitor for an ursodiol product, based
on well-established use. Under this procedure, a company can submit for approval a product similar
to one that is already marketed by submitting evidence of therapeutic efficacy based on published
literature.
DELURSAN, does not have any patent protection or any regulatory exclusivity in France. As a
result, if another ursodiol product is launched, it could have a significant negative impact on
sales of DELURSAN, in France. See Item 1A. Risk Factors Risks Related to Our Business.
Helicobacter pylori eradication
PYLERA
Since May 2007, we have been marketing as PYLERA a three-in-one capsule therapy for the
eradication of Helicobacter pylori, a bacterium recognized as being the main cause of gastric and
duodenal ulcers.
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We reported net sales of $10.5 million, $8.2 million and $6.6 million for PYLERA in fiscal
years 2010, 2009 and 2008, respectively.
Other pre-packaged products (all in blister packs) that compete with PYLERA include
HELIDAC® (Prometheus Laboratories Inc.) and PREVPAC® (TAP Pharmaceutical
Products Inc.).
PYLERA is protected by patent claims covering triple and quadruple therapies for Helicobacter
pylori eradication. These claims cover the
treatment of duodenal ulcer disease (and in some countries reflux esophagitis and gastric
ulcer) through the eradication of Helicobacter pylori using a bismuth compound together with two or
more antibiotics. The expiry dates of these patents vary depending on the jurisdiction. In the
U.S., they expired in March 2010. The double capsule formulation of this product and its use in
multiple therapies is also covered by patent in a number of countries. The U.S. patent expires in
December 2018. Prior to November 2008, the U.S. patents covering PYLERAs triple and quadruple
therapies for Helicobacter pylori eradication and capsule formulation were not eligible for listing
in the FDAs Orange Book and to benefit from the automatic 30-month stay provisions of the
Hatch-Waxman Act. In November 2008, pursuant to the enactment of the Q1 Program Supplemental
Funding Act (Q1 Act), the Food, Drug and Cosmetics Act, or FDCA, was amended to permit the Orange
Book listing of patents covering products containing antibiotic active ingredients included in an
application submitted to FDA for review prior to November 21, 1997 or, old antibiotics, which is
the case of PYLERA. In December 2008, our patents were submitted for listing in the FDAs Orange
Book. Accordingly, we believe we are eligible to benefit from the automatic stay provisions of the
Hatch-Waxman Act for an ANDA submitted subsequent to the date these patents were listed in the
Orange Book and which contains a paragraph IV certification. For more details regarding the
30-month stay provisions of the Hatch-Waxman Act, see Item 1. Business Government Regulation
U.S. Regulations Abbreviated New Drug Application.
Pancreatic Enzyme Products
ULTRASE
In the U.S., we were marketing as ULTRASE pancreatic enzyme microsphere (ULTRASE MS) and
mini-tablet (ULTRASE MT) products, designed to help patients with exocrine pancreatic insufficiency
(including pancreatic insufficiency associated with cystic fibrosis) to better digest food.
We ceased distributing our ULTRASE product lines in the U.S. effective April 28, 2010. This
action was taken because we did not receive FDA approval for ULTRASE MT by April 28, 2010, the date
mandated by the FDA to obtain approval for pancreatic enzyme products to remain on the market. We
also interrupted shipments of ULTRASE MT from the U.S. to Canada and export markets to allow time
for the FDA to review our request confirming that applicable export requirements were being met. As
of September 30, 2010, this interruption of shipments was still in place.
We completed the initial submission of our NDA for ULTRASE MT and, in the fourth quarter of
fiscal 2008, received a first complete response letter from the FDA. Further to the filing of our
response to this letter, we received a second complete response letter from the FDA in the fourth
quarter of fiscal 2009. On May 5, 2010 the FDA issued an additional complete response with respect
to our NDA for ULTRASE MT. As was the case with prior letters, the FDA requires that deficiencies
raised with respect to the manufacturing and control processes at the manufacturer of the active
ingredient of ULTRASE MT be addressed before approval can be granted. We submitted our response to
this letter to the FDA that confirmed a November 28, 2010 Prescription Drug User Fee Act, or PDUFA,
date for our ULTRASE MT NDA.
On November 28, 2010, the FDA issued a complete response letter regarding the NDA for ULTRASE
MT. The letter requires that unresolved deficiencies raised with respect to the manufacturing and
control processes at the manufacturer of the active ingredient for ULTRASE MT be addressed before
approval can be granted. The letter also requires that deficiencies identified in an FDA inspection
of such manufacturer must be resolved before the NDA can be approved. We are in ongoing
discussions with the FDA and continue to work with the manufacturer of the active pharmaceutical
ingredient to address the remaining open issues identified by the FDA, as soon as possible.
However, those remaining issues do not require additional clinical studies. See Item 1A. Risk
FactorsRisks Related to Our Pancreatic Enzyme Products.
We reported net sales of $37.9 million, $75.9 million and $58.6 million for ULTRASE in fiscal
years 2010, 2009 and 2008, respectively. The decrease in sales in fiscal year 2010 as compared to
fiscal year 2009 is a result of us ceasing to distribute our ULTRASE product line in the U.S.
effective April 28, 2010.
A number of branded pancreatic enzyme products have been approved and are currently marketed
in the United States, including CREON® (Abbott Laboratories), PANCREAZE
(Ortho-McNeil Pharmaceutical, Inc.) and ZENPEP® (Eurand N.V.).
ULTRASE is licensed from Eurand under an exclusive development license and supply agreement
signed in 2000. It was for an original term of ten years with automatic renewals for subsequent
periods of two years. The agreement was amended in 2007 and the term extended to the end of 2015.
We have paid Eurand licensing fees totaling $3.5 million, and we have agreed to pay to Eurand
royalties of 6% on annual net sales of ULTRASE.
ULTRASE MT does not currently benefit from patent protection. However, based on the
29th edition of the Approved Drug Products with Therapeutic Equivalence Evaluations,
commonly known as the Orange Book, published by the FDA in August 2009, CREON®,
PANCREAZE and ZENPEP® have been granted the status of New Chemical Entity,
or NCE, which entitles them to certain market exclusivity protections pursuant to the Hatch-Waxman
Act. We believe that, upon approval of its NDA, ULTRASE MT will also be designated as an NCE
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and will equally benefit from the same market exclusivity provided pursuant to the Hatch-Waxman Act.
This would afford ULTRASE MT a measure of protection from new competition in the marketplace, as
this exclusivity generally prohibits the FDA from reviewing ANDAs for products containing the same
active moiety for a period of five years. Further, in its Guidance for IndustryExocrine
Pancreatic Insufficiency Drug ProductsSubmitting NDAs of April 2006, the FDA has stated that
because of their complexity, pancreatic enzyme extract products are not likely to be appropriate
for ANDA filings. For more details on NCE data exclusivity, see Item 1 Business Government
Regulation U.S. Regulations Data Exclusivity.
VIOKASE
In the U.S., we were marketing as VIOKASE uncoated immediate release pancreatic enzyme
products for the treatment of exocrine pancreatic insufficiency.
We ceased distributing VIOKASE in the U.S. effective April 28, 2010. This action was taken
because we did not receive FDA approval for VIOKASE by April 28, 2010, the date mandated by the FDA
to obtain approval for pancreatic enzyme products to remain on the market.
VIOKASE, although not actively promoted, is still sold in Canada.
We reported net sales of $15.6 million, $22.7 million and $15.1 million for VIOKASE in fiscal
years 2010, 2009 and 2008, respectively. The decrease in sales in fiscal year 2010 as compared to
fiscal year 2009 is a result of us ceasing to distribute our VIOKASE product lines in the U.S.
effective April 28, 2010.
The submission of our rolling NDA for VIOKASE was completed in the first quarter of fiscal
2010. At the time we completed this submission we requested a priority review and the FDA advised
us in the second quarter of fiscal 2010 that it would not grant a priority review for this NDA. The
initial PDUFA date for VIOKASE was August 30, 2010. In August 2010, we received feedback from the
FDA regarding the timeline to review the VIOKASE NDA. At that time, the FDA indicated that the
review was progressing but postponed the PDUFA date to November 30, 2010 to allow more time to
complete their review.
On November 28, 2010, the FDA issued a complete response letter regarding the NDA for VIOKASE.
The letter requires that unresolved deficiencies raised with respect to the manufacturing and
control processes at the manufacturer of the active ingredient for VIOKASE be addressed before
approval can be granted. The letter also requires that deficiencies identified in an FDA inspection
of such manufacturer must be resolved before the NDA can be approved. We are in ongoing
discussions with the FDA and continue to work with the manufacturer of the active pharmaceutical
ingredient to address the remaining open issues identified by the FDA, as soon as possible.
However, those remaining issues do not require additional clinical studies. See Item 1A. Risk
Factors -Risks related to our Pancreatic Enzyme Products.
VIOKASE does not currently benefit from patent protection. However, we believe that like
ULTRASE MT, it will be entitled to receive NCE market exclusivity pursuant to the Hatch-Waxman Act
upon NDA approval.
PANZYTRAT
PANZYTRAT consists of enteric-coated microtablets for use in the treatment of exocrine
pancreatic insufficiency and pancreatic enzyme deficiency. PANZYTRAT is marketed in several
countries, mainly Germany, the Netherlands and Switzerland, as well as a several Eastern European
markets. We reported net sales of $14.8 million, $14.2 million and $16.6 million for PANZYTRAT in
fiscal years 2010, 2009 and 2008, respectively. In local currency, net sales of PANZYTRAT, were
10.9 million, 10.6 million and 11.1 million in fiscal years 2010, 2009 and 2008, respectively.
The main competitor for PANZYTRAT in Germany and the Netherlands is KREON®
(Abbott Laboratories). The decline in sales in fiscal years 2010 and 2009 as compared to
fiscal year 2008 resulted from the negative impact of currency fluctuations compared to the
preceding fiscal year (fiscal year 2009 as compared to fiscal year 2008), as the value of the euro
depreciated against the U.S. dollar by 11.6% and from the reduction in sales volumes within export
markets.
PANZYTRAT does not benefit from any patent protection, nor any other form of regulatory
exclusivity in the main countries in which it is marketed, namely Germany and the Netherlands.
On July 7, 2010, we entered into a distribution agreement with PharmaSwiss S.A., for the
distribution of PANZYTRAT, in various Central and East European countries.
Other Products
LACTEOL
LACTEOL is a product containing specific proprietary strains of Lactobacillus LB in a
lyophilized powder form. It is available as capsules and powder sachets, and is primarily indicated
for the treatment of diarrhea. LACTEOL is mainly sold in France and in 36 export markets.
We reported net sales of $15.9 million, $16.5 million and $19.0 million for LACTEOL in fiscal
years 2010, 2009 and 2008, respectively
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including $9.5 million, $9.3 million and $11.1 million
outside of France. The decline in sales is a result of LACTEOL no longer being reimbursed in
Germany, since February 2010. In addition, the decline in sales in fiscal year 2009 as compared to
fiscal year 2008 resulted from the negative impact of currency fluctuations compared to the
preceding fiscal year, as the value of the euro depreciated against the U.S. dollar by 11.6% and
from the reduction in sales volumes within export markets.
LACTEOL competes with a number of similar products in most markets. As LACTEOL has been
marketed for several decades, we believe the brand name LACTEOL constitutes a definite marketing
advantage wherever the product is sold.
LACTEOL has no patent protection or regulatory exclusivity. However, the product is derived
from proprietary strains of bacteria for which the source strains are protected by a number of
security safeguards, such that access by third parties seeking to reproduce it for competitive or
other purposes is limited and controlled.
On April 6, 2009, we entered into a license agreement with a leading multi-national company
(the Licensee), whereby we granted the Licensee the right to use the active ingredient contained
in LACTEOL to develop and commercialize new food products that will contain this active ingredient.
Under the terms of the agreement, the Licensee will have exclusive rights to commercialize these
new products. We will continue to own all other rights related to the active ingredient, including
the right to use the active ingredient and develop, manufacture and commercialize non-food
products, including pharmaceutical products, containing it.
On April 22, 2010, we entered into an agreement with Norgine Pharmaceuticals for the
distribution and promotion of our LACTEOL product line in Australia. Under the terms of the
agreement, Norgine Pharmaceuticals obtained exclusive rights to the distribution and promotion of
the LACTEOL line of products on the Australian market. Norgine Pharmaceuticals will be responsible
for securing regulatory approval and for launching LACTEOL on that market expected to occur during
the first half of fiscal year 2011.
PHOTOFRIN/PHOTOBARR
PHOTOFRIN/PHOTOBARR is a photo-sensitizer approved for use in photodynamic therapy, an
innovative medical therapy based on the use of light-activated drugs.
We market (directly or through distributors) PHOTOFRIN/PHOTOBARR in the U.S., the EU and
Canada, as well as in other selected markets. PHOTOFRIN/PHOTOBARR has received regulatory approval
in a number of countries, including approval for the treatment of high-grade dysplasia associated
with Barretts esophagus, obstructing esophageal cancer and non-small-cell lung cancer, as well as
certain types of gastric cancers and cervical dysplasia. Our marketing strategy varies based on the
indication for which the product is approved and on the availability of the centering catheter
required to perform some of the procedures.
We reported net sales of $3.9 million, $4.2 million and $6.5 million for PHOTOFRIN/PHOTOBARR
in fiscal years 2010, 2009 and 2008, respectively. The decline in sales resulted from the continued
loss of supply of the balloon centering catheter as it was discontinued. That balloon centering
catheter is required for the treatment of high-grade dysplasia associated with Barretts esophagus.
In addition, the decline in sales in fiscal year 2009 as compared to fiscal year 2008 resulted from
the negative impact of currency fluctuations compared to the preceding fiscal year, as the value of
the euro depreciated against the U.S. dollar by 11.6%.
To our knowledge, there are currently no other photo-sensitizers approved as drugs in the
U.S., the EU or Canada for the treatment of high-grade dysplasia associated with Barretts
esophagus, obstructing esophageal cancer and lung cancer, gastric cancer or cervical dysplasia.
In Germany, PHOTOSAN® (Seehof Laboratories), although not approved, had been
marketed as a medical device for use in the treatment of broad oncological applications. However,
in a recent ruling, the German Federal Court of Justice ruled in favor of the Axcan and its
distributor confirming lower court findings that PHOTOSAN® was a pharmaceutical product
and, as a result, did not have the required regulatory approvals to remain on the market. As a
result of this judgment, Seehof Laboratories stopped distribution of its product in Germany.
PHOTOFRIN/PHOTOBARR is covered by a number of patents in various countries, claiming
compositions (including product by process claims), methods of use in approved indications and,
methods of manufacture, as well as patents for certain devices used in connection with treatment
with these products. In the U.S., PHOTOFRIN/PHOTOBARRs main market, the last of the patents
covering this product or devices used in connection with the treatment expires in May 2016.
FLEET PHOSPHO-SODA and CITRAFLEET
On October 23, 2009, we signed a distribution agreement with Laboratorios Casen-Fleet S.L.U.,
a Spanish subsidiary of the American company C.B. Fleet. Under the terms of the agreement, we have
been granted exclusive distribution rights in France for FLEET PHOSPHO-SODA and CITRAFLEET, two
products used for bowel cleansing.
FLEET PHOSPHO-SODA is an oral sodium phosphate solution product which is used for bowel
cleansing prior to colonoscopy and other medical procedures. CITRAFLEET is a powder formulation of
sodium picosulfate/magnesium citrate for oral solution indicated for use prior to any diagnostic
exploration requiring bowel cleansing, such as a colonoscopy or a radiological examination.
We started promoting FLEET PHOSPHO-SODA on January 1, 2010 and CITRAFLEET on September 15,
2010. We reported net sales of $2.2 million for FLEET PHOSPHO-SODA and CITRAFLEET in fiscal year
2010.
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Products in Development
Our research and development team leverages its expertise in the field of gastroenterology to
develop product line enhancements and modifications to existing products and to complete the
clinical development of new product candidates, consistent with our development growth strategy.
Our R&D capabilities include Pharmaceutical Development, Regulatory Affairs, Quality and
Compliance, Clinical Development and Medical Affairs.
Our staff of research scientists has expertise in all aspects of the drug development process
on a global basis, from pre-formulation studies and formulation development, to scale-up and
manufacturing. The clinical development and medical affairs team assumes product stewardship up to
post-marketing study and contributes to market access strategies and tactics.
For new product candidates, we mainly consider the development of late-stage (Phase II and
beyond) novel molecules and innovative product candidates that, in our view, provide an acceptable
risk/return profile. As part of our business strategy, we enter into licensing agreements with
companies that are developing compounds and innovative products in the field of gastroenterology.
These compounds and products are typically in-licensed with some combination of up-front payments,
development milestone payments and/or royalty payments. In some cases, we have an option to acquire
an ownership position in the company with which we have entered into such an agreement.
For the existing portfolio, we seek to enhance product life cycles and extend exclusivity
through the staged introduction of product enhancements. These may include (but are not limited to)
new indications, improvements in the frequency of administration of drug products, improvements in
the convenience of administration, reduction of side effects (improved tolerability) and improved
efficacy.
Our pipeline products are in various stages of development. Despite the reduced risk profile
of our pipeline programs (relative to new chemical entities), they do carry potential development
risks, and as such, we do not anticipate the commercialization of all of these products. In
addition, we routinely review and prioritize our pipeline as new product candidates are added,
which can result in the discontinuation or delay in other ongoing development programs which offer,
in our estimation, a comparatively less attractive risk/return profile. This is normal practice in
the pharmaceutical industry.
Given that the successful development of any pipeline program is dependent on a number of
variables, it is difficult to accurately predict timelines for regulatory approval and thus
clinical development expenses. In fiscal year 2010, our R&D expenses were approximately $31.7
million or 8.9% of our total revenue ($36.0 million, or 8.8% of revenue in fiscal year 2009 and
$28.1 million, or 7.4% of revenue in fiscal year 2008).
From time to time, we review our portfolio of products under development to set priorities for
the various development programs underway and to ensure that internal and budgeted resources are
allocated accordingly. As a result of these reviews, the contents of certain development programs
and related timelines may be modified or certain programs terminated.
The following is a description of our active and disclosed pipeline projects. The intellectual
property associated with these projects is discussed below in Patents and Trademarks.
Mesalamine
Our MAX-002 Phase III clinical program, seeking approval of a new patented mesalamine
suppository formulation characterized by its smaller size and lower melting temperature, is still
ongoing.
We also have ongoing life cycle management initiatives with respect to our CANASA franchise.
Sucralfate
We also have ongoing life cycle management initiatives with respect to our CARAFATE franchise.
Ursodiol
URSO
Non-alcoholic steatohepatitis (NASH) is an advanced form of non-alcoholic fatty liver disease
associated with significant morbidity and mortality for which there is no proven effective
pharmacological therapy. The prevalence of NASH is difficult to determine. It seems to occur in
approximately 3% of the population but may be found in more than 25% of obese persons.
We have successfully completed a multicentric, double-blind, randomized-controlled trial of
high-dose ursodiol in patients suffering from NASH. The study, which was conducted in France,
assessed the efficacy and safety of high-dose (25-35 mg/kg/day) ursodiol in NASH patients.
Results confirmed that high-dose ursodiol is safe and well tolerated in patients with NASH.
They also demonstrated a significant and marked biochemical response to high-dose ursodiol. Results
of this study were published in the October 2010 edition of the Journal of Hepatology.
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Helicobacter pylori eradication
PYLERA
We have submitted our application for required regulatory approval to market, or Marketing
Authorization, for PYLERA in major EU markets in fiscal year 2010. This submission was filed using
the decentralized procedure process and we expect to get approval in the first market in fiscal
year 2011, followed by a launch in the first market during the same year. For a discussion on the
decentralized procedure, see Item 1 Business Government Regulation European Economic Area
Decentralized Procedure.
Pancreatic Enzyme Products
ULTRASE and VIOKASE
We ceased distributing our ULTRASE and VIOKASE product lines in the United States effective
April 28, 2010. This action was taken because we did not receive FDA approval for ULTRASE MT or
VIOKASE by April 28, 2010, the date mandated by the FDA to obtain approval for pancreatic enzyme
products.
We completed the initial submission of our NDA for ULTRASE MT and, in the fourth quarter of
fiscal 2008, received a first complete response letter from the FDA. Further to the filing of our
response to this letter, we received a second complete response letter from the FDA in the fourth
quarter of fiscal 2009. On May 5, 2010, the FDA issued an additional complete response with respect
to our NDA for ULTRASE MT. As was the case with prior letters, the FDA requires that deficiencies
raised with respect to the manufacturing and control processes at the manufacturer of the active
ingredient of ULTRASE MT be addressed before approval can be granted. We submitted our response to
this letter to the FDA that confirmed a November 28, 2010 Prescription Drug User Fee Act, or PDUFA,
date for our ULTRASE MT NDA.
The submission of our rolling NDA for VIOKASE was completed in the first quarter of fiscal
2010. At the time we completed this submission we requested a priority review and the FDA advised
us in the second quarter of fiscal 2010 that it would not grant a priority review for this NDA. The
initial PDUFA date for VIOKASE was August 30, 2010. In August 2010, we received feedback from the
FDA regarding the timeline to review the VIOKASE NDA. At that time, the FDA indicated that the
review was progressing but postponed the PDUFA date to November 30, 2010 to allow more time to
complete their review.
On November 28, 2010, the FDA issued complete response letters regarding the NDAs for ULTRASE
MT and VIOKASE. The letters require that unresolved deficiencies raised with respect to the
manufacturing and control processes at the manufacturer of the active ingredient for both ULTRASE
MT and VIOKASE be addressed before approval can be granted. The letters also require that
deficiencies identified in an FDA inspection of such manufacturer must be resolved before the NDAs
can be approved. We are in ongoing discussions with the FDA and continue to work with the
manufacturer of the active pharmaceutical ingredient to address the remaining open issues
identified by the FDA, as soon as possible. However, those remaining issues do not require
additional clinical studies.
In order to continue to support ULTRASE MT once approved, we have completed a pediatric Phase
III clinical program to demonstrate the efficacy of ULTRASE MT in patients aged two to six years
old. Once ULTRASE MT is approved, we expect to submit a supplemental NDA to enhance the products
labeling.
While we cannot provide any assurances, we expect to ultimately receive regulatory approval
for ULTRASE MT and VIOKASE under FDAs guidance to the industry. See Item 1A. Risk Factors
-Risks related to our Pancreatic Enzyme Products.
PANZYTRAT
We have initiated a multicenter Phase IV study aimed at assessing and comparing the efficacy
of PANZYTRAT 25,000 in the control of steatorrhea in patients with cystic fibrosis who demonstrate
pancreatic insufficiency. This study should allow us to better position our product on the markets
where it is currently available.
Others
Cx401
On September 30, 2007, we entered into an exclusive license and development agreement with
Cellerix of Spain, for the North American (U.S., Canada and Mexico) rights to Cx401, an innovative
biological product in development for the treatment of perianal fistulas. Under the terms of the
agreement, Axcan was responsible for the costs of developing and commercializing Cx401 in North
America.
Based on the results of a Phase III study conducted by Cellerix in Europe, we have decided to
not pursue the development of this formulation. We are awaiting the results of trials related to a
new formulation of this compound to which we have certain rights to develop.
See Patents and TrademarksCx401 below for more information regarding certain royalty
payments we may have to make related to the development of Cx401.
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Sales and Marketing
In the U.S., we sell our products to most major wholesale drug companies and distributors,
which in turn distribute our products to chain and independent pharmacies, hospitals and mail-order
pharmacies. As of September 30, 2010, we had 97 sales representatives, 11 regional sales managers
managed by 2 zone directors and 5 national account managers in our managed markets group, all
located in the U.S. This sales team calls on high-volume prescribing gastroenterology physicians,
cystic fibrosis centers, as well as third-party payors, clinical pharmacists and formulary
administrators. Since the launch of PYLERA, in May 2007, sales representatives have also been
visiting general practitioners known to be high-volume prescribers of Helicobacter pylori
eradication therapies. Finally, some of our sales representatives are specialized in photodynamic
therapy and call on potential and current photodynamic therapy treatment centers.
In Canada, we sell our products to hospitals and wholesale drug companies, which in turn
distribute our products to pharmacies. Our major products are included in most provincial drug
benefit formularies. Our products are promoted by our 11 sales representatives and a market access
manager, under the supervision of a regional sales manager. They call on gastroenterologists and
internal medicine specialists with a particular interest in GI diseases, as well as on colorectal
surgeons.
In France, we sell our products to distributors, which in turn distribute them to wholesale
drug companies, which in turn distribute them to pharmacies. As of September 30, 2010, we had 43
sales representatives who, under the supervision of 5 regional sales directors, regularly visit
high-volume prescribing physicians to promote our other prescription products. In addition, in
Germany, we have an exclusive contracted sales force consisting of 16 sales representatives under
the supervision of two regional sales directors and in the United Kingdom, we have 1 sales
representative. We also have a partnership agreement with an over-the-counter distributor and
marketer to co-promote one of our products in France.
This international sales structure is complemented by our sponsorship of high-level
international medical meetings on topics related to therapeutic areas we focus on, our products and
research activities. These events are recognized by leading institutions. In North America,
continuing medical education (CME) credits are awarded to attendees. As a consequence, we believe
that we are recognized not only as a supplier of quality products, but also as an important link in
the continuous medical education process.
Customers
While the ultimate end users of our products are the individual patients to whom our products
are prescribed by physicians, our direct customers include a number of large pharmaceutical
wholesale distributors and large pharmacy chains. The pharmaceutical wholesale distributors that
comprise a significant portion of our customer base sell our products primarily to retail
pharmacies, which ultimately dispense our products to the end consumers.
We use a pull-through marketing approach that is typical of pharmaceutical companies. Under
this approach, our sales representatives actively promote our products by demonstrating the
features and benefits of our products to physicians and, in particular, gastroenterologists who
may prescribe our products for their patients. The patients, in turn, take the prescriptions to
pharmacies to be filled. The pharmacies then place orders, directly or through buying groups, with
the wholesalers, to whom we sell our products.
The following table sets forth the percentage of total net product sales for each of the last
three fiscal years for each of our wholesale customers that accounted for 10% or more of our total
net product sales in any of the last three fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal years |
|
|
|
ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Customer A |
|
|
29.9 |
% |
|
|
30.4 |
% |
|
|
39.0 |
% |
Customer B |
|
|
28.1 |
% |
|
|
37.4 |
% |
|
|
26.6 |
% |
Customer C |
|
|
12.2 |
% |
|
|
11.7 |
% |
|
|
10.3 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
70.2 |
% |
|
|
79.5 |
% |
|
|
75.9 |
% |
-14-
Competition
Our business is highly competitive. Competition within the gastroenterology industry is
primarily based upon product efficacy, tolerability and convenience, although price competition
is an important factor as health-care providers continue to be concerned with costs.
Our products face competition from both branded and generic products, sold by other
pharmaceutical companies. Technological developments by competitors, earlier regulatory approval
of competitive products, including generic versions of our products, or competitors superior
marketing capabilities could adversely affect the commercial potential of our products and could
have a material adverse effect on our revenue and results of operations. Many of our competitors
have greater financial resources and marketing capabilities than we do. Our competitors in the
U.S. and abroad are numerous and include major pharmaceutical companies, and some of the
manufacturers of our products. We believe that our focus on gastroenterology, combined with our
strategy of funding and controlling all or most aspects of our business, will provide the cost
savings, efficiencies in product development and acceleration of regulatory filings necessary
for us to compete effectively with such companies. Our competitors, however, may succeed in
developing products that are as, or more, clinically effective or cost-effective than any that
are being developed or licensed by us, or that would render our products obsolete or
uncompetitive. In addition, certain of our competitors have greater experience than we do in
clinical testing and human clinical trials of pharmaceutical products and in obtaining FDA and
other regulatory approvals.
Competition for each of our key product lines is discussed in greater detail above in the
Products section.
Manufacturing and Supply
While we manufacture LACTEOL at our facility in France and SALOFALK at our facility in
Canada, we outsource all aspects of the manufacturing of our other products. Our third-party
manufacturers are subject to extensive government regulations. For example, the FDA requires
that the drug product be manufactured, packaged and labeled in conformity with current good
manufacturing practices, or cGMP. In complying with cGMP regulations, manufacturers must
continue to invest time, money and effort in manufacturing and quality control and quality
assurance to ensure that their products meet applicable specifications and regulatory
requirements. The same applies to our manufacturers outside of the U.S. We intend to continue
to outsource the manufacturing and distribution of most of our products for the foreseeable
future, and we believe this strategy will enable us to direct our financial resources to
product in-licensing and acquisition, product development and sales and marketing.
With the exception of LACTEOL, we rely on third parties to supply the active
pharmaceutical ingredients used in our finished products. Our experts in materials management,
sourcing, technical services, quality assurance and regulatory affairs oversee the activities
of contract manufacturing organizations and suppliers of active ingredients. We ensure
continuity of supply through optimum inventory levels, dual sourcing, where feasible, supplier
management and contracts. We usually build up inventory prior to changing manufacturing sites.
Supply agreements are in place with most third parties and typically give price protection over
the period of the contract; price increases, if any, are usually based on the consumer/producer
price index. Contracts typically have three to five-year terms; our current contracts will
expire at various dates over the next three to five years.
We have entered into agreements with third parties to manufacture the finished dosage form
of all our marketed products other than LACTEOL and SALOFALK. Depending on the particular
arrangement, either we or the third-party manufacturer sources the active pharmaceutical
ingredient. We also use third parties to perform analytical testing on our raw materials, active
ingredients, finished products and product candidates.
While we believe there are alternative sources of supply for the active pharmaceutical
ingredients and raw materials required for the manufacturing of our products, should any of our
current suppliers be unable to meet our business needs, there is possibility we could not be able
to qualify these alternative suppliers in a timely manner, or obtain the required materials under
favorable terms. For some of our marketed products, the finished dosage manufacturer also
packages the product, while for others, we use a separate third-party packaging company.
Our agreements with suppliers, manufacturers and testing laboratories include, among other,
specific supply terms, product specifications, testing and release mechanisms, batch size
requirements, price, payment terms, forecast requirements, shipping and quality assurance
conditions. Under some of these agreements, we are obligated to purchase all or a specified
percentage of our requirements for the product or active pharmaceutical ingredient supplied
under the agreement. These agreements generally permit the manufacturer or supplier to pass on
to us increases in cost of production or materials.
With the exception of the manufacturers of ULTRASE, CANASA, and CARAFATE, our manufacturers
and suppliers are not prevented from supplying similar product to third parties. Eurand, our
supplier of ULTRASE, has agreed to restrictions on its ability to supply any third-party in the
U.S., Canada and some Central and South-American countries with certain pancreatic enzyme
products. Subject to certain requirements, Eurand is permitted to commercialize its own
pancreatic enzyme product line, ZENPEP® as well as an authorized generic version of
ZENPEP®, which was launched in the U.S. in 2009.
Our suppliers of mesalamine and the manufacturer of CANASA have each agreed not to supply
similar or same mesalamine active ingredient or mesalamine product to a third-party in the U.S.
or Canada.
-15-
Our supplier of CARAFATE has agreed not to supply a suspension formulation of sucralfate,
the active pharmaceutical ingredient in CARAFATE, to a third-party in the U.S.
Our agreements for the manufacturing of certain of our core products expire at various
dates over the next three to five years. We believe, but cannot guarantee, that we will be able
to renew these agreements under satisfactory terms and conditions as they expire or we shall be
able to find suitable alternate suppliers and manufacturers. Should we be unable to renew these
agreements under favorable terms and conditions or find suitable alternatives, our business may
be adversely affected.
Manufacturers and suppliers of our products and product candidates are subject to the
FDAs current cGMP requirements and other rules and regulations as prescribed by regulatory
authorities outside the U.S., including in Canada and the EU. We depend on our third-party
suppliers and manufacturers for continued compliance with cGMP requirements and other
applicable regulations and standards.
Government Regulation
The research and development, manufacture, and marketing of pharmaceutical products are
subject to regulation by U.S., Canadian and foreign governmental authorities and agencies. Such
national agencies and other federal, state, provincial and local entities regulate the testing,
manufacturing, safety and promotion of our products. The regulations applicable to our products
may be subject to change as regulators acquire additional experience in the specific area.
U.S. Regulations
New Drug Application
We are required by the FDA to comply with new drug application (NDA) procedures for our
branded products prior to commencement of marketing. New drug compounds and new formulations for
existing drug compounds that cannot be filed as ANDAs are subject to NDA procedures. These
procedures include (1) preclinical laboratory and animal toxicology tests; (2) submission of an
investigational new drug (IND) application and its required acceptance by FDA before any human
clinical trials can commence; (3) adequate and well-controlled replicate human clinical trials to
establish the safety and efficacy of a drug for its intended indication; (4) submission of an NDA
to the FDA; and (5) FDA approval of an NDA prior to any commercial sale or shipment of the
product, including pre-approval and post-approval inspections of its manufacturing and testing
facilities.
In seeking FDA approval for a drug through an NDA, applicants are required to list each
patent with claims that cover the applicants product or an approved use of the product. Upon
approval of a drug, each of the patents listed in the application for the drug is, where eligible,
published in the FDAs Approved Drug Products with Therapeutic Equivalence Evaluations, commonly
known as the Orange Book.
Abbreviated New Drug Application
When a drug is listed in the Orange Book and when a potential competitor seeks to develop a
generic version of such a product, an ANDA may be filed in lieu of an NDA. An ANDA provides for
marketing of a drug product that has the same active pharmaceutical ingredients in the same
strengths and dosage form as the listed drug and has been shown through bioequivalence testing to
be therapeutically equivalent to the listed drug. Under the ANDA procedure, the FDA waives the
requirement to submit complete reports of preclinical and clinical studies of safety and efficacy,
and instead, requires the submission of bioequivalency data, that is, demonstration that the
generic drug produces the same blood levels of drug in the body as its brand-name counterpart,
although the FDA may agree or require other means of establishing bioequivalence.
For each patent listed for the approved product in the Orange Book, the ANDA applicant must
certify to the FDA that (1) the required patent information has not been filed; (2) the listed
patent has expired; (3) the listed patent has not expired, but will expire on a particular date
and approval is sought after patent expiration; or (4) the listed patent is invalid or
unenforceable or will not be infringed by the manufacture, use or sale of the new product. A
certification that the new product will not infringe the already approved products listed
patents or that such patents are invalid or unenforceable is called a Paragraph IV certification.
If the ANDA applicant has made a Paragraph IV certification, it must also send notice to the
NDA and patent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent
holders may then initiate a patent infringement lawsuit against the ANDA applicant. The filing of
a patent infringement lawsuit within 45 days of the receipt of a Paragraph IV notice
automatically prevents the FDA from approving the ANDA until the earlier of 30 months from the
receipt of notice by the patent holder, expiration of the patent, or a decision or settlement in
the infringement case finding the patent to be invalid, unenforceable or not infringed.
The Hatch-Waxman Act explicitly encourages generic challenges to listed patents by providing for a
180 day period of generic product exclusivity to the first generic applicant to file an ANDA with
a Paragraph IV certification. Thus, many, if not most, successful new drug products are subject to
generic applications and patent challenges prior to the expiration of all listed patents.
505(b)(2) Application Process
Most drug products obtain FDA marketing approval pursuant to an NDA or an ANDA but a third
alternative is a special type of NDA, commonly referred to as a Section 505(b)(2) NDA, which
enables the applicant to rely, in part, on the FDAs findings of safety and efficacy of
-16-
an approved product, or published literature, in support of its application. Section 505(b)(2) NDAs
often provide an alternate path to FDA approval for new or improved formulations or new uses of
previously approved products. A 505(b)(2) application allows the applicant to file an application
where at least some of the information required for approval comes from studies not conducted by
or for the applicant and for which the applicant has not obtained a right of reference. The
applicant may rely upon the FDAs findings with respect to particular preclinical studies or
clinical trials conducted for an approved product, although the FDA may also require companies to
perform additional studies or
measurements to support the change from the approved product.
Relative to normal regulatory requirements for a 505(b)(1) NDA, regulation may permit a
505(b)(2) applicant to forego costly and time-consuming drug development studies by relying on the
FDAs finding of safety and efficacy for a previously approved drug product. Under some
circumstances, the extent of this reliance approaches that permitted under the generic drug
approval provisions. This approach is intended to encourage innovation in drug development without
requiring duplicative studies to demonstrate what is already known about a drug, while protecting
the patent and exclusivity rights for the approved drug. Notwithstanding the approval of many
products by the FDA pursuant to Section 505(b)(2), over the last few years, some pharmaceutical
companies and others have objected to the FDAs interpretation of Section 505(b)(2).
Data Exclusivity
Under the Hatch-Waxman Act, newly-approved drugs and indications may benefit from a
statutory period of non-patent data exclusivity. The Hatch-Waxman Act provides five-year data
exclusivity to the first applicant to gain approval of an NDA for a new chemical entity, or NCE,
meaning that the FDA has not previously approved any other drug containing the same active
pharmaceutical ingredient. Although protection under the Hatch-Waxman Act will not prevent the
submission or approval of another full NDA, such an NDA applicant would be required to conduct
its own preclinical and adequate, well-controlled clinical trials to demonstrate safety and
effectiveness.
The Hatch-Waxman Act also provides three years of data exclusivity for the approval of new
and supplemental NDAs, including Section 505(b)(2) applications, for, among other things, new
indications, dosage forms, routes of administration, or strengths of an existing drug, or for a
new use, if new clinical investigations that were conducted or sponsored by the applicant are
determined by the FDA to be essential to the approval of the application. This exclusivity,
which is sometimes referred to as clinical investigation exclusivity, would not prevent the
approval of another application if the applicant has conducted its own adequate, well-controlled
clinical trials demonstrating safety and efficacy, nor would it prevent approval of a generic
product that did not incorporate the exclusivity-protected changes of the approved drug product.
Canadian Regulations
The requirements for selling pharmaceutical drugs in Canada are substantially similar to
those of the U.S. described above, with the exception of the 505(b)(2) route, which is not
available in Canada. Canadian regulations also include provisions relating to marketing and data
exclusivity.
European Economic Area
A medicinal product may only be placed on the market in the European Economic Area, or EEA,
composed of the 27 European Union member states, plus Norway, Iceland and Lichtenstein, when a
marketing authorization has been issued by the competent authority of a member state. There are
essentially three community procedures created under prevailing European pharmaceutical
legislation that, if successfully completed, allow an applicant to place a medicinal product on
the market in the EEA.
Centralized Procedure
A centralized procedure exists when a marketing authorization is granted by the European
Commission, acting in its capacity as the European Licensing Authority on the advice of the
European Medicines Agency. That authorization is valid throughout the entire community and
directly or indirectly (in the case of Norway, Iceland and Liechtenstein) allows the applicant to
place the product on the market in all member states of the EEA. The European Medicines Agency is
the administrative body responsible for coordinating the existing scientific resources available
in the member states for evaluation, supervision and pharmacovigilance of medicinal products.
Mutual Recognition and Decentralized Procedures
The competent authorities of the member states are responsible for granting marketing
authorizations for medicinal products that are placed on their markets. If the applicant for a
marketing authorization intends to market the same medicinal product in more than one member
state, the applicant may seek an authorization progressively in the community under the mutual
recognition or decentralized procedure.
Mutual Recognition
Mutual recognition is used if the medicinal product has already been authorized in one
member state. In this case, the holder of this marketing authorization requests the member state
where the authorization has been granted to act as reference member state by preparing an updated
assessment report that is then used to facilitate mutual recognition of the existing
authorization in the other member states in which approval is sought (the so-called concerned
member states). The reference member state must prepare an updated assessment report which,
together with the approved Summary of Product Characteristics, or SmPC (which sets out the
conditions of use of the product), and a
-17-
labeling and package leaflet are sent to the concerned
member states for their consideration. The concerned member states are required to make an
approval decision on the assessment report, the SmPC, and the labeling and package leaflet within
90 days of receipt of these documents.
Decentralized Procedure
This procedure is used in cases where the medicinal product has not received a marketing
authorization in the EU at the time of application. The applicant sends its application
simultaneously to all concerned member states and requests a member state of its choice to
act as reference member state to prepare an assessment report that is then used to
facilitate agreement with the concerned member states and the granting of a national marketing
authorization in all of these member states. In this procedure, the reference member state must
prepare, for consideration by the concerned member states, the draft assessment report, a draft
SmPC and a draft of the labeling and package leaflet within 120 days after receipt of a valid
application. As in the case of mutual recognition, the concerned member states are required to
make an approval decision on these documents within 90 days of their receipt.
International Regulations
Sales of our products outside the U.S., Canada and the EU are subject to local regulatory
requirements governing the testing, registration and marketing of pharmaceuticals, which vary
widely from country to country.
In addition to the regulatory approval process and regulations relating to the manufacture
of drugs, pharmaceutical companies are subject to regulations under provincial, state and federal
laws, including requirements regarding occupational safety, laboratory practices, environmental
protection and hazardous substance control, and may be subject to other present and future local,
provincial, state, federal and foreign regulations, including possible future regulations of the
pharmaceutical industry. We believe that we are in compliance in all material respects with such
regulations as are currently in effect.
Trademarks and Patents
We believe that trademark protection is an important part of establishing product and brand
recognition. We own a number of registered trademarks and trademark applications, including
trademarks for all of our key product lines, and have acquired the rights to trademarks for
several of our smaller product lines by license. We actively manage our trademark portfolio and
maintain trademark registrations in a number of jurisdictions where we sell our products and
regularly file applications where we sell or intend to distribute our products. In the U.S.,
trademark registrations remain in force for 10 years and may be renewed every 10 years after
issuance, provided the mark is still being used in commerce.
A patent is a statutory private right that grants to the patentee exclusive rights to
exclude others from using the patented invention during the term of the patent. A patent is
territorial and may be sought in many jurisdictions. In the U.S., as in most other countries, the
term of patent protection is 20 years from the date the patent application was filed. An
invention may be patentable if it meets the criteria of being new, useful and non-obvious.
Depending upon whether a particular drug is patentable and the relative cost associated with
obtaining patents for the invention, an inventor will either apply for a patent in order to
protect the invention or maintain the confidentiality of the information to rely on the
common-law protection afforded to trade secrets.
A company may also enter into licensing agreements with third-party licensors in order to
obtain the right to make, use and sell certain products, thereby gaining access to know-how,
trade secrets and patented technology. The value of a license is generally enhanced by the
existence of one or more patents. A license gives the licensee access to developed and, in many
cases, tested technology and provides the licensee faster and often less expensive entry into the
market. Licensing also establishes relationships, which may provide access to additional products
or technology or may lead to joint ventures or alliances affording the licensor and the licensee
an opportunity to evaluate each others products and technology. This is also true, to a lesser
extent, for distribution relationships.
Pursuant to license agreements with third parties, we have acquired rights to manufacture,
market and used related know-how, tade secrets and, in certain cases, patented technology for our
existing products, as well as many of our development products and technologies. Such agreements
typically contain provisions requiring us to use commercially reasonable efforts or otherwise
exercise diligence in pursuing market development for such products in order to maintain the
rights granted under the agreements, and may be cancelled upon our failure to perform our payment
or other obligations.
We further rely and expect to continue to rely upon unpatented proprietary know-how and
technological innovation in the development and manufacture of many of our marketed and
development products. We also maintain and rely on trade secrets, know-how, product innovations,
in-licensed technologies and in-licensing opportunities to develop and maintain our proprietary
positions. Our success depends in part on our ability to obtain and maintain proprietary
protection for our products and product candidates, to operate without infringing the proprietary
rights of others, and to prevent others from infringing our proprietary rights as we develop
products or expand into new territories.
We also depend upon the skills, knowledge and experience of our scientific and technical
staff, as well as that of our advisors, consultants and other contractors. To help protect our
proprietary know-how that is not patentable, and for inventions for which patents may be
difficult to enforce, we rely on trade secret protection and confidentiality agreements to
protect our interests. To this end, we require our employees, consultants, advisors and certain
other contractors to enter into confidentiality agreements that prohibit the disclosure of
confidential information and, where applicable, require disclosure and assignment to us of the
ideas, developments, discoveries and
-18-
inventions pertinent to our business. Additionally, these
confidentiality agreements require that our employees, consultants and advisors do not bring to
us, or use without proper authorization, any third-partys proprietary technology.
We have entered into several types of collaborative agreements with licensors, licensees and
other third parties and will continue to do so. The following provides an overview of relevant
patent, trademark and regulatory protection and, where applicable, agreements which have been
entered into, with respect to products marketed by us or under development.
ULTRASE
We own the trademark ULTRASE and we market certain pancreatic enzyme-based microspheres and
mini-tablets under the ULTRASE brand in North and Latin America, under an exclusive development,
license and supply agreement with Eurand. This agreement, entered into in 2000, was amended in
2007, to extend its term to 2015. We have paid Eurand licensing fees totaling $3.5 million, and we
have agreed to pay Eurand royalties of 6% on our annual net sales of ULTRASE.
There are currently no issued U.S. patents covering ULTRASE. However, there are three (3)
pending patent applications in the U.S. with claims related to pancrelipase products. The patent
applications include claims intended to provide market exclusivity for certain technological and
commercial aspects of pancrelipase products and their manufacture.
In addition, based on the 29th edition of the Approved Drug Products with
Therapeutic Equivalence Evaluations, commonly known as the Orange Book, published by the FDA in
August 2009, CREON®, ZENPEP® and PANCREAZE have been granted the status of
New Chemical Entity, or NCE, which entitles them to certain market exclusivity protections pursuant
to the Hatch-Waxman Act. We believe that, upon approval of its NDA, ULTRASE MT will also be
designated as an NCE and will equally benefit from the same market exclusivity provided pursuant to
the Hatch-Waxman Act. This would afford ULTRASE MT a measure of protection from new competition in
the marketplace, as this exclusivity generally prohibits the FDA from reviewing ANDAs for products
containing the same active moiety for a period of five years. Further, in its Guidance for
IndustryExocrine Pancreatic Insufficiency Drug ProductsSubmitting NDAs of April 2006, the FDA
has stated that because of their complexity, pancreatic enzyme extract products are not likely to
be appropriate for ANDA filings. For more details on NCE data exclusivity, see Item 1 Business -
Government Regulation U.S. Regulations Data Exclusivity.
MAX-002
In June 2008, the USPTO approved our application and granted us a patent covering MAX-002
(U.S. Patent Application Publication No. 2009-0264386 A1). This patent includes claims covering the
products formulation and methods of treatment, including for active ulcerative proctitis. We
believe this patent should provide significant protection for this novel suppository by preventing
third parties from making, selling, offering to sell, or using an infringing mesalamine suppository
in the U.S. The patent will expire June 6, 2028 and is expected to be eligible for listing in the
FDAs Orange Book once MAX-002 receives FDA regulatory approval. We have also filed and are
pursuing the prosecution of a continuation-in-part application to this issued patent that includes
claims covering other dosage strengths of our novel suppository formulation.
Ursodiol
URSO
In March 1999, we entered into two agreements with Synthélabo of France (now, Sanofi-Aventis)
that secured our right to manufacture, use and market URSO for the treatment of PBC in Canada and
the U.S.
For the U.S., we licensed the rights to a patent covering the use of ursodiol in the
treatment of PBC, which expired on November 19, 2007. On May 13, 2009, the Office of Generic Drugs
approved a generic version of our ursodiol tablet products, which was launched by a third-party
shortly thereafter. On July 2, 2009, we announced that we had entered into an agreement with
Prasco Laboratories under which Prasco will market and sell an authorized generic of URSO 250 and
URSO FORTE in the U.S. For Canada, we acquired full ownership of the patent relating to the use of
ursodiol for the treatment of PBC, which expired in June 2010. However, in May 2006, the Canadian
PBC patent was held to be invalid for the purposes of opposing the issuance of a Notice of
Compliance for a generic version of URSO, under proceedings pursuant to the Canadian Patented
Medicines (Notice of Compliance) Regulations.
PHOTOFRIN
In May 2000, we purchased from QLT Inc., or QLT, the trademark PHOTOFRIN for the U.S., Canada
and all other countries where it has been registered as a trademark or used in marketing. We also
purchased, licensed or sublicensed from QLT, as the case may be, the worldwide rights in and to
other assets and intellectual property related to PHOTOFRIN. As part of the transaction, we also
acquired a European subsidiary of QLT, which holds the European regulatory approvals for
PHOTOFRIN. The last of the patents, which form part of the licensed and acquired assets, expire in
2016 in the U.S. and in 2017 in certain other territories. As part of the acquisition, we agreed
to assume QLTs obligation to pay royalties of up to 5% on net sales of PHOTOFRIN to Health
Research Inc., or Health Research, pursuant to
arrangements under which we are a sub-licensee of the technology that QLT licensed from
Health Research. Pursuant to the terms of the transaction between us and QLT, we have paid to QLT
milestone cash payments of CAN$20.0 million (representing the maximum potential aggregate amount
of milestone cash payments under the terms of the transaction).
-19-
PANZYTRAT
In November 2002, we acquired from Abbott Laboratories and its affiliates, or Abbott, certain
assets related to the distribution, marketing and sale of a line of pancreatic enzyme products
used to enhance the digestion of fats. This pancreatic enzyme product line is commonly marketed
under the trademark PANZYTRAT. Abbott directly assigned us certain patents related to the product,
the last of which expired in 2006. The know-how and trade secrets associated with these products
and their manufacture are the object of a perpetual unrestricted license from Abbott. The
PANZYTRAT and related trademark portfolio, was assigned directly by Abbott to our French
subsidiary, Axcan Pharma S.A. (now Axcan Pharma SAS). This portfolio contains trademarks
associated with the product line for a number of countries throughout the world.
PYLERA
In January 2000, we entered into a worldwide (excluding Australia and New Zealand) licensing
agreement (which was amended in November 2000 and August 2001) with Exomed Australia Pty Ltd,
Gastro Services Pty Ltd, Ostapat Pty Ltd, and Capability Services Pty Ltd. This agreement, as
amended, provided us with exclusive rights in a number of countries, including Canada and the
U.S., to a series of patents covering triple and quadruple therapies for Helicobacter pylori
eradication. These patents cover the treatment of duodenal ulcer disease (and in some countries
reflux esophagitis and gastric ulcer) through the eradication of Helicobacter pylori using a
bismuth compound together with two or more antibiotics. We paid approximately $1.64 million cash
for the license and will pay a 5.5% royalty based on sales. The expiry dates of these licensed
patents vary depending on the jurisdiction. In the U.S., the patents expired in March 2010 and in
other territories, the last patent will expire in July 2011.
In May 1999, we acquired the rights to a double-capsule delivery technology to be used for
PYLERA and related patents issued or applied for in various jurisdictions. This patent expires in
December 2018 in the U.S. Prior to November 2008, the U.S. patents covering PYLERAs triple and
quadruple therapies for Helicobacter pylori eradication and capsule formulation were not eligible
for listing in the FDAs Orange Book and to benefit from the automatic 30-month stay provisions of
the Hatch-Waxman Act. In November 2008, pursuant to the enactment of the Q1 Program Supplemental
Funding Act (Q1 Act), the FDCA was amended to permit the Orange Book listing of patents covering
products containing antibiotic active ingredients included in an application submitted to FDA for
review prior to November 21, 1997 or, old antibiotics, which is the case of PYLERA. In December
2008, our patents were submitted for listing and, as a result, were listed in the FDAs Orange
Book. Accordingly, we believe we are eligible to benefit from the automatic stay provisions of the
Hatch-Waxman Act for an ANDA submitted subsequent to the date these patents were listed in the
Orange Book and which contains a paragraph IV certification. For more details regarding the
30-month stay provisions of the Hatch-Waxman Act, see Item 1. Business Government Regulation
U.S. Regulations Abbreviated New Drug Application.
LACTEOL
In April 2002, we acquired all of the shares of Laboratoire du Lactéol du Docteur Boucard
(now Axcan Pharma SAS), which owns all the intellectual property rights to the bacterial strain
(Lactobacillus LB) composition marketed by Laboratoire du Lactéol under different trademarks,
including LACTEOL.
In April 2009, we entered into a license agreement with a leading multi-national company
(the Licensee) whereby we granted the Licensee the right to use the active ingredient contained
in one of our commercialized products, LACTEOL, to develop and commercialize new food products
that will contain this active ingredient. Under the terms of the agreement, the Licensee will
have exclusive rights to commercialize these new products. We will continue to own all other
rights related to the active ingredient, including the right to use the active ingredient and
develop, manufacture and commercialize non-food products containing the active ingredient,
including pharmaceutical products. For the fiscal year ended September 30, 2009, we recorded as
revenue milestones that we are entitled to receive under the agreements in the amount of $7.1
million.
LACTEOL has no patent protection or regulatory exclusivity. However, the product is derived
from proprietary strains of bacterium for which the ultimate parent organism is protected by a
number of security safeguards, such that access by third parties seeking to reproduce it for
competitive or other purposes is limited and controlled.
Cx401
Under the terms of the agreement signed with Cellerix on September 30, 2007, relating to
Cx401, an innovative biological product in development for the treatment of perianal
fistulas, we made a $10.0 million upfront payment to Cellerix (which was charged to expense
in the fourth quarter of fiscal year 2007), and will make regulatory milestone payments that
could total up to $30.0 million. In addition, patent applications were submitted, which, if
granted, could provide protection until at least 2025. However, we cannot provide assurances
that such patents will be granted.
Based on the results of a Phase III study conducted by Cellerix in Europe, we have decided to
not pursue the development of this formulation. We are awaiting the results of trials related to a
new formulation to which we have certain exerciseable development rights.
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Employees
As of September 30, 2010, we employed 525 people. Of these employees, 194 were located in the
U.S., 186 were located in Canada and 145 were located in the EU. In Canada, we are a party to a
collective bargaining agreement expires March 24, 2011. As of September 30, 2010, this agreement
covers 53 employees, all of whom are non management employees. In France, our employees are
subject to the Convention Collective Nationale de lIndustrie Pharmaceutique, a collective
bargaining agreement which applies to the entire pharmaceutical industry. We believe that
relations with both our unionized and non unionized employees are good.
We believe that our future success will depend in part on our continued ability to attract,
hire, and retain qualified personnel, including sales and marketing personnel in particular.
Competition for such personnel is intense, and there can be no assurance that we will be able to
identify, attract, and retain such personnel in the future.
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ITEM 1A. RISK FACTORS
This report contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those discussed in this report. Factors that could
cause or contribute to these differences include, but are not limited to, those discussed below
and elsewhere in this report.
If any of the following risks, or other risks are not presently known to us or that we
currently believe to not be significant, develop into actual events, then our business, financial
condition, results of operations or prospects could be materially adversely affected. If that
happens, the market value of our bonds could decline, and bond holders could lose all or part of
their investment.
RISKS RELATED TO OUR BUSINESS
Since we ceased distributing PEPs products in the U.S., we currently depend on three categories of
products for a large portion of our revenues; any material decline in the sales of any of them or
our inability to relaunch PEPs in the U.S. would have an adverse impact on our business.
Any factor that adversely affects the sale or price of our key products could significantly
decrease our sales and profits. Ursodiol products (URSO, URSO 250, URSO DS, URSO FORTE and
DELURSAN,), mesalamine products (CANASA and SALOFALK) and sucralfate products (CARAFATE and
SULCRATE) accounted for 18.0%, 25.3% and 16.7%, respectively, of our net product sales for fiscal
year 2009 and for 12.6%, 28.4% and 24.4%, respectively, of our net product sales for fiscal year
2010. With the exception of ursodiol products that now face generic competition both in the U.S.
and Canada, we believe that sales of other groups of products will continue to constitute a
significant portion of our total revenues until we launch additional products. Any significant
setback with respect to any one of these products, including shipping, manufacturing, regulatory
issues, product safety, marketing, government licenses and approvals, intellectual property rights
problems, or generic or other forms of competition, could have a material adverse effect on our
financial position, cash flows or overall trends in results of operations.
Pancreatic enzyme products (ULTRASE, VIOKASE and PANZYTRAT) were representing the fourth
category of products that was accounting for a large portion of our revenues. PEPs accounted for
27.5% of our net product sales for fiscal year 2009 and for 19.3% of our net product sales for
fiscal year 2010. We ceased distributing our ULTRASE and VIOKASE product lines in the U.S.
effective April 28, 2010. This action was taken because we did not receive FDA approval for
ULTRASE MT or VIOKASE by April 28, 2010, the date mandated by the FDA to obtain approval for
pancreatic enzyme products. ULTRASE and VIOKASE have accounted for 24.0% of our net product sales
in fiscal year 2009 and for 15.1% of our net product sales in fiscal year 2010. If ULTRASE MT and
VIOKASE are not approved, it will continue to adversely affect our financial position, cash flows
or overall trends in results of operations.
The entry of generics versions of our CARAFATE and CANASA products in the U.S. could have a
material adverse impact on our financial position, cash flows or overall trends in results of
operations.
CANASA
CANASA does not have any patent protection in the U.S. On November 5, 2007, clinical
investigation exclusivity previously granted pursuant to the Hatch-Waxman Act, covering a change in
the formulation of this drug from a 500 mg formulation to a 1,000 mg suppository formulation,
expired. As a result, if a generic mesalamine suppository were to be launched, it could have a
significant negative impact on sales of CANASA in the U.S.
In June 2007, the FDA published draft guidance on the requirements it expects manufacturers
seeking approval of a mesalamine suppository to meet in order to obtain approval of mesalamine
suppositories. This draft guidance specifies that a request for regulatory approval of a mesalamine
suppository product must be supported by placebo and reference-drug controlled clinical studies
with clinical endpoints demonstrating safety and effectiveness in patients with ulcerative
proctitis. We cannot provide assurances that the FDA requirements reflected in this draft guidance
will be applied by the FDA or will be formally adopted in their current form.
In a July 2010 posting on clinicaltrial.gov that was updated in November 2010, Sandoz Inc.
disclosed that it had initiated in June 2010 a clinical trial to establish therapeutic equivalence
of a 1,000 mg rectal mesalamine suppository product to CANASA rectal suppositories, for the
treatment of mild to moderate ulcerative proctitis. The disclosure states that the trial is being
conducted in India and has an estimated duration of 18 months. Cadila Healthcare Inc. also
recently disclosed that it is conducting a similar clinical study in India to establish
therapeutic equivalence of a 1,000 mg rectal mesalamine suppository product to CANASA.
CARAFATE
CARAFATE does not have any patent protection or regulatory exclusivity in the United States.
In a public filing on May 7, 2010, K-V Pharmaceutical Company announced the sale of certain
intellectual property and other assets related to its Abbreviated New Drug Application, submitted
with the U.S. Food and Drug Administration for the approval to engage in the commercial
manufacture and sale of 1gm/10mL sucralfate suspension, the active pharmaceutical ingredient in
our CARAFATE product. We do not have any information on the status of this ANDA.
Generic competition against any of our products could potentially lower prices and unit sales
and could have a material adverse impact on our financial position, cash flows or overall trends
in results of operations.
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The launch of a product that competes with our ursodiol product line in France could have a
material adverse impact on our financial position, cash flows or overall trends in results of
operations.
We reported net sales of $23.4 million, $20.8 million and $21.4 million for DELURSAN in
fiscals 2010, 2009, and 2008, respectively. (In local currency, net sales of DELURSAN were
17.3 million, 15.4 million and 14.2 million in fiscal years 2010, 2009 and 2008,
respectively).
DELURSAN mainly competes with URSOLVAN® (Sanofi-Aventis S.A.). However, we
expect another competing branded product to be launched in France by the end of calendar year
2011. An additional request for marketing approval was submitted by another competitor for an
ursodiol product, based on well-established use. Under this procedure, a company can submit for
approval a product similar to one that is already marketed by submitting evidence of
therapeutic efficacy based on published literature. If this other ursodiol product is launched,
it could have a significant negative impact on sales of DELURSAN in France.
Competition to DELURSAN, which made up approximately 6.6% of our net product sales in fiscal
year 2010, could have a material adverse effect on our results of operations and financial
condition.
Some of our key products face competition from generic or unbranded products.
Some of our key products, including products from our URSO and CANASA lines, currently face
competition from generic or unbranded products (such as ACTIGALL , its generics and the launched
generic in the case of URSO, and other mesalamine rectal dosage forms in the case of CANASA).
Third-party payors and pharmacists can substitute generic or unbranded products for our products
even if physicians prescribe our products by name. Particularly in the U.S., government agencies
and third-party payors often put pressure on patients to purchase generic products instead of
brand-name products as a way to reduce health-care costs.
Generic competition against any of our products could lower prices and unit sales and could
therefore have a material adverse effect on our results of operations and financial condition.
Future sales of our marketed products might be less than expected.
The degree of continued market acceptance of our products among physicians, patients,
health-care payors and the medical community will depend upon a number of factors including
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the timing of regulatory approvals and product launches by us or competitors, and
any generic or over-the-counter competitors; |
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perceptions by physicians and other members of the health-care community regarding
the safety and efficacy of the products; |
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price increases, and the price of our products relative to other drugs or
competing treatments; |
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patient and physician demand; |
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adverse side effects or unfavorable publicity regarding our products or other
drugs in our class; |
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the results of product development efforts for new indications; |
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the scope and timing of additional marketing approvals and favorable reimbursement
programs for expanded uses; |
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availability of sufficient commercial quantities of the products; and |
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our success in getting other companies to distribute our products outside our
target markets. |
The concentration of our product sales to only a few wholesale distributors increases the risk
that we will not be able to effectively distribute our products if we need to replace any of
these distributors, which would cause our sales to decline.
The majority of our sales are to a small number of pharmaceutical wholesale distributors,
which in turn sell our products primarily to retail pharmacies, which ultimately dispense our
products to the end consumers. In fiscal year 2010, sales to our main customer, Customer A,
accounted for 29.9% of our net product sales, sales to Customer B accounted for 28.1% of our net
product sales, and sales to Customer C accounted for 12.2% of our net product sales.
If any of these distributors cease doing business with us for any or all of our products, or
materially reduce the amount of product they purchase from us and we cannot conclude agreements
with replacement wholesale distributors on commercially reasonable terms, we might not be able to
effectively distribute our products through retail pharmacies. The possibility of this occurring
is exacerbated by the consolidation occurring in the wholesale drug distribution industry,
including through mergers and acquisitions among wholesale distributors and the growth of large
retail drugstore chains. As a result, a small number of large wholesale distributors control a
significant share of the market. However, this risk is mitigated by the fact that we now have DSAs
with our three largest U.S. wholesalers.
Wholesaler buying patterns may change, and this could have a detrimental effect on our future
revenue and financial condition.
Since fiscal year 2005, some wholesalers have changed their business model from one depending
on drug price inflation to a fee-for-service arrangement, whereby manufacturers pay wholesalers a
fee for inventory management and other services. These fees typically are a percentage of the
wholesalers purchases from the manufacturer or a fixed charge per item or per unit. The
fee-for-service approach results in
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wholesalers compensation being more stable and volume-based
as opposed to price-increase-based. As a result of the move to a fee-for-service business model,
many wholesalers are no longer investing in inventory ahead of anticipated price increases and
have reduced their
inventories from their historical levels. Under the new model, the consequence of
manufacturers using wholesalers is that they now realize the benefit of price increases more
rapidly in return for paying wholesalers for the services they provide, on a fee-for-service
basis. Fees resulting from distribution service agreements, or DSAs, are deducted from gross
sales. We have DSAs with our three largest U.S. wholesalers, which provide that these wholesalers
will maintain the levels of inventory of our products that they carry within specific agreed upon
target levels. A reduction in inventory levels by a pharmaceutical wholesale distributor would
result in a reduction in our sales to that wholesale distributor for the period during which the
reduction occurs, and would have a negative effect on our results of operations for the period.
We deduct DSA fees, which totaled approximately $3.6 million and $5.6 million for fiscal year
2009 and fiscal year 2010, respectively, from our total revenues. If we enter into DSAs with
additional wholesalers, we will likely have to pay them DSA fees, which will further reduce our
revenue in future periods.
Generally, changes in wholesaler buying patterns may occur in the future, and these changes
could result in a reduction in our revenues and could have a detrimental effect on our overall
financial condition or results of operations.
We use third parties to manufacture and test most of our products and product candidates. This
may increase the risk of not having sufficient quantity of our products or product candidates,
quantity at an acceptable cost or product with acceptable quality or in compliance with standards
and specifications. This could adversely affect sales of our products or result in the clinical
development or commercialization of our products or product candidates being delayed, prevented
or impaired.
With the exception of SALOFALK and LACTEOL, we have limited capabilities in manufacturing
pharmaceutical products. We do not expect to engage directly in the manufacturing of products, but
instead will continue to contract with third-party organizations. There are a limited number of
manufacturers capable of manufacturing our marketed products and our product candidates. We could
fail to contract or renew contracts with the relevant manufacturers or could contract with
manufacturers under terms and conditions that may not be entirely acceptable to us.
We currently rely, and expect to continue to rely, on third parties for (i) the supply and
testing of the active pharmaceutical ingredients used in our products and product candidates, and
(ii) the manufacturing, packaging and testing of the finished products. The current manufacturers
of our products and product candidates and likely future third-party manufacturers with whom we
would enter into an agreement, are or could be sole suppliers of our products and product
candidates for a given period of time. These manufacturers are commonly referred to as
single-source suppliers. Our agreements for the manufacturing of our core products expire at
various dates over the next three to five years. Should we be unable to renew these agreements
under favorable terms or find suitable alternates, our business may be adversely affected. Some of
our contracts prohibit us from using alternate manufacturers or suppliers for the products
supplied under these contracts, which prevents us from reducing dependence on single sources of
supply. In addition, we currently purchase materials and clinical supplies for some of our
products and product candidates from third-party manufacturers on a purchase order basis. Should
any of these manufacturers be unable to supply us for any reason, we may be delayed in identifying
and qualifying replacements. In any event, identifying and qualifying a new supplier or
third-party manufacturer could involve significant cost, is associated with the transfer of the
active pharmaceutical ingredient or finished-product manufacturing process. In addition, any
change in manufacturing generally requires formal approval by the regulatory agency, e.g. the FDA,
prior to proceeding with manufacturing at the new site. This approval process typically takes a
minimum of 12 to 18 months and during that time we may face a shortage of supply of our products.
Reliance on third-party manufacturers entails risks to which we would not be subject if we
manufactured or tested products or product candidates ourselves; risks revolve around, without
being limited to, the followings:
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Manufacturing of products may be difficult to scale up when required, which could
result in delays, inefficiencies and poor or low yields of quality products. |
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Some of our contracts contain purchase commitments that require us to make minimum
purchases that might exceed needs or limit the ability to negotiate with other
manufacturers, which might increase costs. |
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Cost involved in manufacturing certain products may lead to such products being
prohibitively expensive. |
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Delays in site transfers or scale-up to commercial quantities and any difficulty in
manufacturing could delay clinical studies, regulatory submissions, approval and
commercialization or continued commercialization of our products. |
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In the event of a manufacturing change, the FDA and other comparable country
regulators require testing and compliance inspections; new manufacturers may have to
be educated to our products production process, which requires time. |
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There is a limited number of manufacturers that operate under cGMP regulations and
that are both capable of manufacturing for us and willing to do so. If the third
parties that we engage to manufacture and/or test a product for commercial sale or for
our clinical trials were to cease to continue to do so for any reason, we could
experience delays in obtaining sufficient quantities of our products for us to meet
commercial demand or in advancing production of our commercial products or our clinical
trials while we identify and qualify replacement suppliers. |
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If, for any reason, we were not able to obtain adequate supply of our product and
product candidates or the drug substances used to manufacture them, it would be
difficult for us to develop, transfer or manufacture our products ourselves and compete
effectively. |
Our current and anticipated future dependence upon others for the manufacturing and testing
of our products and product candidates may adversely affect our profit margins and our ability to
develop products and commercialize additional products that receive regulatory
approval in a timely and competitive manner.
We rely on our third-party manufacturers for compliance with applicable regulatory requirements.
This may increase the risk of sanctions being imposed on us or on a manufacturer of our products
or product candidates, which could result in our inability to obtain sufficient quantities of
these products or product candidates.
Manufacturers are subject to the FDAs cGMP regulations and similar foreign standards,
and we do not have control over compliance with these regulations by our third-party
manufacturers. Our manufacturers may not be able to comply with cGMP regulations or other
regulatory requirements or similar regulatory requirements outside the U.S.
Our manufacturers are subject to unannounced inspections by the FDA, state regulators and
similar regulators outside the U.S. Our failure, or the failure of our third-party
manufacturers, to comply with applicable regulations could result in sanctions being imposed
on us, including
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fines; |
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injunctions; |
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civil penalties; |
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failure of regulatory authorities to grant marketing approval of our product candidates; |
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delays, suspension or withdrawal of approvals; |
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suspension of manufacturing operations; |
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license revocation; |
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seizures or recalls of products or product candidates; |
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operating restrictions; and |
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criminal prosecutions. |
Any of these sanctions could significantly and adversely affect supplies of our products and
product candidates and might adversely affect our profit margins and our ability to develop
product candidates and commercialize any additional products that receive regulatory approval
on a timely and competitive basis.
We rely on third parties to conduct, supervise and monitor our clinical trials, and those
third parties may perform in an unsatisfactory manner, such as by failing to meet
established deadlines for the completion of such trials.
We rely on third parties such as contract research organizations, medical institutions and
clinical investigators to enroll qualified patients and conduct, supervise and monitor our
clinical trials. Our reliance on these third parties for clinical development activities reduces
our control over these activities. Our reliance on these third parties, however, does not relieve
us of our regulatory responsibilities, including ensuring that our clinical trials are conducted
in accordance with good clinical practice regulations, and the investigational plan and protocols
contained in the relevant regulatory application, such as the IND. In addition, such third parties
may not complete activities on schedule, or may not conduct our preclinical studies or clinical
trials in accordance with regulatory requirements or our trial design. If these third parties do
not successfully carry out their contractual duties or meet expected deadlines, our efforts to
obtain regulatory approvals for, and to commercialize, our product candidates may be delayed or
prevented.
Our business could suffer as a result of adverse drug reactions to the products
we market.
Unexpected adverse drug reactions by patients to any of our products could negatively impact
utilization or market availability of our product.
Absence of long-term safety data may also limit the approved uses of our products, if any.
If we fail to comply with the regulatory requirements of the FDA and other applicable regulatory
authorities, or if previously unknown problems with any approved commercial products,
manufacturers or manufacturing processes are discovered, we could be subject to administrative
or judicially imposed sanctions or other setbacks, including
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restrictions on the products, manufacturers or manufacturing processes; |
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warning letters and untitled letters; |
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civil penalties and criminal prosecutions and penalties; |
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fines; |
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injunctions; |
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product seizures or detentions; |
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import or export bans or restrictions; |
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voluntary or mandatory product recalls and related publicity requirements; |
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suspension or withdrawal of regulatory approvals; |
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total or partial suspension of production; and |
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refusal to approve pending applications for marketing approval of new
products or of supplements to approved applications. |
The publication of negative results of studies or clinical trials may adversely impact our sales
revenue.
From time to time, studies or clinical trials on various aspects of pharmaceutical products
are conducted by academics or others, including government agencies. The results of these studies
or trials, when published, may have a dramatic effect on the market for the pharmaceutical
product that is the subject of the study. The publication of negative results of studies or
clinical trials related to our products or the therapeutic areas in which our products compete
could adversely affect our sales, the prescription trends for our products and the reputation of
our products. In the event of the publication of negative results of studies or clinical trials
related to our products or the therapeutic areas in which our products compete, our business,
financial condition, results of operation and cash flows could be materially adversely affected.
We may not be able to acquire or successfully integrate new products or businesses.
Our products are maturing, and therefore a significant component of our strategy is growth
through acquisitions of products or businesses. However, we cannot be certain that we will be
able to identify appropriate acquisition candidates. Even if an acquisition candidate is
identified, there can be no assurance we will be able to successfully negotiate any such
acquisition on favorable terms or at all, finance such an acquisition or integrate such an
acquired product or business into our existing business. We face significant competition from
other pharmaceutical companies for acquisition candidates, which makes it more difficult to find
attractive transaction opportunities for products or companies on acceptable terms. Furthermore,
the negotiation of potential acquisitions and the integration of such acquired products or
businesses could divert managements time and resources and require significant financial
resources to consummate. Failure to acquire new products may diminish our rate of growth and
adversely affect our competitive position.
Acquisitions that we may undertake will involve a number of inherent risks, any of which could
cause us not to realize the anticipated benefits.
One of our key strategies will be acquisitions of additional products and/or businesses.
Acquisition transactions involve various inherent risks, such as assessing the value, strengths,
weaknesses, contingent and other liabilities, and potential profitability of the acquisition; the
potential loss of key personnel of an acquired business; the ability to achieve operating and
financial synergies anticipated to result from an acquisition and unanticipated changes in
business, industry or general economic conditions that affect the assumptions underlying the
acquisition. Any one or more of these factors could cause us not to realize the anticipated
benefits from the acquisition of businesses or products.
There is no assurance that we will continue to be successful in our licensing and marketing
operations.
Certain of our products are sold and marketed by third parties. Such third-party arrangements
may not be successfully negotiated in the future. Any such arrangements may not be available on
commercially reasonable terms. Even if acceptable and timely marketing arrangements are available,
the products we develop may not be accepted in the marketplace, and even if such products are
initially accepted, sales may thereafter decline. Additionally, our clients or marketing partners
may make important marketing and other commercialization decisions with respect to products we
develop that are not within our control. As a result, many of the variables that may affect our
revenues, cash flows and net income are not exclusively within our control.
The success of our strategic investments, partnerships or development alliances depends upon the
performance of the companies in which we invest, or with which we partner or co-develop products.
Economic, governmental, industry and internal company factors outside our control affect each
of the companies in which we may invest or with which we may partner or co-develop products. Some
of the material risks relating to such companies include:
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the ability of these companies to successfully develop, manufacture and obtain
necessary governmental approvals for the products that serve as the basis for our
investments in, or relationship with, such companies; |
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the ability of competitors of these companies to develop similar or more effective
products, making the drugs developed by these companies difficult or impossible to
market; |
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the ability of these companies to adequately secure patents for their products and protect
their proprietary information; |
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the ability of these companies to enter the marketplace without infringing upon competitors
patents; |
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the ability of these companies to finance their operations; |
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the ability of these companies to remain technologically competitive; and |
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the dependence of these companies upon key scientific and managerial personnel. |
We may have limited or no control over the resources that any such company may devote to
developing the products for which we collaborate with them. Any such company may not perform as
expected. These companies may breach or terminate their agreements with us or otherwise fail to
conduct product discovery and development activities successfully, or in a timely manner. If any
of these events occurs, it could have a material adverse effect on our business and our financial
results.
Our operations could be disrupted if our information systems fail or if we are unsuccessful in
implementing necessary upgrades.
Our business depends on the efficient and uninterrupted operation of our computer and
communications systems and networks, hardware and software systems, and other information
technology. If our systems were to fail or we were unable to successfully expand the capacity of
these systems, or we were unable to integrate new technologies into our existing systems, our
operations and financial results could suffer.
Our quarterly results may fluctuate.
Our quarterly operating results have fluctuated in the past and may continue to fluctuate in
the future. Factors that could cause quarterly operating results to decline, many of which are not
within our control, include, for example, the size and timing of product orders, which can be
affected by customer budgeting and buying patterns, or the size and timing of expenses associated
with our development and marketing programs. As a result, if customer buying patterns cause
revenue shifts from one fiscal quarter to another, or if the development and marketing of our
products causes our expenses to change from one fiscal quarter to another, our net quarterly
income may fluctuate.
Our business depends on key scientific, sales and managerial personnel for continued success.
Much of our success to date has resulted from the skills of certain of our officers,
scientific personnel and sales force. If these individuals were no longer employed by us, we
might not be able to attract or retain employees with similar skills or carry out our business
plan.
RISKS RELATED TO OUR PANCREATIC ENZYME PRODUCTS (PEPs)
Our ULTRASE MT and VIOKASE PEPs may never be approved in the U.S.
We ceased distributing our ULTRASE and VIOKASE product lines in the United States effective
April 28, 2010. ULTRASE and VIOKASE have accounted for 24.0% of our net product sales in fiscal
year 2009 and for 15.1% of our net product sales in fiscal year 2010. This action was taken because
we did not receive FDA approval for ULTRASE MT or VIOKASE by April 28, 2010, the date mandated by
the FDA to obtain approval for pancreatic enzyme products. In April 2004, the FDA mandated that
all manufacturers of PEPs file an NDA and receive approval for their products by April 2008 or be
subject to regulatory action. In October 2007, the FDA published a notice in the Federal Register
extending the deadline within which to obtain marketing approval for PEPs until April 28, 2010, for
those companies that (a) were marketing unapproved PEPs as of April 28, 2004; (b) submitted NDAs on
or before April 28, 2009; and (c) continued diligent pursuit of regulatory approval.
We completed the initial submission of our NDA for ULTRASE MT and, in the fourth quarter of
fiscal 2008, received a first complete response letter from the FDA. Further to the filing of our
response to this letter, we received a second complete response letter from the FDA in the fourth
quarter of fiscal 2009. On May 5, 2010 the FDA issued an additional complete response with respect
to our NDA for ULTRASE MT. As was the case with prior letters, the FDA requires that deficiencies
raised with respect to the manufacturing and control processes at the manufacturer of the active
ingredient of ULTRASE MT be addressed before approval can be granted. We submitted our response to
this letter to the FDA that confirmed a November 28, 2010 Prescription Drug User Fee Act, or PDUFA,
date for our ULTRASE MT NDA.
The submission of our rolling NDA for VIOKASE was completed in the first quarter of fiscal
2010. At the time we completed this submission we requested a priority review and the FDA advised
us in the second quarter of fiscal 2010 that it would not grant a priority review for this NDA. The
initial PDUFA date for VIOKASE was August 30, 2010. In August 2010, we received feedback from the
FDA regarding the timeline to review the VIOKASE NDA. At that time, the FDA indicated that the
review was progressing but postponed the PDUFA date to November 30, 2010 to allow more time to
complete their review.
On November 28, 2010, the FDA issued complete response letters regarding the NDAs for ULTRASE
MT and VIOKASE. The letters require that unresolved deficiencies raised with respect to the
manufacturing and control processes at the manufacturer of the active ingredient for both ULTRASE
MT and VIOKASE be addressed before approval can be granted. The letters also require that
deficiencies identified in an FDA inspection of such manufacturer must be resolved before the NDAs
can be approved. We are in ongoing discussions with the FDA and continue to work with the
manufacturer of the active pharmaceutical ingredient to address the remaining open issues
identified by the FDA, as soon as possible. However, those remaining issues do not require
additional clinical studies.
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If ULTRASE MT and VIOKASE are not approved, it will continue to adversely affect our
financial position, cash flows or overall trends in results of operations.
If ULTRASE MT and VIOKASE are approved and relaunched, competition in the PEP market could be
more intense than expected.
If approved and relaunched, the level of competition that ULTRASE MT and VIOKASE will face in
the U.S. will be more intense than before April 28, 2010, when we ceased distributing these
products. A number of branded pancreatic enzyme products have been approved and are currently
marketed in the United States, including CREON® (Abbott Laboratories),
PANCREAZE (Ortho-McNeil Pharmaceutical, Inc.) and ZENPEP® (Eurand
N.V.). In order to relaunch ULTRASE MT and VIOKASE, we will need to re-establish the market
position for these products and succeed in having customers using other marketed products start or
restart using our products. These efforts will likely result in increased marketing and other
expenses. If we are not successful, this would have a material adverse effect on our business and
our financial results.
If ULTRASE MT and VIOKASE are approved and relaunched, our future revenues and profitability will
be adversely affected if governmental, private third-party payors and other third-party payors,
including Medicare and Medicaid, do not sufficiently defray the cost
of ULTRASE MT and VIOKASE to the consumer.
Our future revenues and profitability will be adversely affected if governmental, private
third-party payors and other third-party payors, including Medicare and Medicaid, do not
sufficiently defray the cost of ULTRASE MT and VIOKASE to the consumer. If these entities do not
provide coverage and reimbursement for ULTRASE MT and VIOKASE or determine to provide an
insufficient level of coverage and reimbursement, ULTRASE MT and VIOKASE may be too costly for
general use, and physicians may not prescribe it. Many third-party payors cover only selected
drugs, making drugs that are not preferred by such payor more expensive for patients, and often
require prior authorization or failure on another type of treatment before covering a particular
drug.
In addition to potential restrictions on coverage, the amount of reimbursement for our
products may adversely affect results of operations. In the U.S., there have been, and we expect
there will continue to be, actions and proposals to control and reduce health-care costs.
Government and other third-party payors are challenging the prices charged for health-care
products and increasingly limiting and attempting to limit both coverage and level of
reimbursement for prescription drugs.
If adequate coverage and reimbursement by third-party payors does not continue to be
available, our ability to successfully relaunch ULTRASE MT and VIOKASE may be adversely impacted.
Any limitation on the use of ULTRASE MT and VIOKASE or any decrease in the price of ULTRASE MT and
VIOKASE will have a material adverse effect on our business.
RISKS RELATED TO REGULATORY MATTERS
If our products fail in clinical studies or if we fail, or encounter difficulties, in obtaining
regulatory approval for our new products or new indications of existing products or relaunching
our PEPs, we will have expended significant resources for no return.
If our products are not successful in clinical trials or if we do not obtain such regulatory
approvals, we will have expended significant resources for no return. Our ongoing clinical studies
might be delayed or halted or additional studies might be required, for various reasons, including
the following:
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Our products are shown not to be effective. |
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We do not comply with requirements concerning the investigational NDAs, biologic
license applications (BLAs) or new drug submissions (NDSs), for the protection of the
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Patients experience unacceptable side effects or die during clinical trials. |
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Patients do not enroll in the studies at the rate we expect. |
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A drug is modified during testing. |
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Product supplies are delayed or are not sufficient to treat the patients participating
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Failure by our manufacturers or suppliers to comply with any of the FDAs or other
relevant foreign counterparts continuing regulations. |
If we cannot obtain regulatory approvals for the products we are developing or may seek to
develop in the future, our rate of sales growth and competitive position will suffer. This risk
is most acute for products that are currently in the development of the final formulation, or
ULTRASE MT and VIOKASE, our pancreatic enzyme products, for which we need to comply with FDAs
requirement in order to return to the market.
Approval might entail ongoing requirements for post-marketing studies. Even if regulatory
approval is obtained, labeling and promotional activities are subject to continual scrutiny by
the regulatory agencies, in particular the FDA, and, in some circumstances, the Federal Trade
Commission. FDA enforcement policy prohibits the marketing of approved products for unapproved,
or off-label, uses. These regulations and the FDAs interpretation of them might impair our
ability to effectively market our products.
We, our third-party manufacturers and certain of our suppliers are also required to comply
with the applicable FDA cGMP regulations,
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which include requirements relating to quality control
and quality assurance, as well as the corresponding maintenance of records and documentation.
Furthermore, manufacturing facilities must be approved by regulatory authorities before they can
be used to manufacture our products and certain raw materials used therein, and they are subject
to additional inspections. If we or any of our manufacturers or suppliers fails to comply with
any of the FDAs or other relevant foreign counterparts continuing regulations, we could be
subject to sanctions, including:
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delays, warning letters and fines; |
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product recalls or seizures and injunctions on sales; |
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refusal to review pending applications; |
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total or partial suspension of production; |
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withdrawals of previously approved marketing applications; and |
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civil penalties and criminal prosecutions. |
In addition, identification of side effects after a drug is on the market or the occurrence
of manufacturing problems could cause subsequent withdrawal of the product from the market,
reformulation of the drug, additional testing or changes in labeling of the product.
We may find it difficult to achieve market acceptance of our PEPS or products in our product
pipeline.
The commercial success of any of our product candidates for which we obtain marketing
approval from the FDA, Health Canadas Therapeutic Products Directorate, or TPD, the European
medicines Agency, or EMA, or other regulatory authorities will depend upon the acceptance of these
products by the medical community, including physicians, patients and health-care payors. The
degree of market acceptance of any of our approved products will depend on a number of factors,
including
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demonstration of clinical safety and efficacy compared to other products; |
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the relative convenience and ease of administration; |
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the prevalence and severity of any adverse side effects; |
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limitations or warnings contained in a products FDA, TPD or EMA approved labeling; |
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availability of alternative treatments for the indications we target; |
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pricing and cost effectiveness compared to competing products, particularly generic products; |
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the effectiveness of our or any future collaborators sales and marketing strategies; |
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the effectiveness of our manufacturing and distribution plans; |
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our ability to obtain sufficient third-party coverage or reimbursement; and |
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the willingness of patients to pay out-of-pocket in the absence of third-party coverage. |
If any of our product candidates are approved but do not achieve an adequate level of
acceptance by physicians, health-care payors and patients, we may not generate sufficient revenue
from these products for such products to become or remain profitable. In addition, our efforts to
educate the medical community and third-party payors on the benefits of our product candidates may
require significant resources and may never be successful.
Our business is subject to limitations imposed by government regulations.
Governmental agencies in the countries in which we conduct business regulate pharmaceutical
products intended for human use. These regulations normally require extensive clinical trials and
other testing in addition to governmental review and final approval before products can be
marketed. Governmental authorities in such countries also regulate the research and development,
manufacture, distribution, promotion, testing and safety of products, and therefore, the cost of
complying with governmental regulations can be substantial.
Requirements for approval can vary widely from country to country. A product must normally be
approved by regulatory authorities in each country in which we intend to market it, prior to the
commencement of marketing in that country. There can be long delays in obtaining required
clearances from regulatory authorities in many countries after applications are filed. Therefore,
there can be no assurance that we will obtain regulatory approvals in such countries or that we
will not incur significant costs in obtaining
or maintaining such regulatory approvals. Moreover, the regulations applicable to our existing and
future products may change.
Government regulations require the detailed inspection and control of research and laboratory
procedures, clinical studies, manufacturing procedures and marketing and distribution methods, all
of which significantly increase the level of difficulty and the costs involved in obtaining and
maintaining the regulatory approval for marketing new and existing products. Moreover, regulatory
measures adopted by governments provide for the possible withdrawal of products from the market
and, in certain cases, suspension or revocation of the required approvals for their production and
sale.
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Failure to obtain necessary regulatory approvals; the restriction, suspension or revocation
of existing approvals; or any other failure to comply with regulatory requirements would
restrict or impair our ability to market our products and carry on our business.
Regulatory approval for our currently marketed products is limited by the regulatory authorities to
those specific indications and conditions for which clinical safety and efficacy have been
demonstrated.
Any regulatory approval is limited to those specific diseases and indications for which our
products are deemed to be safe and effective by the FDA, the TPD, the EMA, or other regulatory
authorities. In addition to approval required for new formulations, any new indication for an
approved product also requires regulatory approval. If we are not able to obtain regulatory
approval for any desired future indications for our products, our ability to effectively market
and sell or products may be reduced and our business may be adversely affected.
Our ability to promote the product is limited to those indications that are specifically
approved by regulatory authorities. Regulatory authorities further restrict communications by
pharmaceutical companies on the subject of off-label use. If our promotional activities fail to
comply with these regulations or guidelines, we may be subject to warnings from, or enforcement
action by, these authorities. In addition, our failure to follow rules and guidelines relating to
promotion and advertising may cause regulatory authorities to delay approval or refuse to approve
a product, the suspension or withdrawal of an approved product from the market, recalls, fines,
disgorgement of money, operating restrictions, injunctions or criminal prosecution, any of which
could harm our business.
Our approved products and pipeline products remain subject to ongoing regulatory requirements.
If we fail to comply with these requirements, we could lose these approvals, and the sales of
any such approved commercial products could be suspended.
After receipt of initial regulatory approval, each product remains subject to extensive
regulatory requirements, including requirements
relating to manufacturing, labeling, packaging, adverse event reporting, storage,
advertising, promotion, distribution and recordkeeping. Furthermore, even if we receive regulatory
approval to market a particular product, such a product will remain subject to the same extensive
regulatory requirements. Even if regulatory approval of a product is granted, the approval may be
subject to limitations on the uses for which the product may be marketed or the conditions of
approval, or contain requirements for costly post-marketing testing and surveillance to monitor
product safety or efficacy, which could reduce our revenues, increase our expenses and render the
approved product not commercially viable. In addition, as clinical experience with a drug expands
after approval because it is typically used by a greater number and more diverse group of patients
after approval than during clinical trials, side effects and other problems may be observed after
approval that were not seen or anticipated during pre-approval clinical trials or other studies.
Our approved products and pipeline products remain subject to ongoing regulatory requirements.
Following receipt of regulatory approval, any products that we market continue to be subject
to extensive regulation. These regulations affect many aspects of our operations, including the
manufacture, labeling, packaging, adverse-event reporting, storage, distribution, advertising,
promotion and record keeping related to the products. The FDA also frequently requires
post-marketing testing and surveillance to monitor the effects of approved products or place
conditions on any approvals that could restrict the commercial applications of these products. In
addition, the subsequent discovery of previously unknown problems with the product may result in
restrictions on the product, including withdrawal of the product from the market. If we fail to
comply with applicable regulatory requirements, we may be subject to fines, suspension or
withdrawal of regulatory approvals, product recalls, seizure of products, significant
disbursements, operating restrictions and criminal prosecution.
In addition to FDA restrictions on marketing of pharmaceutical products, several other types
of state and federal laws have been applied to restrict certain marketing practices in the
pharmaceutical industry in recent years. These laws include anti-kickback statutes and false
claims statutes. The federal health-care program anti-kickback statute prohibits, among other
things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce
or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of
any health-care item or service reimbursable under Medicare, Medicaid or other federally financed
health-care programs. This statute has been interpreted to apply to arrangements between
pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers
on the other. Violations of the anti-kickback statute are punishable by imprisonment, criminal
fines, civil monetary penalties and exclusion from participation in federal health-care programs.
Although there are a number of statutory exemptions and regulatory safe harbors protecting
certain common activities from prosecution or other regulatory sanctions, the exemptions and safe
harbors are drawn narrowly, and practices that involve remuneration intended to induce
prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for
an exemption or safe harbor. Our practices may not in all cases meet all of the criteria for safe
harbor protection from anti-kickback liability.
Federal false claims laws prohibit any person from knowingly presenting, or causing to be
presented, a false claim for payment to the federal government, or knowingly making, or causing
to be made, a false statement to have a false claim paid. Several pharmaceutical and other
health-care companies have been prosecuted under these laws for allegedly inflating drug prices
they report to pricing services, which in turn are used by the government to set Medicare and
Medicaid reimbursement rates, and for allegedly providing free products to customers with the
expectation that the customers would bill federal programs for those products. In addition,
certain marketing practices, including off-label promotion, may also violate false claims laws.
The majority of states also have statutes or regulations similar to the federal anti-kickback law
and false claims laws, which apply to items and services reimbursed under Medicaid and other
state programs, or, in several states, apply regardless of the payor. Sanctions under these
federal and state laws may include civil monetary penalties, exclusion of a manufacturers
products from reimbursement under government programs, criminal fines and imprisonment.
Because of the breadth of these laws and the narrowness of the safe harbors, it is possible
that some of our business activities could be
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subject to challenge under one or more of such
laws. Such a challenge could have a material adverse effect on our business, financial condition
and results of operations.
In addition, as part of the sales and marketing process, pharmaceutical companies frequently
provide samples of approved drugs to physicians. This practice is regulated by the FDA and other
governmental authorities, including, in particular, requirements concerning record keeping and
control procedures. Any failure to comply with the regulations may result in significant criminal
and civil penalties as well as damage to our credibility in the marketplace.
RISKS RELATED TO OUR INDUSTRY
The pharmaceutical industry is highly competitive and is subject to rapid and significant change,
which could render our products obsolete or uncompetitive.
Competition in our business is intense and characterized by extensive research efforts and
rapid technological progress. Technological developments by competitors, regulatory approval for
marketing competitive products, including potential generic or over-the-counter products, or
competitors superior marketing resources could adversely affect the commercial potential of our
products and could have a material adverse effect on our revenue and results of operations. We
believe that there are numerous pharmaceutical and biotechnology companies, including large
well-known pharmaceutical companies, as well as academic research groups throughout the world,
engaged in research and development efforts with respect to pharmaceutical products targeted at
gastrointestinal diseases and conditions addressed by our current and potential products. In
particular, we are aware of products in research or development by competitors that address the
diseases targeted by our products. Developments by others might render our current and potential
products obsolete or noncompetitive. Competitors might be able to complete the development and
regulatory approval process sooner and, therefore, market their products earlier than we can.
They may succeed in developing products that are more effective or less expensive to use than
any that we may develop or license. These developments could render our products obsolete or
uncompetitive, which would have a material adverse effect on our business and financial results.
Many of our competitors have greater financial resources and selling and marketing
capabilities, have greater experience in clinical testing and human clinical trials of
pharmaceutical products, and have greater experience in obtaining approvals from the FDA, the
TPD or other applicable regulatory approvals.
Pricing pressures from, and other measures taken by, third-party payors, including managed care
organizations, government sponsored health-care systems and regulations relating to Medicare and
Medicaid, Health Care and Education Reconciliation Act of 2010, pharmaceutical reimbursements and
pricing in general could decrease our revenues.
Our ability to successfully commercialize our products and product candidateseven if FDA,
TPD or EMA approval is obtained depends, in part, on whether appropriate reimbursement levels
for the cost of the products and related treatments are obtained from government authorities and
private health insurers and other organizations, such as health maintenance organizations, or
HMOs, managed-care organizations, or MCOs, and provincial formularies.
Third-party payors are increasingly challenging the pricing of pharmaceutical products. In
addition, the trend toward managed health-care in the U.S., the growth of organizations such as
HMOs and MCOs, and the recently enacted Health Care and Education Reconciliation Act of 2010,
could significantly influence the purchase of pharmaceutical products, resulting in lower prices
and a reduction in product demand. One way in which MCOs and government sponsored health-care
systems seek to control their costs is by developing formularies to encourage plan beneficiaries
to use preferred products for which the plans have negotiated favorable terms. Exclusion of a
product from a formulary, or placement of a product on a disfavored formulary tier, can lead to
sharply reduced usage in the patient population covered by the applicable MCO or
government-sponsored health-care system. If our products are not included in an adequate number
of formularies or if adequate reimbursement levels are not provided, or if reimbursement policies
increasingly favor generic products, our market share and business could be negatively affected.
Recent reforms to Medicare added an out-patient prescription drug reimbursement for all
Medicare beneficiaries beginning in 2006. The U.S. federal government and private plans
contracting with the government to deliver the benefit, through their purchasing power under these
programs, are demanding discounts from pharmaceutical companies that may implicitly create price
controls on prescription drugs. These reforms may decrease our future revenues from product lines
covered by the Medicare drug benefit, thereby adversely affecting our results or operations and
cash flows.
Uncertainty also exists regarding the reimbursement status of certain newly-approved
pharmaceutical products and reimbursement may not be available for some of our products. Any
reimbursements granted may not be maintained or limits on reimbursements available from
third-party payors may reduce the demand for, or negatively affect the price of, these products.
If our products do not qualify for reimbursement, if reimbursement levels diminish, or if
reimbursement is denied, our sales and profitability would be adversely affected.
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The Patient Protection and Affordable Care Act of 2010 and the Health Care and Education
Reconciliation Act of 2010, known together as the Affordable Care Act, enacted in the U.S in March
2010 contain several provisions that could impact our business.
Although many provisions of the new legislation do not take effect immediately, several
provisions became effective during fiscal year 2010. These include (1) an increase in the minimum
Medicaid rebate to States participating in the Medicaid program on our branded prescription drugs;
(2) the extension of the Medicaid rebate to Managed Care Organizations that dispense drugs to
Medicaid beneficiaries; and. (3) the expansion of the 340B Public Health Service Act drug pricing
program, which provides outpatient drugs at reduced rates, to include certain childrens
hospitals, free standing cancer hospitals, critical access hospitals, and rural referral centers.
In addition, beginning in 2011, the new law requires drug manufacturers to provide a 50%
discount to Medicare beneficiaries for any covered prescription drugs purchased during a Medicare
Part D coverage gap (i.e. the donut hole). Also, beginning in 2011, new fees will be assessed
on all branded prescription drug manufacturers and importers. This fee will be calculated based
upon each organizations percentage share of total branded prescription drug sales to U.S.
government programs (such as Medicare Parts B and D, Medicaid, Department of Veterans Affairs and
Department of Defense programs and TRICARE retail pharmacy program) made during the previous year.
The aggregated industry wide fee is expected to total $28 billion through 2019, ranging from $2.5
billion to $4.1 billion annually. The IRS has issued guidance for calculating preliminary fees,
but there is still uncertainty as to final implementation, since the IRS has requested public
comment and may make changes in response. The new law also imposes a 2.3% excise tax on sales of
certain taxable medical devices that are made after December 31, 2012, including our FLUTTER mucus
clearance device. Further, effective March 31, 2013, the law requires pharmaceutical, medical
device, biological, and medical supply manufacturers to begin reporting to the federal government
the payments they make to physicians and teaching hospitals, and physician ownership interests in
those entities. The law also provides for the creation of an abbreviated regulatory pathway for
FDA approval of biosimilars and interchangeable biosimilar products. While creation of the
biosimilars program is authorized as of passage of the legislation in 2010, the process of
creating the regulatory pathway for approval of biosimilars will likely be lengthy, and the FDA is
in the process of soliciting public input.
The impact in terms of additional reserves recorded in contract rebates has been $1.8 million
for the fiscal year 2010. However, we continue to assess the full extent of this legislations
longer-term impact on our business. While certain aspects of the new legislation implemented in
2010 are expected to reduce our revenues in future years, other provisions of this legislation may
offset, at some level, any reduction in revenues when these provisions become effective. In
future years, based on our understanding, these other provisions are expected to result in higher
revenues due to an increase in the total number of patients covered by health insurance and an
expectation that existing insurance coverage will provide more comprehensive consumer protections.
This would include a federal subsidy for a portion of a beneficiarys out-of-pocket cost under
Medicare Part D. However, these higher revenues will be negatively impacted by the branded
prescription drug manufacturers fee.
Uncertainties regarding the Affordable Care Act and third-party reimbursement may impair our
ability to continue to sell our products or form collaborations.
The continuing efforts of governmental and third-party payers to contain or reduce the
costs of health-care through various means may harm our business. For example, in some foreign
markets, the pricing or profitability of health-care products is subject to government control.
In the United States, there have been, and we expect there will continue to be, a number of
federal and state proposals to implement similar government control. The implementation or even
the announcement of any of these legislative or regulatory proposals or reforms could harm our
business by reducing the prices we are able to charge for our products, or impeding our ability
to continue to achieve profitability or form collaborations. In addition, the availability of
reimbursement from third-party payers determines, in large part, the demand for health-care
products in the United States and elsewhere. Examples of such third-party payers are government
and private insurance plans. Significant uncertainty exists as to the reimbursement status of
newly approved health-care products and third-party payers are increasingly challenging the
prices charged for medical products and services. Reimbursement from third-party payers may not
be available or may not be sufficient to allow us to continue to sell our products on a
competitive or profitable basis.
Our relationships with customers and payors are subject to applicable fraud and abuse and other
health-care laws and regulations, which could expose us to criminal sanctions, civil penalties,
contractual damages, reputational harm, and diminished profits and future earnings.
Health-care providers, physicians and others play a primary role in the recommendation and
prescription of our products. Our arrangements with third-party payors and customers may expose
us to broadly applicable fraud and abuse and other health-care laws and regulations that may
constrain the business or financial arrangements and relationships through which we market, sell
and distribute our products. Applicable U.S. federal and state health-care laws and regulations,
include, but are not limited to, the following:
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The federal health-care anti-kickback statute prohibits, among other things, persons
from knowingly and willfully soliciting, offering, receiving or providing remuneration,
directly or indirectly, in cash or in kind, to induce or reward either the referral of an
individual for, or the purchase, order or recommendation of, any good or service, for
which payment may be made under federal health-care programs such as Medicare and
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The federal False Claims Act imposes criminal and civil penalties, against
individuals or entities for knowingly presenting, or causing to be presented, to the
federal government, claims for payment that are false or fraudulent or making a false
statement to avoid, decrease, or conceal an obligation to pay money to the federal
government. |
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The federal false statements statute prohibits knowingly and willfully falsifying,
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making any materially false statement in
connection with the delivery of or payment for health-care benefits, items or services. |
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Analogous state laws and regulations, such as state anti-kickback and false claims
laws, may apply to sales or marketing arrangements and claims involving health-care
items or services reimbursed by non-governmental third-party payors, including private
insurers, and some state laws require pharmaceutical companies to comply with the
pharmaceutical industrys voluntary compliance guidelines and the relevant compliance
guidance promulgated by the federal government. |
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There are similar laws in countries outside the U.S. |
Efforts to ensure that our business arrangements with third parties comply with applicable
health-care laws and regulations could be costly. It is possible that governmental authorities
will conclude that our business practices may not comply with current or future statutes,
regulations or case law involving applicable fraud and abuse or other health-care laws and
regulations. If our past or present operations, including activities conducted by our sales team
or agents, are found to be in violation of any of these laws or any other governmental regulations
that may apply to us, we may be subject to significant civil, criminal and administrative
penalties, damages, fines, exclusion from third-party payor programs, such as Medicare and
Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or
other providers or entities with whom we do business are found to be not in compliance with
applicable laws, they may be subject to criminal, civil or administrative sanctions, including
exclusions from government funded health-care programs.
Many aspects of these laws have not been definitively interpreted by the regulatory
authorities or the courts, and their provisions are open to a variety of subjective
interpretations, which increases the risk of potential violations. In addition, these laws and
their interpretations are subject to change. Any action against us for violation of these laws,
even if we successfully defend against it, could cause us to incur significant legal expenses,
divert our managements attention from the operation of our business and damage our reputation.
The FDAAA may make it more difficult and costly for us to obtain regulatory approval of our
product candidates and to produce, market and distribute our existing products.
The Food and Drug Administration Amendments Act of 2007, or FDAAA, grants a variety of
powers to the FDA, many of which are aimed at improving drug safety and assuring the safety of
drug products after approval. Under the FDAAA, companies that violate the new law are subject to
substantial civil monetary penalties. We expect the FDAAA to have a substantial effect on the
pharmaceutical industry. As the FDA issues regulations, guidance and interpretations relating to
the new legislation, the impact on the industry, as well as our business, will become clearer.
The requirements and other changes that the FDAAA imposes may make it more difficult, and likely
more costly, to obtain approval of new pharmaceutical products and to produce, market and
distribute existing products.
Changes in laws and regulations could affect our results of operations, financial position or cash
flows.
Our future operating results, financial position or cash flows could be adversely affected
by changes in laws and regulations such as (i) changes in the FDA, TPD or EMA (or their foreign
equivalents) approval processes that may cause delays in, or prevent the approval of, new
products; (ii) new laws, regulations and judicial decisions affecting product development,
marketing, promotion or the health-care field generally; (iii) new laws or judicial decisions
affecting intellectual property rights and (iv) changes in the application of tax principles,
including tax rates, new tax laws, or revised interpretations of existing tax laws and
precedents, which result in a shift of taxable earnings between tax jurisdictions.
We may be subject to investigations or other inquiries concerning our compliance with
reporting obligations under federal health-care program pharmaceutical pricing requirements.
Under federal health-care programs, some state governments and private payors investigate and
have filed civil actions against numerous pharmaceutical companies alleging that the reporting of
prices for pharmaceutical products has resulted in false and overstated average wholesale price,
or AWP, which in turn may be alleged to have improperly inflated the reimbursements paid by
Medicare, private insurers, state Medicaid programs, medical plans and others to health-care
providers who prescribed and administered those products or pharmacies that dispensed those
products. These same payors may allege that companies do not properly report their best prices
to the state under the Medicaid program. Suppliers of outpatient pharmaceuticals to the Medicaid
program are also subject to price rebate agreements. Failure to comply with these price rebate
agreements may lead to federal or state investigations, criminal or civil liability, exclusion
from federal health-care programs, contractual damages, and otherwise harm our reputation,
business and prospects.
Future litigation and the outcome of current litigation may harm our business.
In general, and subject to the terms of each specific agreement, we have agreed to indemnify
our licensors, distributors and certain of our contract manufacturers for product liability
claims and there is a risk that we will be subject to product liability claims and claims for
indemnification under these agreements. A substantial portion of our revenues are derived and
will continue to be derived from activities in the U.S., where pharmaceutical companies are
exposed to a higher risk of litigation than in other jurisdictions.
Currently, we maintain claims-based product liability insurance coverage in respect of all
our products marketed in the U.S. We cannot be certain that existing or future insurance
coverage available to us will be adequate to satisfy any or all future product liability claims
and defense costs in the U.S.
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Exposure relating to product liability claims may harm our business.
We face an inherent business risk of exposure to product liability and other claims in the
event that the use of our products results, or is alleged to have resulted, in adverse effects.
While we have taken, and will continue to take, what we believe are appropriate precautions, there
can be no assurance that we will avoid significant product liability claims. Although we currently
carry product liability insurance that we believe is appropriate for the risks that we face, there
can be no assurance that we have sufficient coverage, or can in the future obtain sufficient
coverage at a reasonable cost. An inability to obtain product liability insurance at an acceptable
cost or to otherwise protect against potential product liability claims could prevent or inhibit
the growth of our business or the number of products we can successfully market. Our obligation to
pay indemnities, the withdrawal of a product following complaints, or a product-liability claim
could have a material adverse effect on our business, results of operations, cash flows and
financial condition. For details regarding certain litigation matters in which we are currently
involved, see Item 3. Legal Proceedings.
RISKS RELATED TO INTELLECTUAL PROPERTY
We rely on the intellectual property of others, and we may not be able to protect our own
intellectual property.
Our continued success will depend, in part, on our ability to obtain, protect and maintain
intellectual property rights and licensing arrangements for our products. Some of the
proprietary rights in some of our products are held by third parties, which require us to obtain
licenses for the use of such products. Despite these licenses, there can be no guarantees that
the rights or patents used by us will not be challenged by third parties. Furthermore, an
adverse outcome could lead to an infringement or other legal action being brought against us
directly. We have filed and/or licensed patent applications related to certain of our products,
but such applications may fail to be granted, or, even if granted, may be challenged or
invalidated or may fail to provide us with any competitive advantages.
To protect our own intellectual property, we have historically relied on patents and trade
secrets, know-how and other proprietary information, as well as requiring our employees and other
vendors and suppliers to sign confidentiality agreements prohibiting them from taking our
proprietary information and technology or from using or disclosing proprietary information to
third parties except in specified circumstances. However, confidentiality agreements may be
breached despite all precautions taken, and we may not have adequate remedies for any breach.
Third parties may gain access to our proprietary information or may independently develop
substantially equivalent proprietary information. Our inability to protect and maintain
intellectual property rights in our products may impair our competitive position and adversely
affect our growth.
Litigation or third-party claims of intellectual property infringement could require
substantial time and money to resolve. Unfavorable outcomes to these proceedings could
limit our intellectual property rights and our activities.
Third-party patents (now or in the future) may cover the materials or methods of treatment
related to our products, and third parties may make allegations of infringement, regardless of
merit. We cannot provide any assurances that our products or activities, or those of our
licensors, will not infringe patents or other intellectual property owned by third parties. We
have been (and from time to time we may be) notified that third parties consider their patents or
other intellectual property relevant to our products.
In addition, we may from time to time have access to confidential or proprietary
information of third parties that could bring a claim against us asserting that we have
misappropriated their technology (which, although not patented, may be protected by trade
secrets) and that we have improperly incorporated that technology into our products. Some of our
employees may have been employed by other pharmaceutical or biotechnology companies that may
allege violations of their trade secrets by these individuals, irrespective of the steps that we
may take to prevent such allegations.
If a lawsuit is commenced with respect to any alleged intellectual property infringement by
us, the uncertainties inherent in such litigation make the outcome difficult to predict, and the
costs that we may incur as a result may have an adverse effect on our profitability. Such
litigation would involve significant expense and would be a substantial diversion of the efforts
of our scientific and our management teams. During the course of any intellectual property
litigation, there may be public announcements regarding claims and defenses, and regarding the
results of hearings, motions and other interim proceedings or developments in the litigation. If
securities analysts or investors perceive these announcements as negative, the market price of the
secured notes or any other securities that we may issue from time to time may decline.
Any such lawsuit that culminates in an adverse determination may result in the award of
monetary damages to the intellectual property holder and payment by us of any such damages,
and/or an injunction prohibiting all of our business activities that infringe the intellectual
property, or may require us to obtain licenses from third parties on terms that may not be
commercially acceptable to us, which would in each case adversely affect our profitability and
our business. If so, we may attempt to redesign our processes, products or technologies so that
they do not infringe, but that might not be possible. If we cannot obtain a necessary or
desirable license, can obtain such a license only on terms that we consider to be unattractive
or unacceptable, or cannot redesign our products or processes to avoid potential patent or other
intellectual property infringement, then we or our collaborators may be restricted or prevented
from developing and commercializing our products and our business will be harmed.
-34-
Our intellectual property rights might not afford us with meaningful protection.
The intellectual property rights protecting our products might not afford us with meaningful
protection from generic and other competition. In addition, because our strategy is to in-license
or acquire pharmaceutical products that typically have been discovered and initially researched by
others, future products might have limited or no remaining patent protection due to the time
elapsed since their discovery. Competitors could also design around any of our intellectual
property or otherwise design competitive products that do not infringe our intellectual property.
Any litigation that we become involved in to enforce intellectual property rights could
result in substantial cost to us. In addition, claims by others that we infringe their
intellectual property rights could be costly. Our patent or other proprietary rights related to
our products might conflict with the current or future intellectual property rights of others.
Litigation or patent interference proceedings, either of which could result in substantial cost to
us, might be necessary to defend any patents to which we have rights and our other proprietary
rights or to determine the scope and validity of other parties proprietary rights. The defense of
patent and intellectual property claims is both costly and time consuming, even if the outcome is
favorable. Any adverse outcome could subject us to significant liabilities to third parties,
require disputed rights to be licensed from third parties, or require us to cease selling one or
more of our products. We might not be able to obtain a license to any third-party technology that
we require to conduct our business, or, if obtainable, that technology might not be available at a
reasonable cost.
We also rely on trade secrets, proprietary know-how and technological advances, which we seek
to protect, in part, through confidentiality agreements with collaborative partners, employees and
consultants. These agreements might be breached and we might not have adequate remedies for any
such breach. In addition, our trade secrets and proprietary know-how might otherwise become known
or be independently developed by others.
RISKS RELATED TO GENERAL ECONOMIC AND FINANCIAL CONDITIONS
We are exposed to political, economic and other risks that arise from operating a multinational
business.
We have operations in several different countries. For the fiscal years ended September 30,
2008, 2009 and 2010, approximately 27.0%, 24.5% and 27.9% of our revenues, respectively, were
derived from sources outside the U.S. We are therefore exposed to risks inherent in international
operations. These risks include, but are not limited to
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changes in general economic, social and political conditions; |
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adverse tax consequences; |
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the difficulty of enforcing agreements and collecting receivables through certain
legal systems; |
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inadequate protection of intellectual property; |
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required compliance with a variety of laws and regulations of jurisdictions
outside of the U.S., including labor and tax laws; |
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customers outside of the U.S. may have longer payment cycles; |
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changes in laws and regulations of jurisdictions outside of the U.S.; and |
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terrorist acts and natural disasters. |
Our business success depends in part on our ability to anticipate and effectively manage these
and other regulatory, economic, social and political risks inherent in multinational business. We
cannot provide assurances that we will be able to effectively manage these risks or that they
will not have a material adverse effect on our multinational business or on our business as a
whole.
Currency exchange rate fluctuations may have a negative effect on our financial condition.
We operate internationally, but a majority of our revenue and expense activities, including
our debt service obligations, and capital expenditures are denominated in U.S. dollars. The other
currencies in which we engage in significant transactions are Canadian dollars and euros. As a
consequence, we are exposed to currency fluctuations from purchases of goods, services and
equipment and investments in other countries, and funding denominated in the currencies of other
countries. In particular, we are exposed to the fluctuations in the exchange rate between the
U.S. dollar, the euro and the Canadian dollar. During fiscal year 2010, approximately 17.8% of
our revenues was denominated in euros, 9.0% of our revenue was denominated in Canadian dollar,
while the remainder was denominated in U.S. dollars.
Fluctuations in currency exchange rates may affect the results of our operations and the
value of our assets and revenues, and increase our liabilities and costs, which in turn may
adversely affect reported earnings and the comparability of period-to-period results of
operations. For example, in 2010, we experienced a positive foreign exchange effect on revenues
of approximately 0.8%. Changes in currency exchange rates may affect the relative prices at which
we and our competitors sell products in the same market. Changes in the value of the relevant
currencies also may affect the cost of goods, services and equipment required in our operations.
In addition, due to the constantly changing currency exposures and the potential substantial
volatility of currency exchange rates, we cannot predict the effect of exchange rate fluctuations
on our future results and, because we do not currently hedge fully against all currency risks and
fluctuations between the U.S. dollar and the euro, such fluctuations may result in currency
exchange rate losses. Fluctuations in exchange rates could result in our realizing a lower profit
margin on sales of our product candidates than we anticipate at the time of entering into
commercial agreements. Adverse movements in exchange rates could have a material adverse effect
on our financial condition and results of operations.
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A 1% change in the value of foreign currencies as compared the U.S. dollar to in which we
had sales, income or expense in 2010 would
have increased or decreased the translation of foreign sales by $0.9 million and income by
$0.1 million.
We might be impacted by unfavorable decisions in proceedings related to future tax assessments.
We operate in a number of jurisdictions and are from time to time subject to audits and
reviews by various taxation authorities with respect to income, consumption, payroll and other
taxes and remittances, for current as well as past periods. Accordingly, we may become subject to
future tax assessments by various authorities. Any amount we might be required to pay in
connection with a future tax assessment may have a material adverse effect on our financial
position, cash flows or overall results of operations. There is a possibility of a material
adverse effect on the results of operations of the period in which the matter is ultimately
resolved, if it is resolved unfavorably, or in the period in which an unfavorable outcome becomes
probable and reasonably estimable.
RISKS RELATED TO OUR INDEBTEDNESS
We may need additional capital.
We believe that our current cash and cash equivalents, together with cash generated from the
sale of our products will be sufficient to fund our operations for fiscal year 2011. Our future
capital requirements will depend on many factors, including but not limited to:
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any impact on us of current conditions and uncertainties in the economy; |
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patient and physician demand for our products; |
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the status of competitive products, including current and potential generics; |
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the results, costs and timing of our research and development activities,
regulatory approvals and product launches; |
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our ability to reduce our costs in the event product demand is less than expected,
or regulatory approvals are delayed or more expensive than expected; |
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the number of products and/or companies we acquire or in-license; |
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the actual amounts of returns we receive compared to our current estimates; and |
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our ability to maintain our current credit facility. |
If we need additional capital, we might seek additional debt to fund our operations or
acquisitions. If we incur more debt, we might be restricted in our ability to raise additional
capital and be subject to financial and restrictive covenants. We might also enter into additional
collaborative arrangements that could provide us with additional funding in the form of equity,
debt, licensing, milestone and/or royalty payments. We might not be able to enter into such
arrangements or raise any additional funds on terms favorable to us or at all, especially in the
current economic environment.
Our substantial level of indebtedness could materially adversely affect our ability to generate
sufficient cash to fulfill our obligations under our existing indebtedness, our ability to
react to changes in our business and our ability to incur additional indebtedness to fund
future needs.
We have a substantial amount of indebtedness. As of September 30, 2010, our total
indebtedness was $594.5 million and we had an additional $115.0 million of borrowing capacity
available under our senior secured revolving credit facility. The following chart shows our level
of indebtedness as of September 30, 2010.
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($ in millions of dollars) |
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Debt: |
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Senior secured term loan facility(1) |
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135.2 |
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Senior secured revolving credit facility |
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0 |
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Secured Notes(2) |
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226.2 |
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Senior Notes(3) |
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233.1 |
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Total |
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$ |
594.5 |
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(1) |
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Represents the net proceeds received on our $175.0 million senior secured term
loan facility after original issue discount. |
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Represents the net proceeds received on $228.0 million aggregate principal
amount of secured notes after original issue discount. |
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Represents the net proceeds received on $235.0 million aggregate principal amount of
senior notes after original issue discount. |
In addition, we have significant other commitments, including milestone and royalty
payments. See Note 19 in Notes to Consolidated Financial Statements. As of September 30, 2010,
we had outstanding approximately $135.2 million in aggregate principal amount of indebtedness
under our senior secured credit facilities that would bear interest at a floating rate. Although
we may enter into interest rate swap agreements, and did enter into an interest rate swap on
February 28, 2008, related to $115.0 million under our senior secured revolving credit facility,
we are exposed to interest rate increases on the floating portion of our senior secured credit
facility that is
-36-
not covered by an interest rate swap. Effective March 3, 2008, we entered into
two pay-fixed, receive-floating interest rate swap agreements, effectively converting $115
million of variable-rate debt under our secured senior credit facilities to fixed-rate debt.
Through the first two quarters of 2008, our two interest rate swaps were designated as effective
hedges of cash flows. For the quarter ended September 30, 2008, due to the increased volatility
in short-term interest rates and a realignment of our LIBOR rate election on our debt
capital repayment schedule, hedge accounting was discontinued as the hedge relationship
ceased to satisfy the strict conditions of hedge accounting. On December 1, 2008, we
redesignated our $50 million notional interest rate swap that matures in February 2010 anew as a
cash flow hedge using an improved method of assessing the effectiveness of the hedging
relationship. Our $65 million notional interest rate swap matured in February 2009. Effective
March 2009, we entered into a pay-fixed, receive-floating interest rate swap of a notional
amount of $52 million amortizing to $13 million through February 2010. During the fiscal year
ended September 30, 2010, our two interest rate swaps with a combined $63 million notional that
were designated as cash flow hedges of interest rate risk matured during the quarter ended March
31, 2010 and we have not entered into any new derivative agreement. The weighted average fixed
interest rate on these swaps was 1.91%. Absent any such interest rate swap agreements, a change
of 1/8% in floating rates would affect our annual interest expense on the senior secured
borrowings by approximately $0.2 million. See Item 7A. Quantitative and Qualitative Disclosures
about Market RiskInterest Rate Risk.
Our substantial level of indebtedness increases the possibility that we may be unable to
generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in
respect of our indebtedness. Our substantial indebtedness, combined with our other financial
obligations and contractual commitments, could have important consequences for our note holders.
For example, it could:
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make it more difficult for us to satisfy our obligations with respect to our
indebtedness, including the notes, and any failure to comply with the obligations under
any of our debt instruments, including restrictive covenants, could result in an event of
default under the indentures governing the notes and the agreements governing such other
indebtedness; |
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require us to dedicate a substantial portion of our cash flow from operations to
payments on our indebtedness, thereby reducing funds available for working capital,
capital expenditures, acquisitions, selling and marketing efforts, research and
development and other purposes; |
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increase our vulnerability to adverse economic and industry conditions, which could
place us at a competitive disadvantage compared to our competitors that have relatively
less indebtedness; |
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limit our flexibility in planning for, or reacting to, changes in our business and the
industries in which we operate; |
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limit our ability to borrow additional funds, or to dispose of assets to raise
funds, if needed, for working capital, capital expenditures, acquisitions, research
and development and other corporate purposes; and |
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prevent us from raising the funds necessary to buy back all notes tendered to us
upon the occurrence of certain changes of control, which would constitute a default under
the indentures governing the notes. |
We, including our subsidiaries, have the ability to incur substantially more indebtedness,
including senior secured indebtedness.
Subject to the restrictions in our senior secured credit facilities and the indentures
governing the notes, we, including our subsidiaries, may incur significant additional
indebtedness. As of September 30, 2010:
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we had $361.4 million of senior secured debt, including borrowings under our senior
secured credit facilities, and the secured notes; |
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we had $233.1 million of senior unsecured indebtedness under the senior notes; |
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we had approximately $115.0 million available for borrowing under our senior
secured revolving credit facilities, which, if borrowed, would be senior secured
indebtedness; and |
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subject to our compliance with certain covenants under the terms of our senior
secured credit facility, we have the option to increase the senior secured term loan
facility by up to $75 million without satisfying any additional financial tests under the
indentures governing the notes, which, if borrowed, would be senior secured indebtedness. |
Although the terms of our senior secured credit facilities and the indentures governing the
notes contain restrictions on the incurrence of additional indebtedness, these restrictions are
subject to a number of important exceptions, and indebtedness incurred in compliance with these
restrictions could be substantial. If we and our restricted subsidiaries incur significant
additional indebtedness, the related risks that we face could increase.
Restrictions imposed by the indentures governing the notes, our senior secured credit
facilities and our other outstanding indebtedness may limit our ability to operate our business
and to finance our future operations or capital needs or to engage in other business
activities.
The terms of our senior secured credit facilities and the indentures governing the notes
restrict us and our subsidiaries from engaging in specified types of transactions. These
covenants restrict our ability and the ability of our restricted subsidiaries, among other
things, to:
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incur or guarantee additional indebtedness; |
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pay dividends on our capital stock or redeem, repurchase or retire our capital stock or
indebtedness; |
-37-
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make investments, loans, advances and acquisitions; |
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create restrictions on the payment of dividends or other amounts to us from our restricted
subsidiaries; |
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engage in transactions with our affiliates; |
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sell assets, including capital stock of our subsidiaries; |
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consolidate or merge; and |
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create liens. |
In addition, the agreements governing our senior secured credit facilities require us to
comply with certain financial ratio maintenance covenants. Our ability to comply with these ratios
can be affected by events beyond our control, and we may not be able to satisfy them. A breach of
any of these covenants would be an event of default. In the event of a default under any of our
senior secured credit facilities, the lenders could elect to declare all amounts outstanding under
the agreements governing our senior secured credit facilities to be immediately due and payable or
terminate their commitments to lend additional money. If the indebtedness under our senior secured
credit facilities accelerates, the indebtedness under the notes would also accelerate and our
assets may not be sufficient to repay such indebtedness in full. In particular, holders of senior
notes will be paid only if we have assets remaining after we pay amounts due on our secured
indebtedness, including our senior secured credit facilities and the secured notes. We have
pledged a significant portion of our assets as collateral under our senior secured credit
facilities and the secured notes.
We may not be able to generate sufficient cash to service all of our indebtedness and may be
forced to take other actions to satisfy our obligations under our indebtedness, which may not be
successful.
Our ability to make scheduled payments on or to refinance our debt obligations depends on our
financial condition and operating performance, which is subject to prevailing economic and
competitive conditions and to certain financial, business and other factors beyond our control. We
may not be able to maintain a level of cash flows from operating activities sufficient to permit
us to pay the principal, premium, if any, and interest on our indebtedness, including the notes.
If our cash flows and capital resources are insufficient to fund our debt service
obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell
assets, seek additional capital or restructure or refinance our indebtedness, including the notes.
Our ability to restructure or refinance our debt will depend on the condition of the capital
markets and our financial condition at such time. Any refinancing of our debt could be at higher
interest rates and may require us to comply with more onerous covenants, which could further
restrict our business operations. The terms of existing or future debt instruments and the
indentures governing the notes may restrict us from adopting some of these alternatives. In
addition, any failure to make payments of interest and principal on our outstanding indebtedness
on a timely basis would likely result in a reduction of our credit rating, which could harm our
ability to incur additional indebtedness. In the absence of such operating results and resources,
we could face substantial liquidity problems and might be required to dispose of material assets
or operations to meet our debt service and other obligations. Our senior secured credit facilities
and the indentures governing the notes restrict our ability to dispose of assets and use the
proceeds from the disposition. We may not be able to consummate those dispositions or to obtain
the proceeds that we could realize from them and these proceeds may not be adequate to meet any
debt service obligations then due. These alternative measures may not be successful and may not
permit us to meet our debt service obligations.
Our note holders right to receive payments on the senior notes is effectively junior to the
right of lenders who have a security interest in our assets to the extent of the value of
those assets.
Our obligations under the senior notes and our guarantors obligations under their guarantees
of the senior notes are unsecured, but our obligations under our senior secured credit facilities
and the secured notes and each guarantors obligations under its guarantee of our senior secured
credit facilities and secured notes are secured by a security interest in substantially all of our
domestic tangible and intangible assets, including the stock of substantially all of our
wholly-owned U.S. subsidiaries and all or a portion of the stock of certain of our non-U.S.
subsidiaries. If we are declared bankrupt or insolvent, or if we default under our senior secured
credit facilities or the secured notes, the lenders could declare all of the funds borrowed
thereunder, together with accrued interest, immediately due and payable. If we were unable to
repay such indebtedness, the lenders could foreclose on the pledged assets to the exclusion of
holders of the senior notes, even if an event of default exists under the indenture governing the
senior notes at such time. Furthermore, if the lenders foreclose and sell the pledged equity
interests in any guarantor under the senior notes, then that guarantor will be released from its
guarantee of the senior notes automatically and immediately upon such sale. In any such event,
because the senior notes will not be secured by any of our assets or the equity interests in the
guarantors, it is possible that there would be no assets remaining from which our note holders
claims could be satisfied or, if any assets remained, they might be insufficient to satisfy our
note holders claims in full.
As of September 30, 2010, we had:
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$361.4 million of senior secured debt, including borrowings under our senior
secured credit facilities, and the secured notes; |
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an additional $115.0 million of borrowing capacity under our senior secured
revolving credit facility, which, if borrowed, would be senior secured
indebtedness; and |
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subject to our compliance with certain covenants under the terms of our senior
secured credit facilities, the option to increase our senior secured term loan facility
by up to $75 million, which, if borrowed, would be senior secured indebtedness. |
-38-
Subject to the limits set forth in the indentures governing the notes, we may also incur
additional secured debt.
Our ability to repay our debt is affected by the cash flow generated by our subsidiaries.
Our subsidiaries own substantially all of our assets and conduct substantially all of our
operations. Accordingly, repayment of our indebtedness is dependent on the generation of cash
flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt
repayment or otherwise. Unless they are guarantors of the notes, our subsidiaries will not have
any obligation to pay amounts due on the notes or to make funds available for that purpose. Our
subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to
make payments in respect of our indebtedness, including the notes. Each subsidiary is a distinct
legal entity and, under certain circumstances, legal and contractual restrictions may limit our
ability to obtain cash from our subsidiaries. While the indentures governing the notes limit the
ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends
or make other intercompany payments to us, these limitations are subject to certain
qualifications and exceptions. In the event that we do not receive distributions from our
subsidiaries, we may be unable to make required principal and interest payments on our
indebtedness, including the notes.
Claims of note holders will be structurally subordinated to claims of creditors of certain of our
subsidiaries that will not guarantee the notes.
The notes are not guaranteed by certain of our subsidiaries, including all of our significant
non-U.S. subsidiaries (other than Axcan Pharma Inc.). Accordingly, claims of holders of the notes
will be structurally subordinated to the claims of creditors of these non-guarantor subsidiaries,
including trade creditors. All obligations of our non-guarantor subsidiaries will have to be
satisfied before any of the assets of such subsidiaries would be available for distribution, upon
liquidation or otherwise, to us or a guarantor of the notes.
For fiscal year 2010, our non-guarantor subsidiaries accounted for approximately $64.0
million, or 18.0% of our consolidated revenue. As of September 30, 2010, our non-guarantor
subsidiaries accounted for approximately $168.4 million, or 23.6% of our consolidated total
assets and $13.2 million, or 1.8% of our consolidated total liabilities. All amounts are
presented after giving effect to intercompany eliminations. The indentures governing the notes
permit these subsidiaries to incur certain additional debt and does not limit, or will not limit,
their ability to incur other liabilities that are not considered indebtedness under the
indentures.
The lenders under our senior secured credit facilities have the discretion to release any
guarantors under these facilities in a variety of circumstances, which will cause those
guarantors to be released from their guarantees of the notes.
While any obligations under our senior secured credit facilities remain outstanding, any
guarantee of the notes may be released without action by, or consent of, any holder of the notes
or the trustee under the indentures governing the notes, at the discretion of lenders under our
senior secured credit facilities, if the related guarantor is no longer a guarantor of
obligations under our senior secured credit facilities or any other indebtedness. The lenders
under our senior secured credit facilities have the discretion to release the guarantees under
our senior secured credit facilities in a variety of circumstances. Any of our subsidiaries that
is released as a guarantor of our senior secured credit facilities will automatically be
released as a guarantor of the notes. Our note holders will not have a claim as a creditor
against any subsidiary that is no longer a guarantor of the notes, and the indebtedness and
other liabilities, including trade payables, whether secured or unsecured, of those subsidiaries
will effectively be senior to claims of note holders.
If we default on our obligations to pay our other indebtedness, we may not be able to make payments
on the notes.
Any default under the agreements governing our indebtedness, including a default under our
senior secured credit facilities, that is not waived by the required lenders, and the remedies
sought by the holders of such indebtedness, could prevent us from paying principal, premium, if
any, and interest on the notes and substantially decrease the market value of the notes. If we are
unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet
required payments of principal, premium, if any, and interest on our indebtedness, or if we
otherwise fail to comply with the various covenants, including financial and operating covenants
in the instruments governing our indebtedness (including covenants in our senior secured credit
facilities and the indentures governing the notes), we could be in default under the terms of the
agreements governing such indebtedness, including our senior secured credit facilities and the
indentures governing the notes. In the event of such default:
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the holders of such indebtedness could elect to declare all the funds borrowed
thereunder to be due and payable, together with accrued and unpaid interest; |
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the lenders under our senior secured credit facilities could elect to terminate
their commitments thereunder, cease making further loans and institute foreclosure
proceedings against our assets; and |
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we could be forced into bankruptcy or liquidation. |
If our operating performance declines, we may in the future need to obtain waivers from the
required lenders under our senior secured credit facilities to avoid being in default. If we
breach our covenants under our senior secured credit facilities and seek a waiver, we may not be
able to obtain a waiver from the required lenders. If this occurs, we would be in default under
our senior secured credit facilities, the lenders could exercise their rights, as described above,
and we could be forced into bankruptcy or liquidation.
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We may not be able to repurchase the notes upon a change of control.
Upon the occurrence of specific kinds of change of control events, we will be required to
offer to repurchase all outstanding notes at 101% of their principal amount plus accrued and
unpaid interest, if any. The source of funds for any such purchase of the notes will be our
available cash or cash generated from our operations or the operations of our subsidiaries or
other sources, including borrowings, sales of assets or sales of equity. We may not be able to
repurchase the notes upon a change of control because we may not have sufficient financial
resources to purchase all of the notes that are tendered upon a change of control. Further, under
the terms of our senior secured credit facilities, a change of control is an event of default that
permits lenders to accelerate the maturity of borrowings and requires us to offer to repay loans
thereunder. Any of our future debt agreements may contain similar provisions. Accordingly, we may
not be able to satisfy our obligations to purchase the notes unless we are able to refinance or
obtain waivers under our senior secured credit facilities. Our failure to repurchase the notes
upon a change of control would cause a default under the indentures governing the notes and a
cross-default under our senior secured credit facilities.
Insolvency and fraudulent transfer laws and other limitations may preclude the recovery of
payment under the notes and the guarantees.
Federal bankruptcy and state fraudulent transfer and conveyance statutes may apply to the
issuance of the notes and the incurrence of any guarantees. In addition, insolvency, fraudulent
transfer and conveyance statutes in Canada, the Netherlands and Luxembourg may apply to the
incurrence of the guarantees by our subsidiaries organized in these countries. Although laws
differ among these jurisdictions, in general, under applicable fraudulent transfer or conveyance
laws, the notes or guarantees could be voided as a fraudulent transfer or conveyance if (1) we or
any of the guarantors, as applicable, issued the notes or incurred the guarantees with the intent
of hindering, delaying or defrauding creditors; (2) in the case of a guarantee incurred by any of
our foreign subsidiaries, such subsidiary issued the guarantee in a situation where a prudent
businessperson as a shareholder of such a subsidiary would have contributed equity to such
subsidiary; or (3) we or any of the guarantors, as applicable, received less than reasonably
equivalent value or fair consideration in return for either issuing the notes or incurring the
guarantees and, in the case of (3) only, one of the following is also true:
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We or any of the guarantors, as applicable, were insolvent or rendered insolvent
by reason of the issuance of the notes or the incurrence of the guarantees or
subsequently become insolvent for other reasons. |
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The issuance of the notes or the incurrence of the guarantees left us or any
of the guarantors, as applicable, with an unreasonably small amount of capital to
carry on the business. |
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We or any of the guarantors intended to, or believed that we or such guarantor
would, incur debts beyond our or such guarantors ability to pay such debts as they
mature. |
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We or any of the guarantors was a defendant in an action for money damages, or
had a judgment for money damages docketed against us or such guarantor if, in either
case, after final judgment, the judgment is unsatisfied. |
A court could find that we or a guarantor did not receive reasonably equivalent value or
fair consideration for the notes or such guarantee if we or such guarantor did not substantially
benefit directly or indirectly from the issuance of the notes or the applicable guarantee. As a
general matter, value is given for a transfer or an obligation if, in exchange for the transfer
or obligation, property is transferred or an antecedent debt is secured or satisfied. A debtor
will generally not be considered to have received value in connection with a debt offering if the
debtor uses the proceeds of that offering to make a dividend payment or otherwise retire or
redeem equity securities issued by the debtor. In addition, because the debt was incurred for our
benefit, and only indirectly for the benefit of the guarantors, a court could conclude that the
guarantors did not receive fair value.
Different jurisdictions evaluate insolvency on various criteria. Generally, however, an
entity would be considered insolvent if, at the time it incurred indebtedness,
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the sum of its debts, including contingent liabilities, was greater than the fair saleable
value of all its assets; |
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the present fair saleable value of its assets was less than the amount that would
be required to pay its probable liability on its existing debts, including contingent
liabilities, as they become absolute and mature; or |
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it could not pay its debts as they become due. |
We cannot be certain as to the standards a court would use to determine whether or not we or
the guarantors were solvent at the relevant time or, regardless of the standard that a court uses,
that the issuance of the senior notes and the incurrence of the guarantees would not be held to
constitute fraudulent transfers or conveyances on other grounds. If a court were to find that the
issuance of the notes or the incurrence of the guarantee was a fraudulent transfer or conveyance,
the court could void the payment obligations under the notes or such guarantee or further
subordinate the notes or such guarantee to presently existing and future indebtedness of ours or
of the related guarantor, or require the holders of the notes to repay any amounts received with
respect to such guarantee. In the event of a finding that a fraudulent transfer or conveyance
occurred, our note holders may not receive any repayment on the notes.
Although each guarantee entered into by a guarantor will contain a provision intended to
limit that guarantors liability to the maximum amount that it could incur without causing the
incurrence of obligations under its guarantee to be a fraudulent transfer, this provision may not
-40-
be effective to protect those guarantees from being voided under fraudulent transfer or
conveyance laws, or may reduce that guarantors obligation to an amount that effectively makes
its guarantee worthless.
In addition, enforcement of any of the guarantees against any guarantor will be subject to
certain other defenses available to guarantors generally. These laws and defenses include those
that relate to voidable preference, financial assistance, corporate purpose or benefit,
preservation of share capital, thin capitalization, and regulations or defenses affecting the
rights of creditors generally. If one or more of these laws and defenses are applicable, a
guarantor may have no liability or decreased liability under its guarantee.
Enforcing our note holders rights under the guarantees entered into by certain of our
foreign subsidiaries across multiple jurisdictions may be difficult.
We are a U.S. company incorporated in the state of Delaware. The notes are guaranteed by all
of our significant U.S. subsidiaries and certain of our foreign subsidiaries in Canada, the
Netherlands and Luxembourg. In the event of bankruptcy, insolvency or a similar event, proceedings
could be initiated in any of these jurisdictions and in the jurisdiction of organization of any
future guarantor of the notes. Our note holders rights under the notes and the guarantees will
thus be subject to the laws of several jurisdictions, and they may not be able to effectively
enforce our note holders rights in multiple bankruptcies, insolvency and other similar
proceedings. Moreover, such multi jurisdictional proceedings are typically complex and costly for
creditors and often result in substantial uncertainty and delay in the enforcement of creditors
rights.
We are indirectly owned and controlled by the Sponsor, and the Sponsors interests as equity
holders may conflict with the interests of our note holders.
The Sponsor owns approximately 70% of our indirect parents equity and, accordingly, has the
ability to control our policies and operations. The Sponsor does not have any liability for any
obligations under the notes, and the interests of the Sponsor may not in all cases be aligned with
our note holders interests. For example, if we encounter financial difficulties or are unable to
pay our debts as they mature, the interests of our equity holders might conflict with our note
holders interests. In addition, our equity holders may have an interest in pursuing acquisitions,
divestitures, financings or other transactions that, in their judgment, could enhance their equity
investments, even though such transactions might involve risks to our note holders. Furthermore,
the Sponsor may in the future own businesses that directly or indirectly compete with us. The
Sponsor also may pursue acquisition opportunities that may be complementary to our business, and
as a result, those acquisition opportunities may not be available to us. For information
concerning our arrangements with the Sponsor, see Item 13. Certain Relationships and Related
Transactions, and Director Independence.
Holders of secured notes may not be able to fully realize the value of their liens.
The security for the benefit of holders of secured notes may be released without such holders
consent.
The liens for the benefit of the holders of secured notes may be released without vote or
consent of such holders, as summarized below:
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The security documents generally provide for an automatic release of all
liens on any asset that is disposed of in compliance with the provisions of the
senior secured credit facilities. |
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Any lien can be released if approved by the requisite number of lenders under our senior
secured credit facilities. |
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The collateral agent and the issuer may amend the provisions of the security
documents with the consent of the requisite number of lenders under our senior secured
credit facilities and without consent of the holders of secured notes. |
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The lenders under our senior secured credit facilities will have the sole ability to
control remedies (including upon sale or liquidation of the collateral after acceleration
of the secured notes or debt under the senior secured credit facilities) with respect to
the collateral. |
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So long as we have the senior secured credit facilities or another senior secured
credit facility, the secured notes will automatically cease to be secured by those liens
if those liens no longer secure our senior secured credit facilities for other reasons. |
As a result, we cannot assure holders of secured notes that the secured notes will continue
to be secured by a substantial portion of our assets. Holders of secured notes will have no
recourse if the lenders under our senior secured credit facilities approve the release of any or
all of the collateral, even if that action adversely affects any rating of the secured notes.
In addition, securities of our subsidiaries will be excluded from the liens to the extent
liens thereon would trigger reporting obligations under Rule 3-16 of Regulation S-X, which
requires financial statements from any company whose securities are collateral if its book value
or market value would exceed 20% of the principal amount of the notes secured thereby. However,
the liens on such securities will continue to secure obligations under our senior secured credit
facilities.
The collateral may not be valuable enough to satisfy all the obligations secured by the collateral.
We secured our obligations under the secured notes by the pledge of certain of our assets.
This pledge is also for the benefit of the lenders under the senior secured credit facilities.
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The value of the pledged assets in the event of a liquidation will depend upon market and
economic conditions, the availability of |
-41-
buyers and similar factors. As of September 30, 2010, before taking into consideration the
effect of intercompany eliminations, the pledged assets had a book value of approximately
$1,952.7 million, approximately $347.6 million of which consisted of intangible assets, including
goodwill. Accordingly, we cannot assure holders of secured notes that the proceeds of any sale of
the pledged assets following an acceleration to maturity with respect to the secured notes would
be sufficient to satisfy, or would not be substantially less than, amounts due on the secured
notes and the other debt secured thereby.
If the proceeds of any sale of the pledged assets were not sufficient to repay all amounts
due on the secured notes, the holders of secured notes (to the extent their secured notes were not
repaid from the proceeds of the sale of the pledged assets) would have only an unsecured claim
against our remaining assets. By their nature, some or all of the pledged assets may be illiquid
and may have no readily ascertainable market value. Likewise, we cannot assure holders of secured
notes that the pledged assets will be saleable or, if saleable, that there will not be substantial
delays in their liquidation. To the extent that liens, rights and easements granted to third
parties encumber assets located on property owned by us or constitute subordinate liens on the
pledged assets, those third parties may have or may exercise rights and remedies with respect to
the property subject to such encumbrances (including rights to require marshalling of assets) that
could adversely affect the value of the pledged assets located at that site and the ability of the
collateral agent to realize or foreclose on the pledged assets at that site.
In addition, the indenture governing the secured notes permits us, subject to compliance
with certain financial tests, to issue additional secured debt, including debt secured equally
and ratably by the same assets pledged for the benefit of the holders of secured notes. This
would reduce amounts payable to holders of secured notes from the proceeds of any sale of the
collateral.
Bankruptcy laws may limit the ability of holders of secured notes to realize value from the
collateral.
The right of the collateral agent to repossess and dispose of the pledged assets upon the
occurrence of an event of default under the indenture is likely to be significantly impaired by
applicable bankruptcy law if a bankruptcy case were to be commenced by or against us before the
collateral agent repossessed and disposed of the pledged assets. For example, under Title 11 of
the U.S. Code, or the U.S. Bankruptcy Code, pursuant to the automatic stay imposed upon the
bankruptcy filing, a secured creditor is prohibited from repossessing its security from a debtor
in a bankruptcy case, or from disposing of security repossessed from such debtor, or taking other
actions to levy against a debtor, without bankruptcy court approval. Moreover, the U.S. Bankruptcy
Code permits the debtor to continue to retain and to use collateral even though the debtor is in
default under the applicable debt instruments, provided that the secured creditor is given
adequate protection. The meaning of the term adequate protection may vary according to
circumstances (and is within the discretion of the bankruptcy court), but it is intended in
general to protect the value of the secured creditors interest in the collateral and may include
cash payments or the granting of additional security, if and at such times as the court in its
discretion determines, for any diminution in the value of the collateral as a result of the
automatic stay of repossession or disposition or any use of the collateral by the debtor during
the pendency of the bankruptcy case. Generally, adequate protection payments, in the form of
interest or otherwise, are not required to be paid by a debtor to a secured creditor unless the
bankruptcy court determines that the value of the secured creditors interest in the collateral is
declining during the pendency of the bankruptcy case. Due to the imposition of the automatic stay,
the lack of a precise definition of the term adequate protection and the broad discretionary
powers of a bankruptcy court, it is impossible to predict (1) how long payments under the secured
notes could be delayed following commencement of a bankruptcy case, (2) whether or when the
collateral agent could repossess or dispose of the pledged assets or (3) whether or to what extent
holders of the secured notes would be compensated for any delay in payment or loss of value of the
pledged assets through the requirement of adequate protection. Similar and other provisions of
Canadian, Dutch and Luxembourg bankruptcy laws may preclude holders of secured notes to realize
value from the collateral granted by foreign subsidiaries in Canada, the Netherlands and
Luxembourg.
The collateral is subject to casualty risks and no mortgage title insurance has been obtained.
We are obligated under our senior secured credit facilities to at all times cause all the
pledged assets to be properly insured and kept insured against loss or damage by fire or other
hazards to the extent that such properties are usually insured by corporations operating
properties of a similar nature in the same or similar localities. There are, however, some
losses, including losses resulting from terrorist acts, which may be either uninsurable or not
economically insurable, in whole or in part. As a result, we cannot assure holders of secured
notes that the insurance proceeds will compensate us fully for our losses. If there is a total or
partial loss of any of the pledged assets, we cannot assure holders of secured notes that the
proceeds received by us in respect thereof will be sufficient to satisfy all the secured
obligations, including the secured notes.
In the event of a total or partial loss to any of the mortgaged facilities, certain items of
equipment and inventory may not be easily replaced. Accordingly, even though there may be
insurance coverage, the extended period needed to manufacture replacement units or inventory
could cause significant delays.
Additionally, we are not required under our senior secured credit facilities and the
security documents to purchase any title insurance insuring the collateral agents lien on the
respective mortgaged properties if the costs of creating or perfecting liens would be considered
excessive in view of the benefits obtained therefrom by the lenders under the senior secured
credit facilities. If a loss occurs arising from a title defect with respect to any mortgaged
property, we cannot assure holders of secured notes that we could replace such property with
collateral of equal value.
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Rights of holders of secured notes in the collateral may be adversely affected by the failure to
perfect security interests in collateral.
Applicable law requires that a security interest in certain tangible and intangible assets
can only be properly perfected and its priority retained through certain actions undertaken by
the secured party. The liens in the collateral securing the secured notes may not be perfected
with respect to the claims of the secured notes if the collateral agent was not able to take the
actions necessary to perfect any of these liens on or prior to the date of the indenture
governing the secured notes. There can be no assurance that the lenders under the senior secured
credit facilities have taken all actions necessary to create properly perfected security
interests, which may result in the loss of the priority of the security interest in favor of the
holders of the secured notes to which they would otherwise have been entitled. In addition,
applicable law requires that certain property and rights acquired after the grant of a general
security interest, such as real property, equipment subject to a certificate of title and certain
proceeds, can only be perfected at the time such property and rights are acquired and identified.
We and the guarantors have limited obligations to perfect the security interest of the holders of
secured notes in specified collateral. There can be no assurance that the trustee or the
collateral agent for the secured notes will monitor, or that we will inform such trustee or
collateral agent of, the future acquisition of property and rights that constitute collateral,
and that the necessary action will be taken to properly perfect the security interest in such
after-acquired collateral. Neither the trustee nor the collateral agent for the secured notes has
an obligation to monitor the acquisition of additional property or rights that constitute
collateral or the perfection of any security interest. Such failure may result in the loss of the
security interest in the collateral or the priority of the security interest in favor of the
secured notes against third parties.
Any future pledge of collateral in favor of the holders of secured notes might be voidable in
bankruptcy.
Any future pledge of collateral in favor of the holders of secured notes, including pursuant
to security documents delivered after the date of the indenture governing the secured notes, might
be voidable by the pledgor (as debtor in possession) or by its trustee in bankruptcy if certain
events or circumstances exist or occur, including, under the U.S. Bankruptcy Code, if the pledgor
is insolvent at the time of the pledge, the pledge permits the holders of secured notes to receive
a greater recovery than if the pledge had not been given and a bankruptcy proceeding in respect of
the pledgor is commenced with 90 days following the pledge, or, in certain circumstances, a longer
period. Similar and other provisions of Canadian, Dutch and Luxembourg bankruptcy laws may make
any future pledge of collateral granted by foreign subsidiaries in Canada, the Netherlands and
Luxembourg voidable.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
We own and lease space for manufacturing, warehousing, research, development, sales,
marketing, and administrative purposes. All these facilities are inspected on a regular basis by
regulatory authorities, and our own internal auditing team ensures compliance on an ongoing basis
with such standards.
We own 107,000 square feet of office space, manufacturing facilities and warehousing in
Mont-Saint-Hilaire, Quebec (Canada). The building houses administrative and pharmaceutical
manufacturing operations as well as our research and development activities. We further own
property next to that building, which could be used to expand. The building and real estate we own
is subject to security granted in favor of our lenders, pursuant to the credit facilities
described under Managements Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources.
We own 606,837 square feet of office space, manufacturing facilities and land in Houdan,
France.
We lease approximately 18,233 square feet of office space in Birmingham, Alabama, (U.S.A.)
under a lease expiring in
December 2013.
We lease approximately 18,584 square feet of office space in Bridgewater, New Jersey, (U.S.A.),
under a lease expiring in June 2014.
We believe that we have sufficient facilities to conduct our operations during fiscal year
2011 and that our facilities are in satisfactory condition and are suitable for their intended
use, although investments to improve and expand our manufacturing and other related facilities
are contemplated, as our business requires.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are party to various legal proceeding or claims, either asserted or
unasserted, which arise in the ordinary course of business. We have reviewed pending legal matters
and believe that the resolution of such matters will not have a significant adverse effect on our
financial condition or results of operations.
One of our subsidiaries, Axcan Scandipharm (now Axcan Pharma US, Inc.), has been a party to
several legal proceedings related to the
product line it markets under the trademark ULTRASE and, in particular, with respect to
dosage strengths that are no longer marketed by us.
-43-
These lawsuits were filed and claims were
asserted against Axcan Scandipharm and other defendants, including the products manufacturer and
a related company and, in certain cases, the manufacturers and distributors of other similar
enzyme products, stemming from allegations that, among other things, the defendants enzyme
products caused colonic strictures. In October 2006, in OMahony v. Axcan Scandipharm, Inc., et
al., a complaint alleging a claim for damages related to products taken in the early part of the
1990s, while the plaintiff was a minor, was filed in the Supreme Court of the state of New York.
This complaint was settled in March 2009. Of the twelve other previous lawsuits, the last of which
was filed in 2001, Axcan Scandipharm was dismissed from one, non-suited in another and settled
ten. All these cases relates to product taken in or before early 1994. Because of the young age of
the patients involved, Axcan Scandipharms product liability exposure for this issue in the U.S.
will remain for a number of years. Axcan Scandipharms insurance carriers have defended the
lawsuits to date and we expect them to continue to defend Axcan Scandipharm (to the extent of its
product liability insurance) should other lawsuits be filed in the future. In addition, the
enzyme manufacturer and a related company had claimed a right to recover amounts paid by them to
defend and settle these claims and seeking a declaration that we were required to provide
indemnification. These claims were submitted to binding arbitration and we were successful in
obtaining a ruling which dismissed those claims. The arbitrators final ruling in the matter was
appealed by one of the plaintiffs and in January 2010, the Court dismissed the appeal and further
awarded damages to the defendants, including Axcan Scandipharm Inc., to compensate for certain
legal fees incurred in defending the matter.
In December 2003 and May 2004, Pharmascience Inc., or PMS, served us two notices of
allegation in accordance with section 5 of the Patented Medicines (Notice of Compliance)
Regulations in Canada, or the Regulations. The first notice of allegation indicated that PMS was
seeking a regulatory approval to market a generic version of URSO 250 in the Canadian market, or
the PMS Product, for use in gallstone dissolution, an indication for which URSO 250 was formerly
approved and marketed in Canada. The second notice of allegation dealt with the validity of our
Canadian PBC use patent. We opposed both these notices of allegation by seeking prohibition
orders. In September 2005, with respect to the first notice of allegation, the Federal Court of
Canada held that, for purposes of the Regulations, the PMS Product did not infringe the patent
that we own for the use of URSO in the treatment of PBC.
In May 2006, the second application seeking a prohibition order was dismissed as our
Canadian PBC use patent was held to be invalid for purposes of the Regulations. PMS has since
filed a claim against us pursuant to section 8 of the Regulations seeking recovery of alleged
damages sustained by reason of the delay to commercialize its product sustained as a result of
our opposition.
In September 2010, one of our subsidiaries, and our indirect parent, received notice of
sanofi-aventis U.S. LLCs (SA) complaint filed with the Superior Court of New Jersey,
Somerset County, requesting certain remedies in connection with SAs stated intention to close
its Kansas City facility where CARAFATE product is currently manufactured. The supply agreement
with SA, as amended, provides that the CARAFATE products manufacturing site may not be changed
without our subsidiarys prior written consent. Pursuant to the complaint filed, SA is seeking
an order for specific performance compelling the defendants to consent to the transfer of the
manufacturing site of CARAFATE product to an alleged SA facility located in Laval, Canada and to
execute related documentation, and for a declaration that SA will not be liable, including for
lost profits, for any interruption in supply by reason of the current sites closure or by reason
of a site transfer to Laval. Our subsidiary removed the case to the United States District Court
for the District of New Jersey; SA has moved to remand the case back to the Superior Court of New
Jersey. The defendants believe that SAs claims lack merit, and that under the supply agreement
as amended, our subsidiary is entitled to have CARAFATE product continue to be manufactured at
the Kansas City site until the expiry of that agreement as amended which, assuming our subsidiary
exercises its option to extend the term as amended, will be in August 2016. Because of ongoing
discussions and by agreement of the parties extending deadlines in the case, the defendants have
yet to file responses to the SA complaint, including any counterclaims, or to file responses to
SAs motion to remand the case.
ITEM 4. (REMOVED AND RESERVED)
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PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market and other information
We are a privately-owned company with no established public trading market for our common
stock.
Holders
As of December 16, 2010, there was one holder of our common stock, Axcan MidCo Inc., one
holder of Axcan MidCo Inc.s common stock, Axcan Holdings Inc. and 55 holders of Axcan Holdings
Inc.s common stock. See Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters for additional information about the ownership of
Axcan Holdings Inc.s common stock.
Dividends
We are currently restricted in our ability to pay dividends under various covenants of our
debt agreements, including our senior secured credit facilities and the indentures governing our
notes. Save to the extent required to finance the repurchase by our indirect parent corporation,
Axcan Holdings Inc., of stock issued pursuant to our equity-based compensation programs, in
connection with the administration of this program, we do not expect for the foreseeable future to
pay dividends on our common stock. Any future determination to pay dividends will depend upon,
among other factors, our results of operations, financial condition, capital requirements, any
contractual restrictions and any other considerations our Board of Directors deems relevant.
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ITEM 6. SELECTED FINANCIAL DATA
Transactions
The February 2008 Transactions
On November 29, 2007, Axcan Intermediate Holdings Inc., then known as Atom Intermediate
Holdings Inc., entered into an Arrangement Agreement with Axcan Pharma Inc., or Axcan Pharma,
pursuant to which we agreed to acquire, through an indirect wholly-owned subsidiary, all of the
outstanding common stock of Axcan Pharma and enter into various other transactions in accordance
with the Plan of Arrangement. We refer to such transactions collectively in this report as the
Arrangement.
The Arrangement was financed through the proceeds from the initial offering of $228.0 million
aggregate principal amount of our 9.25% secured notes due in 2015, or the secured notes, the
initial borrowings under a credit facility composed of term loans and a revolving credit facility,
collectively the new senior secured credit facilities, borrowings under a senior unsecured bridge
facility maturing on February 25, 2009, or the senior unsecured bridge facility, equity investments
funded by direct and indirect equity investments from the Sponsor Funds, or certain investment
funds associated with or designated by TPG Capital, or the Sponsor, certain investors who
co-invested with the Sponsor Funds, including investment funds affiliated with certain of the
initial purchasers of the outstanding notes, or the Co-investors, and the cash on hand of Axcan
Pharma and its subsidiaries. The closing of the offering of the secured notes, the new senior
secured credit facilities and the senior unsecured bridge facility occurred substantially
concurrently with the closing of the Arrangement on February 25, 2008. We refer to the Arrangement,
the closing of the transactions relating to the Arrangement, and our payment of any fees and
expenses related to the Arrangement and such transactions collectively in this report as the
February 2008 Transactions.
Subsequent to the February 2008 Transactions, we became an indirect wholly-owned subsidiary of
Axcan Holdings Inc., or Holdings, an entity controlled by the Sponsor Funds and the Co-investors,
and Axcan Pharma became our indirect wholly-owned subsidiary.
The Refinancing
On May 6, 2008, we completed our offering of $235.0 million aggregate principal amount of our
12.75% senior unsecured notes due in 2016, or the senior notes. The net proceeds from this
offering, along with our cash on hand, were used to repay in full our senior unsecured bridge
facility. We refer to this offering of our senior notes, along with the related use of proceeds, as
the Refinancing and, collectively, with the February 2008 Transactions, as the Transactions.
Financial Information
Financial information for the fiscal year ended September 30, 2008, including product revenue,
is presented as the mathematical combination of the relevant financial information of the
Predecessor (from October 1, 2007, to February 25, 2008) and the Successor (from February 26, 2008,
to September 30, 2008) for the period. The financial information presented for the Predecessor is
the financial information for Axcan Pharma Inc. and its consolidated subsidiaries and the financial
information presented for the Successor is the financial information for Axcan Intermediate
Holdings Inc. and its consolidated subsidiaries.
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Our results of operations for the Predecessor Periods and the Successor Periods should
not be considered representative of our future results of operations.
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Successor |
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Predecessor |
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February 26, |
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October 1, |
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2008 |
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2007 |
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Fiscal Year |
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Fiscal Year |
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through |
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through |
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Ended |
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Ended |
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September 30, |
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February 25, |
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Fiscal Years Ended September 30, |
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September 30, 2010 |
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September 30, 2009 |
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2008 |
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2008 |
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2007 |
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2006 |
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($ in thousands) |
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($ in thousands) |
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Statement of Operations Data: |
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Net product sales |
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$ |
354,587 |
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$ |
409,826 |
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$ |
223,179 |
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$ |
158,579 |
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$ |
348,947 |
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$ |
292,317 |
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Other Revenue |
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7,113 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
$ |
354,587 |
|
|
$ |
416,939 |
|
|
$ |
223,179 |
|
|
$ |
158,579 |
|
|
$ |
348,947 |
|
|
$ |
292,317 |
|
Cost of goods sold(1) |
|
|
130,915 |
|
|
|
103,023 |
|
|
|
77,227 |
|
|
|
38,739 |
|
|
|
83,683 |
|
|
|
72,772 |
|
Selling and administrative
expenses(1)(2) |
|
|
115,033 |
|
|
|
122,942 |
|
|
|
88,246 |
|
|
|
76,198 |
|
|
|
101,273 |
|
|
|
93,338 |
|
Management Fees |
|
|
4,412 |
|
|
|
5,351 |
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
expenses(1)(3) |
|
|
31,715 |
|
|
|
36,037 |
|
|
|
17,768 |
|
|
|
10,256 |
|
|
|
28,655 |
|
|
|
39,789 |
|
Depreciation and amortization |
|
|
61,011 |
|
|
|
60,305 |
|
|
|
35,579 |
|
|
|
9,595 |
|
|
|
22,494 |
|
|
|
22,823 |
|
Acquired in-process research |
|
|
7,948 |
|
|
|
|
|
|
|
272,400 |
|
|
|
|
|
|
|
10,000 |
|
|
|
|
|
Partial write-down of intangible assets |
|
|
107,158 |
|
|
|
55,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (loss) |
|
|
(103,605 |
) |
|
|
33,616 |
|
|
|
(268,140 |
) |
|
|
23,791 |
|
|
|
102,842 |
|
|
|
57,795 |
|
Financial expenses |
|
|
64,956 |
|
|
|
69,809 |
|
|
|
41,513 |
|
|
|
262 |
|
|
|
4,825 |
|
|
|
6,988 |
|
Other interest income |
|
|
(688 |
) |
|
|
(389 |
) |
|
|
(808 |
) |
|
|
(5,440 |
) |
|
|
(11,367 |
) |
|
|
(5,468 |
) |
Other income |
|
|
(9,704 |
) |
|
|
(3,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on foreign currency |
|
|
1,247 |
|
|
|
(328 |
) |
|
|
(1,841 |
) |
|
|
(198 |
) |
|
|
2,352 |
|
|
|
(1,110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(159,416 |
) |
|
|
(31,976 |
) |
|
|
(307,004 |
) |
|
|
29,167 |
|
|
|
107,032 |
|
|
|
57,385 |
|
Income taxes |
|
|
10,950 |
|
|
|
(24,082 |
) |
|
|
(17,740 |
) |
|
|
12,042 |
|
|
|
35,567 |
|
|
|
18,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(170,366 |
) |
|
$ |
(7,894 |
) |
|
$ |
(289,264 |
) |
|
$ |
17,125 |
|
|
$ |
71,465 |
|
|
$ |
39,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at period end): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
161,503 |
|
|
$ |
126,435 |
|
|
$ |
56,105 |
|
|
$ |
348,791 |
|
|
$ |
179,672 |
|
|
$ |
55,830 |
|
Short-term investments, available for
sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129,958 |
|
|
|
117,151 |
|
Total current assets |
|
|
226,749 |
|
|
|
250,682 |
|
|
|
176,980 |
|
|
|
471,170 |
|
|
|
402,127 |
|
|
|
262,378 |
|
Total assets |
|
|
713,177 |
|
|
|
914,602 |
|
|
|
944,812 |
|
|
|
902,384 |
|
|
|
832,611 |
|
|
|
695,817 |
|
Total short-term borrowings |
|
|
13,163 |
|
|
|
30,708 |
|
|
|
10,938 |
|
|
|
373 |
|
|
|
527 |
|
|
|
681 |
|
Total debt |
|
|
594,475 |
|
|
|
613,294 |
|
|
|
622,184 |
|
|
|
441 |
|
|
|
649 |
|
|
|
126,246 |
|
Total current liabilities |
|
|
111,329 |
|
|
|
121,022 |
|
|
|
99,300 |
|
|
|
166,456 |
|
|
|
104,737 |
|
|
|
64,617 |
|
Total liabilities |
|
|
734,209 |
|
|
|
750,838 |
|
|
|
779,142 |
|
|
|
206,903 |
|
|
|
142,414 |
|
|
|
228,393 |
|
Total shareholders equity(4) |
|
|
(21,032 |
) |
|
|
163,764 |
|
|
|
165,670 |
|
|
|
695,401 |
|
|
|
690,197 |
|
|
|
467,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Cash Flows Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
63,120 |
|
|
$ |
92,382 |
|
|
$ |
(47,512 |
) |
|
$ |
73,245 |
|
|
$ |
136,102 |
|
|
$ |
84,334 |
|
Investing activities |
|
|
(6,058 |
) |
|
|
(10,600 |
) |
|
|
(961,556 |
) |
|
|
126,630 |
|
|
|
(19,415 |
) |
|
|
(108,139 |
) |
Financing activities |
|
|
(21,338 |
) |
|
|
(11,594 |
) |
|
|
1,066,053 |
|
|
|
(31,243 |
) |
|
|
6,553 |
|
|
|
(616 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(5) |
|
|
(34,137 |
) |
|
|
97,749 |
|
|
|
(230,720 |
) |
|
|
33,584 |
|
|
|
122,984 |
|
|
|
81,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(5) |
|
|
162,397 |
|
|
|
172,828 |
|
|
|
84,539 |
|
|
|
70,119 |
|
|
|
141,407 |
|
|
|
92,582 |
|
|
|
|
|
|
|
|
|
(1) |
|
Exclusive of depreciation and amortization. |
|
(2) |
|
Amounts shown for the fiscal year ended September 30, 2007, five-month period
ended February 25, 2008, seven-month period ended September 30, 2008, and for the fiscal
year ended September 30, 2009 include expenses related to the February 2008
Transactions. Amount shown for the fiscal year ended September 30, 2010 includes
reorganization, special projects and due diligence costs. |
|
(3) |
|
Amount shown for the fiscal year ended September 30, 2006 includes an up-front
licensing fee equal to $1,500,000 paid in connection with a co-development agreement
with AGI Therapeutics Ltd. Such amount is counted as acquired in-process research for
purposes of calculating Adjusted EBITDA. |
|
(4) |
|
A portion of our common stock was issued to our parent company, Axcan MidCo
Inc., in the February 2008 Transactions in exchange for a note receivable amounting to
$133,154,405. Pursuant to U.S. GAAP, we report the principal amount as a separate
balance offset against shareholders equity. Furthermore, we do not recognize interest
income related to this note receivable due from Axcan MidCo Inc. in our income statement. |
-47-
|
|
|
(5) |
|
EBITDA and Adjusted EBITDA are both non-U.S. GAAP financial measures and are
presented in this report because our management considers them important supplemental
measures of our performance and believes that they are frequently used by interested
parties in the evaluation of companies in the industry. EBITDA, as we use it, is net income
before financial expenses, interest income, income taxes and depreciation and amortization.
We believe that the presentation of EBITDA enhances an investors understanding of our
financial performance. We believe that EBITDA is a useful financial metric to assess our
operating performance from period to period by excluding certain items that we believe are
not representative of our core business. The term EBITDA is not defined under U.S. GAAP,
and EBITDA is not a measure of net income, operating income or any other performance
measure derived in accordance with U.S. GAAP, and is subject to important limitations.
Adjusted EBITDA, as we use it, is EBITDA adjusted to exclude certain non-cash charges,
unusual or non-recurring items and other adjustments set forth below. Adjusted EBITDA is
calculated in the same manner as EBITDA and Consolidated EBITDA as those terms are
defined under the indentures governing our notes and Credit Facility further described in
the section Liquidity and Capital ResourcesLong-term Debt and New Senior Secured Credit
Facility. We believe that the inclusion of supplementary adjustments applied to EBITDA in
presenting Adjusted EBITDA are appropriate to provide additional information to investors
about certain material non-cash items and unusual or non-recurring items that we do not
expect to continue in the future and to provide additional information with respect to our
ability to meet our future debt service and to comply with various covenants in our
indentures and Credit Facility. Adjusted EBITDA is not a measure of net income, operating
income or any other performance measure derived in accordance with U.S. GAAP, and is
subject to important limitations. EBITDA and Adjusted EBITDA have limitations as an
analytical tool, and they should not be considered in isolation, or as substitutes for
analysis of our results as reported under U.S. GAAP. Some of these limitations are: |
|
|
EBITDA and Adjusted EBITDA do not reflect all cash expenditures, future requirements for
capital expenditures, or contractual commitments; |
|
|
|
EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, working
capital needs; |
|
|
|
EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash
requirements necessary to service interest or principal payments, on our debt; |
|
|
|
Although depreciation and amortization are non-cash charges, the assets being depreciated
and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA
do not reflect any cash requirements for such replacements; |
|
|
|
Adjusted EBITDA reflects additional adjustments as provided in the indentures governing
our secured and unsecured notes and new senior secured credit facilities; and |
|
|
|
Other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than
we do, limiting its usefulness as a comparative measure. |
-48-
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as
measures of discretionary cash available to us to invest in our business. Our
management compensates for these limitations by relying primarily on the U.S. GAAP
results and using EBITDA and Adjusted EBITDA as supplemental information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
Predecessor |
|
|
|
|
|
|
|
|
|
|
February 26, |
|
October 1, |
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
|
|
Fiscal Year |
|
Fiscal Year |
|
through |
|
through |
|
Fiscal Years Ended |
|
|
Ended |
|
Ended |
|
September 30, |
|
February 25, |
|
September 30, |
|
|
September 30, 2010 |
|
September 30, 2009 |
|
2008 |
|
2008 |
|
2007 |
|
2006 |
|
|
($ in thousands) |
|
($ in thousands) |
Net income to EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(170,366 |
) |
|
$ |
(7,894 |
) |
|
$ |
(289,264 |
) |
|
$ |
17,125 |
|
|
$ |
71,465 |
|
|
$ |
39,119 |
|
Financial expenses |
|
|
64,956 |
|
|
|
69,809 |
|
|
|
41,513 |
|
|
|
262 |
|
|
|
4,825 |
|
|
|
6,988 |
|
Interest income |
|
|
(688 |
) |
|
|
(389 |
) |
|
|
(808 |
) |
|
|
(5,440 |
) |
|
|
(11,367 |
) |
|
|
(5,468 |
) |
Income taxes expense (benefit) |
|
|
10,950 |
|
|
|
(24,082 |
) |
|
|
(17,740 |
) |
|
|
12,042 |
|
|
|
35,567 |
|
|
|
18,266 |
|
Depreciation and amortization |
|
|
61,011 |
|
|
|
60,305 |
|
|
|
35,579 |
|
|
|
9,595 |
|
|
|
22,494 |
|
|
|
22,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
(34,137 |
) |
|
$ |
97,749 |
|
|
$ |
(230,720 |
) |
|
$ |
33,584 |
|
|
$ |
122,984 |
|
|
$ |
81,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA to Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
(34,137 |
) |
|
$ |
97,749 |
|
|
$ |
(230,720 |
) |
|
$ |
33,584 |
|
|
$ |
122,984 |
|
|
$ |
81,728 |
|
Transaction, integration refinancing costs and other payments to
third parties(a) |
|
|
9,058 |
|
|
|
7,891 |
|
|
|
12,603 |
|
|
|
26,489 |
|
|
|
|
|
|
|
|
|
Management Fees(b) |
|
|
4,412 |
|
|
|
5,351 |
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense excluding impact of the unapproved
PEPs event(c) |
|
|
4,540 |
|
|
|
6,172 |
|
|
|
7,443 |
|
|
|
10,046 |
|
|
|
4,548 |
|
|
|
3,554 |
|
Impairment of intangible assets and goodwill related to the
unapproved PEPs event(d) |
|
|
107,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partial write-down of intangible assets(e) |
|
|
|
|
|
|
55,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,800 |
|
Other adjustments related to the unapproved PEPs event(f) |
|
|
63,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired in-process research |
|
|
7,948 |
|
|
|
|
|
|
|
272,400 |
|
|
|
|
|
|
|
10,000 |
|
|
|
1,500 |
|
Loss of disposal and write-down of assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,875 |
|
|
|
|
|
Inventories stepped-up value expensed(g) |
|
|
|
|
|
|
|
|
|
|
22,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(h) |
|
$ |
162,397 |
|
|
$ |
172,828 |
|
|
$ |
84,539 |
|
|
$ |
70,119 |
|
|
$ |
141,407 |
|
|
$ |
92,582 |
|
|
|
|
|
|
|
|
|
a) |
|
Represents integration and refinancing costs as well as due diligence costs
related to certain non-recurring transactions, payments to third parties in respect of
research and development milestones and other progress payments as defined within our credit
agreement. |
|
b) |
|
Represents management fees and other charges associated with the Management
Services Agreement with TPG. |
|
c) |
|
Represents stock-based employee compensation expense under the provisions of FASB
guidance, excluding the impact of the unapproved PEPs event. |
|
d) |
|
Intangible assets and goodwill impairment charges related to the unapproved PEPs
event. |
|
e) |
|
Partial write-down of intangible assets related to URSO products. |
|
f) |
|
Adjustments and other charges related to the unapproved PEPs event, including an
additional product returns and other sales deduction provision of $23.4 million during the
fiscal year ended September 30, 2010, inventory net realizable value and accrual for
purchases and other materials and supply commitments of $44.9 million during the fiscal year
ended September 30, 2010, and a stock-based compensation recovery of $4.9 million during the
fiscal year ended September 30, 2010. |
|
g) |
|
Represents inventories stepped-up value, arising from the February 2008
Transactions, expensed as acquired inventory is sold. |
|
h) |
|
EBITDA and Adjusted EBITDA are both non-U.S. GAAP financial measures and are
presented in this report because our management considers them important supplemental
measures of our performance and believes that they are frequently used by interested parties
in the evaluation of companies in the industry. EBITDA, as we use it, is net income before
financial expenses, interest income, income taxes |
-49-
|
|
|
|
|
and depreciation and amortization. We
believe that the presentation of EBITDA enhances an investors understanding of our
financial performance. We believe that EBITDA is a useful financial metric to assess our
operating performance from period to period by excluding certain items that we believe are
not representative of our core business. The term EBITDA is not defined under U.S. GAAP, and
EBITDA is not a measure of net income, operating income or any other performance measure
derived in accordance with U.S. GAAP, and is subject to important limitations. Adjusted
EBITDA, as we use it, is EBITDA adjusted to exclude certain non-cash charges, unusual or
non-recurring items and other adjustments set forth below. Adjusted EBITDA is calculated in
the same manner as EBITDA
and Consolidated EBITDA as those terms are defined under the indentures governing our notes
and Credit Facility further described in the section Liquidity and Capital
ResourcesLong-term Debt and New Senior Secured Credit Facility. We believe that the
inclusion of supplementary adjustments applied to EBITDA in presenting Adjusted EBITDA are
appropriate to provide additional information to investors about certain material non-cash
items and unusual or non-recurring items that we do not expect to continue in the future and
to provide additional information with respect to our ability to meet our future debt service
and to comply with various covenants in our indentures and Credit Facility. Adjusted EBITDA is
not a measure of net income, operating income or any other performance measure derived in
accordance with U.S. GAAP, and is subject to important limitations. EBITDA and Adjusted EBITDA
have limitations as an analytical tool, and they should not be considered in isolation, or as
substitutes for analysis of our results as reported under U.S. GAAP. Some of these limitations
are: |
|
|
|
EBITDA and Adjusted EBITDA do not reflect all cash expenditures, future
requirements for capital expenditures, or contractual commitments; |
|
|
|
|
EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for,
working capital needs; |
|
|
|
|
EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or
the cash requirements necessary to service interest or principal payments, on our debt; |
|
|
|
|
Although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized will often have to be replaced in the future, and EBITDA and
Adjusted EBITDA do not reflect any cash requirements for such replacements; |
|
|
|
|
Adjusted EBITDA reflects additional adjustments as provided in the indentures
governing our secured and unsecured notes and new senior secured credit facilities; and |
|
|
|
|
Other companies in our industry may calculate EBITDA and Adjusted EBITDA
differently than we do, limiting its usefulness as a comparative measure. |
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures
of discretionary cash available to us to invest in our business. Our management compensates
for these limitations by relying primarily on the U.S. GAAP results and using EBITDA and
Adjusted EBITDA as supplemental information.
-50-
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our results of operations and financial condition with
Item 6. Selected Financial Data and the historical audited consolidated financial statements and
related notes included elsewhere in this Report. The results of operations for the fiscal years
ended September 30, 2010, and September 30, 2009, and the seven-month period ended September 30,
2008, reflect the results of operations for Axcan Intermediate Holdings Inc. and its consolidated
subsidiaries (the Successor). The results of operations for the five-month period ended February
25, 2008, reflect the results of operations for Axcan Pharma Inc. and its consolidated subsidiaries
(the Predecessor).
Unless the context otherwise requires, in this Managements Discussion and Analysis of Financial
Condition and Results of Operations, the terms Axcan,Axcan Pharma Inc., Company, we, us
and our refer (i) for the period prior to the consummation of the February 2008 Transactions (as
defined in this section), to Axcan Pharma Inc. and its consolidated subsidiaries and (ii) for
periods following the consummation of the February 2008 Transactions, to Axcan Intermediate
Holdings Inc. and its consolidated subsidiaries.
This discussion contains forward-looking statements and involves numerous risk and uncertainties,
including but not limited to those described in Item 1A Risk Factors and Forward-Looking
Statements. Actual results may differ materially from those contained in any forward-looking
statements.
Overview
Our Business
We are a specialty pharmaceutical company focused on marketing and selling pharmaceutical products
used in the treatment of a variety of gastrointestinal, or GI, diseases and disorders, which are
those affecting the digestive tract. Our vision is to become the reference gastrointestinal
company, and we hope to achieve this through our mission: to improve the quality of care and health
of patients suffering from gastrointestinal diseases and disorders by providing effective therapies
for patients and specialized caregivers.
In addition to our marketing activities, we carry out research and development activities on
products at late stages of development. These activities are carried out primarily with respect to
products we currently market in connection with lifecycle management initiatives, as well as
product candidates in late stage of development that we acquired or licensed from third parties.
Our focus on products in late-stage development enables us to reduce risks and expenses typically
associated with new drug development.
We intend to enhance our position as the leading specialty pharmaceutical company concentrating in
the field of gastroenterology by pursuing the following strategic initiatives: 1) growing sales of
existing products; 2) launching new products; 3) selectively acquiring or in-licensing
complementary products; 4) pursuing growth opportunities through development pipeline; and 5)
expanding internationally.
Business Environment
While the ultimate end users of our products are the individual patients to whom our products are
prescribed by physicians, our direct customers include a number of large pharmaceutical wholesale
distributors and large pharmacy chains. The pharmaceutical wholesale distributors that comprise a
significant portion of our customer base sell our products primarily to retail pharmacies, which
ultimately dispense our products to the end consumers.
Increasingly, in North America, third-party payors, such as private insurance companies and drug
plan benefit managers, aim to rationalize the use of pharmaceutical products and medical
treatments, in order to ensure that prescribed products are necessary for the patients disorders.
Moreover, large drug store chains now account for an increasing portion of retail sales of
prescription medicines. The pharmacists and managers of such retail outlets are under pressure to
reduce the number of items in inventory in order to reduce costs.
We use a pull-through marketing approach that is typical of pharmaceutical companies. Under this
approach, our sales representatives actively promote our portfolio products by demonstrating the
features and benefits of our products to physicians and, in particular, gastroenterologists who may
prescribe our products for their patients. The patients, in turn, take the prescriptions to
pharmacies to be filled. The pharmacies then place orders, directly or through buying groups, with
the wholesalers, to whom we sell our products.
Our expenses are comprised primarily of selling and administrative expenses (including marketing
expenses), cost of goods sold (including royalty payments to those companies from which we license
some of our commercialized products), research and development expenses, financial expenses as well
as depreciation and amortization.
Since 2005, some U.S. wholesalers have changed their business model from one depending on drug
price inflation to a fee-for-service arrangement, whereby manufacturers pay wholesalers a fee for
inventory management and other services. These fees typically are a percentage of the wholesalers
purchases from the manufacturer or a fixed charge per item or per unit. The fee-for-service
approach results in wholesalers compensation being more stable and volume-based as opposed to
price-increase based. As a result of the move to a fee-for-service business model, many wholesalers
are no longer investing in inventory ahead of anticipated price increases and have reduced their
inventories from their historical levels. As a consequence of the new model, manufacturers now
realize the benefit of price increases more rapidly in return for paying
-51-
wholesalers for the
services they provide, on a fee-for-service basis. Fees resulting from distribution services
agreements, or DSAs, are deducted from gross sales. We have had DSAs in place with our three
largest U.S. wholesalers since the first quarter of fiscal year 2009.
In March 2010, the Patient Protection and Affordable Care Act of 2010 and the Health Care and
Education Reconciliation Act of 2010, known together as the Affordable Care Act, was enacted in the
U.S. This legislation contains several provisions that impact our business, which include expanding
rebate coverage to managed Medicaid and an increase to the rate of rebates for all our drugs
dispensed to Medicaid beneficiaries; expanding the 340(B) drug pricing program requiring drug
manufacturers to provide discounted product to reduce the Medicare Part D coverage gap; and
assessing a new fee on manufacturers and importers of branded prescription drugs paid for pursuant
to coverage provided under specified government programs. The impact of these changes is further
discussed below under the Affordable Care Act subsection.
On April 29, 2010, we announced that we had taken steps to cease the distribution of ULTRASE
MT and VIOKASE, effective April 28, 2010, in response to FDA guidance related to the
distribution of unapproved pancreatic enzyme products, or PEPs. The effects of ceasing to
distribute these product lines on our financial statements are summarized in the section
Unapproved pancreatic enzyme products (PEPs) event below. Reserves recorded at that time were
based on Managements estimates and, as previously disclosed, were subject to change. We have
reflected certain adjustments to these reserves in our financial statements for the fiscal year
ended September 30, 2010, in accordance with U.S. generally accepted accounting principles (U.S.
GAAP).
The Transactions
The February 2008 Transactions
On November 29, 2007, Axcan Intermediate Holdings Inc., then known as Atom Intermediate Holdings
Inc., entered into an Arrangement Agreement with Axcan Pharma Inc., or Axcan Pharma, pursuant to
which we agreed to acquire, through an indirect wholly-owned subsidiary, all of the outstanding
common stock of Axcan Pharma and enter into various other transactions in accordance with the Plan
of Arrangement. We refer to such transactions collectively in this report as the Arrangement or the
Acquisition.
On February 25, 2008, the Arrangement was completed and as a result,
|
|
|
each share of Axcan Pharma common stock outstanding was deemed transferred to Axcan
Intermediate Holdings Inc. and holders of such common stock received $23.35 per share of
Axcan Pharma common stock, or the offer price, in compensation from us, without interest
and less any required withholding taxes; |
|
|
|
|
all granted and outstanding options to purchase common stock of Axcan Pharma under Axcan
Pharmas stock plans, other than those options held by Axcan Holdings Inc. or its
affiliates, were deemed vested and transferred to Axcan Pharma and cancelled in exchange
for an amount in cash equal to the excess, if any, of the offer price over the applicable
exercise price for the option for each share of common stock subject to such option, less
any required withholding taxes; and |
|
|
|
|
all vested and unvested deferred stock units, or DSUs, and restricted stock units, or
RSUs, issued under Axcan Pharmas stock option plans, were deemed vested and then cancelled
and terminated. Each holder of a DSU or RSU received the offer price, less any required
withholding taxes, for each DSU and RSU formerly held. |
The Arrangement was financed through the proceeds from the initial offering of $228.0 million
aggregate principal amount of our 9.25% secured notes due in 2015, or the secured notes, the
initial borrowings under a credit facility (the Credit Facility) composed of term loans and a
revolving credit facility, collectively the new senior secured credit facilities, borrowings under
a senior unsecured bridge facility maturing on February 25, 2009, or the senior unsecured bridge
facility, equity investments funded by direct and indirect equity investments from the Sponsor
Funds, or certain investment funds associated with or designated by TPG Capital (TPG), or the
Sponsor, certain investors who co-invested with the Sponsor Funds, including investment funds
affiliated with certain of the initial purchasers of the outstanding notes, or the Co-investors,
and the cash on hand of Axcan Pharma and its subsidiaries. The closing of the offering of the
secured notes, the new senior secured credit facilities and the senior unsecured bridge facility
occurred substantially concurrently with the closing of the Arrangement on February 25, 2008. We
refer to the Arrangement, the closing of the transactions relating to the Arrangement, and our
payment of any fees and expenses related to the Arrangement and such transactions collectively in
this report as the February 2008 Transactions.
Subsequent to the February 2008 Transactions, we became an indirect wholly-owned subsidiary of
Axcan Holdings Inc., or Holdings, an entity controlled by the Sponsor Funds and the Co-investors,
and Axcan Pharma became our indirect wholly-owned subsidiary.
The Refinancing
On May 6, 2008, we completed our offering of $235.0 million aggregate principal amount of our
12.75% senior unsecured notes (Senior Unsecured Notes) due in 2016, or the senior notes. The net
proceeds from this offering, along with our cash on hand, were used to repay in full our senior
unsecured bridge facility. We refer to this offering of our senior notes, along with the related
use of proceeds, as the Refinancing and, collectively, with the February 2008 Transactions, as the
Transactions.
In connection with the Transactions, we incurred significant indebtedness. See Liquidity and
Capital Resources. In addition, we accounted for the acquisition as a business combination and,
accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based
on their estimated fair values at the acquisition date.
-52-
The final purchase price allocation is as follows (in millions of U.S. dollars):
|
|
|
|
|
|
|
$ |
|
Cash |
|
|
348.8 |
|
Inventories |
|
|
54.1 |
|
Other current assets |
|
|
91.9 |
|
Property, plant and equipment |
|
|
36.9 |
|
Intangible assets |
|
|
581.7 |
|
Acquired in-process research |
|
|
272.4 |
|
Goodwill |
|
|
169.6 |
|
Deferred debt issue expenses |
|
|
0.9 |
|
Deferred income tax assets |
|
|
7.2 |
|
Current liabilities |
|
|
(174.5 |
) |
Long-term debt |
|
|
(0.1 |
) |
Deferred income tax liabilities |
|
|
(81.6 |
) |
|
Total |
|
|
1,307.3 |
|
|
Presentation of Financial Information
In this Managements Discussion and Analysis of Financial Condition and Results of Operations,
when financial information for the fiscal year ended September 30, 2008, is presented, including
the results of operations, the information presented is the mathematical combination of the
relevant financial information of the Predecessor (from October 1, 2007, to February 25, 2008) and
the Successor (from February 26, 2008, to September 30, 2008) for such period. This mathematical
combination is presented because we believe it assists in a readers analysis of our fiscal years
2010 and 2009 results as compared to our fiscal year 2008 results in comparable time periods.
However, this approach is not consistent with U.S. GAAP and may yield results that are not strictly
comparable on a period-to-period basis primarily due to the impact of purchase accounting entries
recorded as a result of the February 2008 Transactions and the lack of substantial debt outstanding
of the Predecessor as compared to the Successor. In addition, the combined financial information
has not been prepared as pro forma information and does not reflect all of the adjustments that
would be required if the results and cash flows for the period were reflected on a pro forma basis.
Furthermore, this financial information may not reflect the actual financial results we would have
achieved if the February 2008 Transactions had occurred prior to such period and may not be
predictive of future financial results.
FINANCIAL OVERVIEW FOR FISCAL YEARS ENDED SEPTEMBER 30, 2010, 2009 AND 2008
This discussion and analysis is based on our audited annual consolidated financial statements and
the related notes thereto reported under U.S. GAAP. For a description of our products, see the
section entitled Business Products.
For the fiscal year ended September 30, 2010, total revenue was $354.6 million ($416.9 million in
fiscal year 2009 and $381.8 million in fiscal year 2008), operating loss was $103.6 million ($33.6
million of operating income in fiscal year 2009 and $244.3 million of operating loss in fiscal year
2008) and net loss was $170.4 million ($7.9 million of net loss in fiscal year 2009 and $272.2
million of net loss in fiscal year 2008). Net product sales in the U.S. were $259.0 million (73.0%
of net product sales) for the fiscal year ended September 30, 2010, compared to $319.6 million
(78.0% of net product sales) for the fiscal year ended September 30, 2009, and $280.4 million
(73.4% of net product sales) for the fiscal year ended September 30, 2008. In the European Union,
net product sales were $63.2 million (17.8% of net product sales) for the fiscal year ended
September 30, 2010, compared to $58.7 million (14.3% of net product sales) for the fiscal year
ended September 30, 2009, and $66.0 million (17.3% of net product sales) for the fiscal year ended
September 30, 2008. In Canada, net product sales were $32.4 million (9.1% of net product sales) for
the fiscal year ended September 30, 2010, compared to $30.9 million (7.5% of net product sales) for
the fiscal year ended September 30, 2009, and $34.9 million (9.1% of net product sales) for the
fiscal year ended September 30, 2008.
Unapproved pancreatic enzyme products (PEPs) event
As previously disclosed, we ceased distributing our ULTRASE MT and VIOKASE product lines in the
U.S. effective April 28, 2010. ULTRASE MT and VIOKASE have accounted for approximately 19% of our
total net sales in the last three fiscal years ended September 30, 2009.
This action was taken as we did not receive FDA approval for ULTRASE MT or VIOKASE by April 28,
2010, the date mandated by the FDA to obtain approval for pancreatic enzyme products. . We also
interrupted shipments of ULTRASE MT from the U.S. to Canada and export markets to allow time for
the FDA to review our request confirming that applicable export requirements were being met. As of
September 30, 2010, this interruption of shipments was still in place.
-53-
We completed the initial submission of our NDA for ULTRASE MT and, in the fourth quarter of fiscal
2008, received a first complete response letter from the FDA. Further to the filing of our response
to this letter, we received a second complete response letter from the FDA in the fourth quarter of
fiscal 2009. On May 5, 2010 the FDA issued an additional complete response with respect to our NDA
for ULTRASE MT. As was the case with prior letters, the FDA requires that deficiencies raised with
respect to the manufacturing and control processes at the manufacturer of the active ingredient of
ULTRASE MT be addressed before approval can be granted. We have submitted our response to this
letter to the FDA that confirmed a November 28, 2010 Prescription Drug User Fee Act, or PDUFA, date
for our ULTRASE MT NDA.
The submission of our rolling NDA for VIOKASE was completed in the first quarter of fiscal 2010. At
the time we completed this submission we requested a priority review and the FDA advised us in the
second quarter of fiscal 2010 that it would not grant a priority review for this NDA.
The initial PDUFA date for VIOKASE was August 30, 2010. In August 2010, we received feedback from
the FDA regarding the timeline to review the VIOKASE NDA. At that time, the FDA
indicated that the review was progressing but postponed the PDUFA date to November 30, 2010 to
allow more time to complete their review.
On November 28, 2010, the FDA issued complete response letters regarding the NDAs for ULTRASE MT
and VIOKASE. The letters require that unresolved deficiencies raised with respect to the
manufacturing and control processes at the manufacturer of the active ingredient for both ULTRASE
MT and VIOKASE be addressed before approval can be granted. The letters also require that
deficiencies identified in an FDA inspection of such manufacturer must be resolved before the NDAs
can be approved. We are in ongoing discussions with the FDA and continue to work with the
manufacturer of the active pharmaceutical ingredient to address the remaining open issues
identified by the FDA, as soon as possible. However, those remaining issues do not require
additional clinical studies.
As a result of taking steps to cease distribution of ULTRASE MT and VIOKASE and in accordance with
U.S. GAAP, we recorded an additional $23.4 million sales deduction reserve for the fiscal year
ended September 30, 2010. This reserve was an estimate of our liability for ULTRASE MT
and VIOKASE that may be returned by the original purchaser under our DSAs or applicable return
policies as well as other incremental sales deductions that may be incurred in addition to those
previously recorded for ULTRASE MT and VIOKASE prior to the PEPs event. The
cease distribution order issued by the FDA was not considered as a product recall. This reserve was
based on management estimates of ULTRASE MT and VIOKASE inventory in the
distribution channel, assumptions on related expiration dates of this inventory as well as
estimated erosion of ULTRASE MT and VIOKASE demand, based on competition from
approved PEPs and the resulting estimated sell-through of ULTRASE MT and VIOKASE, actual
return activity and other factors. As at September 30, 2010, the remaining PEP liability reserve
balance was $11.0 million which is equal to sales value of the estimated remaining inventory in the
distribution channel as at September 30, 2010.
We recorded a charge of $44.9 million during the fiscal year ended September 30, 2010, to cost of
goods sold to reduce inventories to their net realizable value and for estimated loss for purchase
and other materials and supply commitments related to ULTRASE MT and VIOKASE products.
We recorded this charge for inventory related to ULTRASE MT and VIOKASE, in light of the
fact that these products did not obtain regulatory approval by the April 28, 2010 deadline
established by the FDA.
This event has also resulted in a change in circumstance that caused us to review the carrying
value of our U.S. reporting unit long lived intangible assets, including goodwill. Based on this
review, an impairment charge of $107.2 million was recorded during the fiscal year ended September
30, 2010.
The income tax benefits of the above charges were estimated and an additional $31.1 million was
recorded in income taxes benefit during the fiscal year ended September 30, 2010. We also recorded
an increase in valuation allowance on deferred tax assets of $57.2 million during the fiscal year
ended September 30, 2010.
The charges that we have taken as a result of having ceased distribution of our PEPs reflect many
subjective estimates that were required to be made by management. These estimates include:
a) |
|
The quantity and expiration dates of PEPs inventory in the distribution channel; |
|
b) |
|
Short-term prescription demand during the period of time during which the products continued
to be available at the pharmacy level; |
|
c) |
|
Assumptions regarding the probability of obtaining an eventual NDA approval for our PEPs and
the time required for such approval; |
|
d) |
|
Assumptions regarding market share growth after an eventual re-launch of our PEPs; and |
|
e) |
|
Other factors. |
In future periods, we will monitor and review the assumptions and estimates and will prospectively
record changes to provisions reflected in the fiscal year ended September 30, 2010.
The following table summarizes the assessment by management of the impacts of our ceasing to
distribute ULTRASE MT and VIOKASE, or the unapproved PEPs event as it is sometimes
referred to herein, on our consolidated financial statements of operations for the fiscal year
ended September 30, 2010:
-54-
|
|
|
|
|
|
|
For the fiscal |
|
|
|
year ended |
|
|
|
September 30, |
|
(in millions of U.S. dollars) |
|
2010 |
|
|
|
$ |
|
Net product sales (increase in product returns) |
|
|
(23.4 |
) |
|
Cost of goods sold (inventory net realizable value adjustment and estimated loss for
purchase and other materials and supply commitments) |
|
|
44.9 |
|
Impairment of intangible assets and goodwill |
|
|
107.2 |
|
Selling and administrative expenses (decrease in stock-based compensation expense) |
|
|
(4.9 |
) |
|
Total operating expenses |
|
|
147.2 |
|
|
Operating loss |
|
|
(170.6 |
) |
Income tax expense (tax benefit of above items, net of an increase in valuation allowance) |
|
|
26.1 |
|
|
Net loss |
|
|
(196.7 |
) |
|
Financial highlights
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
(in millions of U.S. dollars) |
|
2010 |
|
|
2009 |
|
|
|
$ |
|
|
$ |
|
Total assets |
|
|
713.2 |
|
|
|
914.6 |
|
Long-term debt (a) |
|
|
594.5 |
|
|
|
613.3 |
|
Shareholders equity (deficiency) |
|
|
(21.0 |
) |
|
|
163.8 |
|
|
(a) |
|
Including the current portion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
For the |
|
|
|
For the fiscal |
|
|
For the fiscal |
|
|
For the fiscal |
|
|
seven-month |
|
|
five-month |
|
|
|
year ended |
|
|
year ended |
|
|
year ended |
|
|
period ended |
|
|
period ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
February 25, |
|
(in millions of U.S. dollars) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor/ |
|
|
|
|
|
|
|
|
|
Successor |
|
|
Successor |
|
|
Successor |
|
|
Successor |
|
|
Predecessor |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Total revenue |
|
|
354.6 |
|
|
|
416.9 |
|
|
|
381.8 |
|
|
|
223.2 |
|
|
|
158.6 |
|
EBITDA (1) |
|
|
(34.1 |
) |
|
|
97.7 |
|
|
|
(197.1 |
) |
|
|
(230.7 |
) |
|
|
33.6 |
|
Adjusted EBITDA (1) |
|
|
162.4 |
|
|
|
172.8 |
|
|
|
154.6 |
|
|
|
84.5 |
|
|
|
70.1 |
|
Net income (loss) |
|
|
(170.4 |
) |
|
|
(7.9 |
) |
|
|
(272.2 |
) |
|
|
(289.3 |
) |
|
|
17.1 |
|
|
-55-
(1) |
|
A reconciliation of net income to EBITDA (a non-U.S. GAAP measure) and from EBITDA
to Adjusted EBITDA (a non-U.S. GAAP measure) for the fiscal years ended September 30, 2010,
2009 and 2008 are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
For the |
|
|
|
For the fiscal |
|
|
For the fiscal |
|
|
For the fiscal |
|
|
seven-month |
|
|
five-month |
|
|
|
year ended |
|
|
year ended |
|
|
year ended |
|
|
period ended |
|
|
period ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
February 25, |
|
(in millions of U.S. dollars) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor/ |
|
|
|
|
|
|
|
|
|
Successor |
|
|
Successor |
|
|
Successor |
|
|
Successor |
|
|
Predecessor |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Net income (loss) |
|
|
(170.4 |
) |
|
|
(7.9 |
) |
|
|
(272.2 |
) |
|
|
(289.3 |
) |
|
|
17.1 |
|
Financial expenses |
|
|
65.0 |
|
|
|
69.8 |
|
|
|
41.8 |
|
|
|
41.5 |
|
|
|
0.3 |
|
Interest income |
|
|
(0.7 |
) |
|
|
(0.4 |
) |
|
|
(6.2 |
) |
|
|
(0.8 |
) |
|
|
(5.4 |
) |
Income tax expense (benefit) |
|
|
11.0 |
|
|
|
(24.1 |
) |
|
|
(5.7 |
) |
|
|
(17.7 |
) |
|
|
12.0 |
|
Depreciation and amortization |
|
|
61.0 |
|
|
|
60.3 |
|
|
|
45.2 |
|
|
|
35.6 |
|
|
|
9.6 |
|
|
EBITDA i) |
|
|
(34.1 |
) |
|
|
97.7 |
|
|
|
(197.1 |
) |
|
|
(230.7 |
) |
|
|
33.6 |
|
Transaction, integration, refinancing costs and
other payments to third parties a) |
|
|
9.0 |
|
|
|
7.8 |
|
|
|
39.1 |
|
|
|
12.6 |
|
|
|
26.5 |
|
Management fees b) |
|
|
4.4 |
|
|
|
5.4 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
|
|
Stock-based compensation expense excluding impact of
the unapproved PEPs event c) |
|
|
4.5 |
|
|
|
6.2 |
|
|
|
17.4 |
|
|
|
7.4 |
|
|
|
10.0 |
|
Impairment of intangible assets and goodwill related
to the unapproved PEPs event d) |
|
|
107.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partial write-down of intangible assets e) |
|
|
|
|
|
|
55.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other adjustments related to the unapproved PEPs
event f) |
|
|
63.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired in-process research g) |
|
|
8.0 |
|
|
|
|
|
|
|
272.4 |
|
|
|
272.4 |
|
|
|
|
|
Inventory stepped-up value
expenses h) |
|
|
|
|
|
|
|
|
|
|
22.7 |
|
|
|
22.7 |
|
|
|
|
|
|
Adjusted EBITDA i) |
|
|
162.4 |
|
|
|
172.8 |
|
|
|
154.6 |
|
|
|
84.5 |
|
|
|
70.1 |
|
|
|
|
|
a) |
|
Represents integration and refinancing costs as well as due diligence costs related
to certain non-recurring transactions, payments to third parties in respect of research and
development milestones and other progress payments as defined within our credit agreement. |
|
b) |
|
Represents management fees and other charges associated with the Management Services
Agreement with TPG. |
|
c) |
|
Represents stock-based employee compensation expense under the provisions of FASB
guidance, excluding the impact of the unapproved PEPs event. |
|
d) |
|
Intangible assets and goodwill impairment charges related to the unapproved PEPs
event. |
|
e) |
|
Partial write-down of intangible assets related to URSO products. |
|
f) |
|
Adjustments and other charges related to the unapproved PEPs event, including an
additional product returns and other sales deduction provision of $23.4 million during the
fiscal year ended September 30, 2010, inventory net realizable value adjustment and accrual
for purchases and other materials and supply commitments of $44.9 million during the fiscal
year ended September 30, 2010, and a stock-based compensation recovery of $4.9 million during
the fiscal year ended September 30, 2010. |
|
g) |
|
Represents the acquired in-process research. |
|
h) |
|
Represents inventories stepped-up value, arising from the February 2008 Transactions,
expensed as acquired inventory is sold. |
|
i) |
|
EBITDA and Adjusted EBITDA are both non-U.S. GAAP financial measures and are
presented in this report because our management considers them important supplemental measures
of our performance and believes that they are frequently used by interested parties in the
evaluation of companies in the industry. EBITDA, as we use it, is net income before financial
expenses, interest income, income taxes and depreciation and |
-56-
|
|
|
|
|
amortization. We believe that the
presentation of EBITDA enhances an investors understanding of our financial performance. We
believe that EBITDA is a useful financial metric to assess our operating performance from
period to period by excluding certain items that we believe are not representative of our core
business. The term EBITDA is not defined under U.S. GAAP, and EBITDA is not a measure of net
income, operating income or any other performance measure derived in accordance with U.S.
GAAP, and is subject to important limitations. Adjusted EBITDA, as we
use it, is EBITDA adjusted to exclude certain non-cash charges, unusual or non-recurring items
and other adjustments set forth below. Adjusted EBITDA is calculated in the same manner as
EBITDA and Consolidated EBITDA as those terms are defined under the indentures governing our
notes and Credit Facility further described in the section Liquidity and Capital
ResourcesLong-term Debt and New Senior Secured Credit Facility. We believe that the inclusion
of supplementary adjustments applied to EBITDA in presenting Adjusted EBITDA are appropriate to
provide additional information to investors about certain material non-cash items and unusual or
non-recurring items that we do not expect to continue in the future and to provide additional
information with respect to our ability to meet our future debt service and to comply with
various covenants in our indentures and Credit Facility. Adjusted EBITDA is not a measure of net
income, operating income or any other performance measure derived in accordance with U.S. GAAP,
and is subject to important limitations. EBITDA and Adjusted EBITDA have limitations as an
analytical tool, and they should not be considered in isolation, or as substitutes for analysis
of our results as reported under U.S. GAAP. Some of these limitations are: |
|
|
|
EBITDA and Adjusted EBITDA do not reflect all cash expenditures, future requirements for
capital expenditures, or contractual commitments; |
|
|
|
|
EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, working
capital needs; |
|
|
|
|
EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash
requirements necessary to service interest or principal payments, on our debt; |
|
|
|
|
Although depreciation and amortization are non-cash charges, the assets being depreciated
and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA
do not reflect any cash requirements for such replacements; |
|
|
|
|
Adjusted EBITDA reflects additional adjustments as provided in the indentures governing
our secured and unsecured notes and new senior secured credit facilities; and |
|
|
|
|
Other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than
we do, limiting its usefulness as a comparative measure. |
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of
discretionary cash available to us to invest in our business. Our management compensates for these
limitations by relying primarily on the U.S. GAAP results and using EBITDA and Adjusted EBITDA as
supplemental information.
Fiscal year ended September 30, 2010, compared to fiscal year ended September 30, 2009
Overview of results of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal |
|
|
For the fiscal |
|
|
|
|
|
|
year ended |
|
|
year ended |
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
(in millions of U.S. dollars) |
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
% |
|
Net product sales b) |
|
|
354.6 |
|
|
|
409.8 |
|
|
|
(55.2 |
) |
|
|
(13.5 |
) |
Other revenue |
|
|
|
|
|
|
7.1 |
|
|
|
(7.1 |
) |
|
|
(100.0 |
) |
|
Total revenue |
|
|
354.6 |
|
|
|
416.9 |
|
|
|
(62.3 |
) |
|
|
(14.9 |
) |
|
Cost of goods sold a) b) |
|
|
130.9 |
|
|
|
103.0 |
|
|
|
27.9 |
|
|
|
27.1 |
|
Selling and administration expenses a) b) |
|
|
115.0 |
|
|
|
122.9 |
|
|
|
(7.9 |
) |
|
|
(6.4 |
) |
Management fees |
|
|
4.4 |
|
|
|
5.4 |
|
|
|
(1.0 |
) |
|
|
(18.5 |
) |
Research and development expenses a) |
|
|
31.7 |
|
|
|
36.0 |
|
|
|
(4.3 |
) |
|
|
(11.9 |
) |
Acquired in-process research |
|
|
8.0 |
|
|
|
|
|
|
|
8.0 |
|
|
|
|
|
Depreciation and amortization |
|
|
61.0 |
|
|
|
60.3 |
|
|
|
0.7 |
|
|
|
1.2 |
|
Impairment of intangible assets and goodwill
b) |
|
|
107.2 |
|
|
|
55.7 |
|
|
|
51.5 |
|
|
|
92.5 |
|
|
Total operating expenses |
|
|
458.2 |
|
|
|
383.3 |
|
|
|
74.9 |
|
|
|
19.5 |
|
|
Operating income (loss) |
|
|
(103.6 |
) |
|
|
33.6 |
|
|
|
(137.2 |
) |
|
|
(408.3 |
) |
|
Financial expenses |
|
|
65.0 |
|
|
|
69.8 |
|
|
|
(4.8 |
) |
|
|
(6.9 |
) |
Interest income |
|
|
(0.7 |
) |
|
|
(0.4 |
) |
|
|
(0.3 |
) |
|
|
(75.0 |
) |
Other income |
|
|
(9.7 |
) |
|
|
(3.5 |
) |
|
|
(6.2 |
) |
|
|
(177.1 |
) |
Loss (gain) on foreign currencies |
|
|
1.2 |
|
|
|
(0.3 |
) |
|
|
1.5 |
|
|
|
500.0 |
|
|
Total other expenses |
|
|
55.8 |
|
|
|
65.6 |
|
|
|
(9.8 |
) |
|
|
(14.9 |
) |
|
Income (loss) before income taxes |
|
|
(159.4 |
) |
|
|
(32.0 |
) |
|
|
(127.4 |
) |
|
|
(398.1 |
) |
Income taxes expense (benefit) b) |
|
|
11.0 |
|
|
|
(24.1 |
) |
|
|
35.1 |
|
|
|
145.6 |
|
|
Net income (loss) |
|
|
(170.4 |
) |
|
|
(7.9 |
) |
|
|
(162.5 |
) |
|
|
(2,057.0 |
) |
|
a) |
|
Exclusive of depreciation and amortization |
|
b) |
|
2010 includes charges related to the unapproved PEPs event |
-57-
Net product sales
For the fiscal year ended September 30, 2010, net product sales were $354.6 million compared to
$409.8 million for the preceding fiscal year, a decrease of 13.5%.
This decrease was primarily derived from lower sales in the U.S., which amounted to $259.0 million
for the fiscal year ended September 30, 2010, compared to $319.6 million for the preceding fiscal
year, a decrease of 19.0%. The decrease in sales in the U.S. is mainly due to the effects of the
unapproved PEPs event and the continued decrease in sales of certain of our URSO branded products.
This decrease in URSO sales
resulted from the entry on the U.S. market of generic versions of URSO 250 and URSO FORTE following
their approval by the Office of Generic Drugs on May 13, 2009, combined with increases in sales
deductions discussed hereafter in the gross-to-net product sales analysis.
Net product sales in the European Union increased 7.7%, to $63.2 million for the fiscal year ended
September 30, 2010, from $58.7 million for the preceding fiscal year. The increase in sales
resulted primarily from higher sales volume of DELURSAN, and the introduction of a new
product, FLEET PHOSPHO-SODA in our distribution channel.
Net product sales in Canada increased 4.9%, to $32.4 million for the fiscal year ended September
30, 2010, from $30.9 million for the preceding fiscal year. The increase in sales resulted
primarily from the positive impact of currency fluctuations compared to the preceding fiscal year,
as the value of the Canadian dollar improved against the U.S. dollar by 10.9%. This increase was
partially offset by the decrease in sales of certain products.
Net product sales are stated net of deductions for product returns, chargebacks, contract rebates,
DSA fees, discounts and other allowances. The following table summarizes our gross-to-net product
sales adjustments for each significant category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal |
|
|
For the fiscal |
|
|
|
|
|
|
year ended |
|
|
year ended |
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
(in millions of U.S. dollars) |
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
% |
|
Gross product sales |
|
|
474.6 |
|
|
|
503.1 |
|
|
|
(28.5 |
) |
|
|
(5.7 |
) |
|
Gross-to-net product sales adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product returns |
|
|
9.3 |
|
|
|
10.7 |
|
|
|
(1.4 |
) |
|
|
(13.1 |
) |
Chargebacks |
|
|
37.3 |
|
|
|
33.7 |
|
|
|
3.6 |
|
|
|
10.7 |
|
Contract rebates |
|
|
36.3 |
|
|
|
36.5 |
|
|
|
(0.2 |
) |
|
|
(0.5 |
) |
DSA fees |
|
|
5.6 |
|
|
|
3.6 |
|
|
|
2.0 |
|
|
|
55.6 |
|
Discounts and other allowances |
|
|
8.1 |
|
|
|
8.8 |
|
|
|
(0.7 |
) |
|
|
(8.0 |
) |
Provisions related to the unapproved PEPs
event |
|
|
23.4 |
|
|
|
|
|
|
|
23.4 |
|
|
|
|
|
|
Total gross-to-net product sales adjustments |
|
|
120.0 |
|
|
|
93.3 |
|
|
|
26.7 |
|
|
|
28.6 |
|
|
Total net product sales |
|
|
354.6 |
|
|
|
409.8 |
|
|
|
(55.2 |
) |
|
|
(13.5 |
) |
|
Product returns, contract rebates, DSA fees, discounts and other allowances totalled $120.0 million
(25.3% of gross product sales) for the fiscal year ended September 30, 2010, compared to $93.3
million (18.5% of gross product sales) for the preceding fiscal year. The increase in total
deductions as a percentage of gross product sales was mainly due to the additional provision of
$23.4 million for the fiscal year ended September 30, 2010, related to the unapproved PEPs event
and to an increase of 1.2% in chargebacks. The increase in chargebacks is primarily due to Medicaid
and the Affordable Care Act.
In May 2009, we entered into an agreement with the Department of Defense, or DOD, to remain
eligible for inclusion on the DODs formulary and pursuant to which we agreed to pay rebates under
the TRICARE retail pharmacy program. We began accounting for these rebates in the third quarter of
fiscal year 2009. Under its contracting process, the DOD is further seeking rebates from
pharmaceutical manufacturers on all prescriptions of covered prescription drugs filled under
TRICARE from January 28, 2008, forward, unless DOD agrees to a waiver or compromise of amounts due.
On November 30, 2009, in litigations initiated by third parties seeking to have the DODs ability
to seek retroactive rebates invalidated, the Court affirmed DODs position that it is entitled to
retroactive refunds on prescriptions filled on or after January 28, 2008. In October 2010, the DOD
affirmed its former rulemaking which was the subject of litigation and its intention to seek to
collect rebates for periods prior to the contract date. We have estimated that our exposure to the
retroactive rebates claimed by the DOD would not be material and have recorded an accrual in fiscal
year 2010.
Deductions also increased due to increases in DSA fees resulting from new DSA agreements signed
with two additional U.S. wholesalers during the previous year.
-58-
Affordable Care Act
The Patient Protection and Affordable Care Act of 2010 and the Health Care and Education
Reconciliation Act of 2010, known together as the Affordable Care Act, enacted in the U.S in March
2010 contain several provisions that could impact our business.
Although many provisions of the new legislation do not take effect immediately, several provisions
became effective during the fiscal year ended September 30, 2010. These include (1) an increase in
the minimum Medicaid rebate to States participating in the Medicaid program on our branded
prescription drugs; (2) the extension of the Medicaid rebate to Managed Care Organizations that
dispense drugs to Medicaid beneficiaries; and (3) the expansion of the 340(B) Public Health Service
Act drug pricing program, which provides outpatient drugs at reduced rates, to include certain
childrens hospitals, free standing cancer hospitals, critical access hospitals, and rural referral
centers.
In addition, beginning in 2011, the new law requires drug manufacturers to provide a 50% discount
to Medicare beneficiaries for any covered prescription drugs purchased during a Medicare Part D
coverage gap (i.e. the donut hole). Also, beginning in 2011, new fees will be assessed on all
branded prescription drug manufacturers and importers. This fee will be calculated based upon each
organizations percentage share of total branded prescription drug sales to U.S. government
programs (such as Medicare Parts B and D, Medicaid, Department of Veterans Affairs and Department
of Defense programs and TRICARE retail pharmacy program) made during the previous fiscal year. The
aggregated industry wide fee is expected to total $28 billion through 2019, ranging from $2.5
billion to $4.1 billion annually. The Internal Revenue Service, or IRS, has issued guidance for
calculating preliminary fees, but there is still uncertainty as to final implementation, since the
IRS has requested public comment and may make changes in response. The new law also imposes a 2.3%
excise tax on sales of certain taxable medical devices that are made after December 31, 2012,
including our FLUTTER mucus clearance device. Further, effective March 31, 2013, the law requires
pharmaceutical, medical device, biological, and medical supply manufacturers to begin reporting to
the federal government the payments they make to physicians and teaching hospitals, and physician
ownership interests in those entities. The law also provides for the creation of an abbreviated
regulatory pathway for FDA approval of biosimilars and interchangeable biosimilar products. While
creation of the biosimilars program is authorized as of passage of the legislation in 2010, the
process of creating the regulatory pathway for approval of biosimilars will likely be lengthy, and
the FDA is in the process of soliciting public input.
The impact in terms of additional reserves recorded in contract rebates has been $1.8 million for
the fiscal year ended September 30, 2010. However, we continue to assess the full extent of this
legislations longer-term impact on our business. While certain aspects of the new legislation
implemented in 2010 are expected to reduce our revenues in future years, other provisions of this
legislation may offset, at some level, any reduction in revenues when these provisions become
effective. In future years, based on our understanding, these other provisions are expected to
result in higher revenues due to an increase in the total number of patients covered by health
insurance and an expectation that existing insurance coverage will provide more comprehensive
consumer protections. This would include a federal subsidy for a portion of a beneficiarys
out-of-pocket cost under Medicare Part D. However, these higher revenues will be negatively
impacted by the branded prescription drug manufacturers fee.
Performance of our main product lines
Variations in sales performance in fiscal year 2010 versus the preceding fiscal year were the
result of a combination of changes in sales volume as well as price increases.
Key sales figures for our main product lines for the fiscal year 2010 are as follows:
|
|
Sales of pancreatic enzyme products (ULTRASE, PANZYTRAT and VIOKASE) decreased $44.5
million (39.5%) to $68.3 million from $112.8 million for the preceding fiscal year mainly due
to decreases in sales volume as a result of the unapproved PEPs event. |
|
|
|
Sales of ursodiol products (URSO, URSO 250, URSO FORTE, URSO DS and DELURSAN,) decreased
$29.3 million (39.6%) to $44.6 million from $73.9 million for the preceding fiscal year. This
decrease resulted mainly in sales volume from the entry of generic versions of URSO 250 and
URSO FORTE on the U.S. market, approved by the Office of Generic Drugs on May 13, 2009. |
|
|
|
Sales of mesalamine products (CANASA and SALOFALK) decreased $3.0 million (2.9%) to $100.7
million from $103.7 million for the preceding fiscal year. |
|
|
|
Sales of sucralfate products (CARAFATE and SULCRATE) increased $18.0 million (26.3%) to
$86.5 million from $68.5 million for the preceding fiscal year. The increase mainly resulted
from price increases announced during the preceding fiscal year and, to a lesser extent, from
an increase in prescription volumes. |
|
|
|
Sales of other products increased $3.6 million (7.1%) to $54.5 million from $50.9 million
for the preceding fiscal year. |
Other revenue
In April 2009, we entered into a license agreement with a leading multi-national company (the
Licensee) whereby we granted the Licensee the right to use the active ingredient contained in one
of our commercialized products, LACTEOL, to develop and commercialize new food products that will
contain this active ingredient. Under the terms of the agreement, the Licensee will have exclusive
rights to commercialize these new products. We will continue to own all other rights related to the active ingredient, including the
right to use the active ingredient and develop,
-59-
manufacture and commercialize non-food products
containing the active ingredient, including pharmaceutical products. For the fiscal year ended
September 30, 2009, we recorded as revenue milestones that we are entitled to receive under the
agreements in the amount of $7.1 million.
Cost of goods sold
Cost of goods sold consists principally of the costs of raw materials, royalties and manufacturing.
We outsource most of our manufacturing requirements. For the fiscal year ended September 30, 2010,
cost of goods sold increased $27.9 million (27.1%) to $130.9 million from $103.0 million for the
preceding fiscal year. As a percentage of net product sales, cost of goods sold for the fiscal year
ended September 30, 2010, increased compared to the preceding fiscal year from 25.1% to 36.9%. The
increase in cost of goods sold is mostly due to adjustments to reduce certain inventory to net
realizable value and purchase commitments reserves related to the unapproved PEPs event that
amounted to $44.9 million (12.7% of net product sales) for the fiscal year ended September 30,
2010,. Excluding the impact related to the unapproved PEPs event, cost of goods sold as a
percentage of net product sales would have been 22.8% for the fiscal year ended September 30, 2010.
Selling and administrative expenses
Selling and administrative expenses, on an ongoing basis, consist principally of salaries and other
costs associated with our sales force and marketing activities. For the fiscal year ended September
30, 2010, selling and administrative expenses decreased $7.9 million (6.4%) to $115.0 million from
$122.9 million for the preceding fiscal year. This decrease in selling and administrative expenses
is mainly due to a reduction of PEPs marketing expenses combined with the adjustment of $6.5
million for stock-based compensation further to changes in assumptions affecting our valuation of
these expenses primarily due to the impact of the unapproved PEPs event on our business amounting
to $4.9 million. This decrease was partially offset by an increase in non-recurring professional
fees.
Management fees
Management fees consist of fees and other charges associated with the Management Services Agreement
with TPG. For the fiscal year ended September 30, 2010, management fees decreased $1.0 million
(18.5%) to $4.4 million from $5.4 million for the preceding fiscal year. The variance was due to
the fact that historically, these fees were previously unallocated to subsidiaries of Axcan
Holdings Inc., the indirect parent company of Axcan Intermediate Holdings Inc. In the fiscal year
ended September 30, 2009, they were allocated from the closing date of February 2008 Transactions
based on revenue.
Research and development expenses
Research and development expenses consist principally of fees paid to outside parties that we use
to conduct clinical studies and to submit governmental approval applications on our behalf, as well
as the salaries and benefits paid to personnel involved in research and development projects. For
the fiscal year ended September 30, 2010, research and development expenses decreased $4.3 million
(11.9%) to $31.7 million, from $36.0 million for the preceding fiscal year. The research and
development expenses include a reduction in expenses related to the development work on PEPs and
European clinical trial costs for PYLERA as compared to the previous fiscal year. This decrease was
offset by the effect of foreign currencies on some of our expenses denominated in Canadian dollars
and in Euros.
Acquired in-process research
During the fiscal year ended September 30, 2010, we entered into an asset purchase and license
agreement to acquire rights in and to the intellectual property, assigned contracts, permits and
inventories related to a compound to be used in the development of an undisclosed product in the
field of gastroenterology. Certain other rights were licensed under the agreement. Pursuant to the
agreement, we made an upfront payment of $8.0 million on closing and will make additional payments
of up to $86.0 million may be required based on the achievement of certain development, regulatory
and commercialization milestones. In addition, we will pay royalties on the basis of net sales. We
completed the asset acquisition in April 2010 and recorded an expense of $8.0 million for the
payment of acquired in-process research in the third quarter of fiscal year 2010.
Depreciation and amortization
Depreciation and amortization consists principally of the amortization of intangible assets with a
finite life. Intangible assets include trademarks, trademark licenses and manufacturing rights. For
the fiscal year ended September 30, 2010, depreciation and amortization increased $0.7 million
(1.2%) to $61.0 million from $60.3 million for the preceding fiscal year.
Impairment of intangible assets and goodwill
The value of goodwill and intangible assets with an indefinite life are subject to an annual
impairment test unless events or changes in circumstances indicate that the carrying amounts of
these assets may not be recoverable. The intangible assets with a finite life and property, plant
and equipment are subject to an impairment test whenever events or changes in circumstances
indicate that the carrying amounts of these assets may not be recoverable. As a result of the
unapproved PEPs event, we compared the carrying value of the intangible assets with a finite life
affected by the unapproved PEPs event to estimated future undiscounted cash flows. The change in
circumstances associated with the
unapproved PEPs event also caused us to review the carrying value of our long lived intangible
assets including goodwill. Based on this review,
-60-
an impairment charge of $107.2 million was
recorded during the fiscal year ended September 30, 2010, reflecting charges of $91.4 million for
the goodwill allocated to our U.S. reporting unit and of $15.8 million related to finite life
intangible assets.
As a result of certain factors related to the ongoing marketing of certain of our products
including the approval of a generic formulation of URSO 250 and URSO FORTE, during the
fiscal year ended September 30, 2009, we reviewed the carrying amount of our intangible assets
specifically related to these products. Based on a discounted cash-flow analysis and market prices,
we concluded that a $55.7 million reduction to the carrying value of the related intangible assets
totalling $83.7 million prior to the write-down was required in that year.
Financial expenses
Financial expenses consist principally of interest and fees paid in connection with funds borrowed
for acquisitions. For the fiscal year ended September 30, 2010, financial expenses decreased $4.8
million (6.9%) to $65.0 million from $69.8 million for the preceding fiscal year. The decrease in
financial expenses is mainly due to the reduction of interest on long-term debt of $3.2 million as
a result of the decrease in interest rates combined with lower capital outstanding and the change
in the fair value of derivatives of $1.2 million. We also had two interest rate swaps with a
combined notional amount of $63.0 million that were designated as cash-flow hedges of interest rate
risk. These swaps matured during the three-month period ended March 31, 2010, and were not
renewed.
Interest income
For the fiscal year ended September 30, 2010, total interest income increased $0.3 million (75.0%)
to $0.7 million from $0.4 million for the preceding fiscal year. This increase is mainly due to the
increase in our cash and cash equivalent investments.
Other income
We initiated claims in damages under the U.S. Lanham Act against a number of defendants alleging
they falsely advertised their products to be similar or equivalent to ULTRASE. During the fiscal
year ended September 30, 2009, a settlement arrangement with respect to these claims was entered
into with certain of these defendants and in the second quarter of fiscal 2010, another settlement
agreement was entered into with the remaining defendants. Pursuant to each of the agreements, the
settling defendants agreed to pay a confidential global amount in one or several installments; all
of which have now been paid. Additionally, in the fourth quarter of fiscal year 2010, pursuant to
the settlement of another matter in which we were a defendant, we received compensation for legal
fees incurred by reason of having to defend against unfounded claims made by the plaintiff. A total
amount of $9,704,000 was paid to us during the fiscal year ended September 30, 2010, ($3,500,000
during the fiscal year ended September 30, 2009) in respect of these settlement agreements. These
amounts were recorded as other income in the statement of operations.
Income taxes
For the fiscal year ended September 30, 2010, income tax expense amounted to $11.0 million compared
to an income tax benefit of $24.1 million for the preceding fiscal year. The effective tax rate was
minus 6.9% for the fiscal year ended September 30, 2010, compared to 75.3% for the preceding fiscal
year. The effective tax rate for the fiscal year ended September 30, 2010, is affected by a number
of elements, the most important being the non-deductible provisions related to the unapproved PEPs
event and the valuation allowance taken against deferred tax assets attributable to the U.S.
reporting unit. During the fiscal year ended September 30, 2010, we recorded a valuation allowance
of $57.5 million against our net deferred tax assets mostly attributable to the U.S. reporting
unit. If, in future periods, the deferred tax assets are determined by management to be more likely
than not to be realized, the recognized tax benefits relating to the reversal of the valuation
allowance will be recorded.
The difference between our effective tax rate and the statutory income tax rate is summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal |
|
|
For the fiscal |
|
|
|
year ended |
|
|
year ended |
|
|
|
September 30, |
|
|
September 30, |
|
(in millions of US dollars) |
|
2010 |
|
|
2009 |
|
|
|
% |
|
|
$ |
|
|
% |
|
|
$ |
|
Combined statutory rate applied to pre-tax
income (loss) |
|
|
35.00 |
|
|
|
(55.8 |
) |
|
|
35.00 |
|
|
|
(11.2 |
) |
Increase (decrease) in taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in promulgated rates |
|
|
0.01 |
|
|
|
0.0 |
|
|
|
(0.91 |
) |
|
|
0.3 |
|
Difference with foreign tax rates |
|
|
1.70 |
|
|
|
(2.7 |
) |
|
|
8.10 |
|
|
|
(2.6 |
) |
Valuation allowance |
|
|
(36.09 |
) |
|
|
57.5 |
|
|
|
(2.30 |
) |
|
|
0.7 |
|
Tax benefit arising from a financing structure |
|
|
11.18 |
|
|
|
(17.8 |
) |
|
|
44.46 |
|
|
|
(14.2 |
) |
Non-deductible items |
|
|
(21.89 |
) |
|
|
34.9 |
|
|
|
(9.72 |
) |
|
|
3.1 |
|
Investment tax credits |
|
|
0.96 |
|
|
|
(1.5 |
) |
|
|
4.24 |
|
|
|
(1.3 |
) |
State taxes |
|
|
1.95 |
|
|
|
(3.1 |
) |
|
|
(0.34 |
) |
|
|
0.1 |
|
Other |
|
|
0.31 |
|
|
|
(0.5 |
) |
|
|
(3.22 |
) |
|
|
1.0 |
|
|
|
|
|
(6.87 |
) |
|
|
11.0 |
|
|
|
75.31 |
|
|
|
(24.1 |
) |
|
-61-
Net loss
For the fiscal year ended September 30, 2010, net loss increased $162.5 million to $170.4 million
from $7.9 million for the preceding fiscal year. The increase in net loss for is mainly due to the
impacts of the unapproved PEPs event amounting to $196.7 million for the fiscal year ended
September 30, 2010. This increase in net loss was partially offset by the partial write-down of
intangible assets related to our URSO products amounting to $55.7 million which was recorded during
the fiscal year ended September 30, 2009.
Balance sheets as at September 30, 2010, and September 30, 2009
The following table summarizes balance sheet information as at September 30, 2010, compared to
September 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at September 30, |
|
|
|
|
(in millions of U.S. dollars) |
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
% |
|
Cash and cash equivalents |
|
|
161.5 |
|
|
|
126.4 |
|
|
|
35.1 |
|
|
|
27.8 |
|
Current assets |
|
|
226.7 |
|
|
|
250.7 |
|
|
|
(24.0 |
) |
|
|
(9.6 |
) |
Total assets |
|
|
713.2 |
|
|
|
914.6 |
|
|
|
(201.4 |
) |
|
|
(22.0 |
) |
Current liabilities |
|
|
111.3 |
|
|
|
121.0 |
|
|
|
(9.7 |
) |
|
|
(8.0 |
) |
Long-term debt |
|
|
581.3 |
|
|
|
582.6 |
|
|
|
(1.3 |
) |
|
|
(0.2 |
) |
Total liabilities |
|
|
734.2 |
|
|
|
750.8 |
|
|
|
(16.6 |
) |
|
|
(2.2 |
) |
Shareholders equity (deficiency) |
|
|
(21.0 |
) |
|
|
163.8 |
|
|
|
(184.8 |
) |
|
|
(112.8 |
) |
Working capital |
|
|
115.4 |
|
|
|
129.7 |
|
|
|
(14.3 |
) |
|
|
(11.0 |
) |
Working capital decreased by $14.3 million (11.0%) to $115.4 million as at September 30, 2010, from
$129.7 million as at September 30, 2009. This decrease was mainly due to net working capital
adjustments of $59.6 million related to the unapproved PEPs event. This decrease was partially
offset by an increase in cash and cash equivalents of $35.1 million from operating activities and
the reduction in installments on long-term debt. Pursuant to our credit agreement we are required
to annually prepay amounts equal to a portion of our annual excess cash flow, as defined under our
credit agreement. For fiscal year 2010, we will be required to offer to prepay $13.2 million of
outstanding term loans in the first quarter of fiscal year 2011 ($17.6 million for the fiscal year
ended September 30, 2009, was paid in the first quarter of fiscal year 2010). As allowed by the
credit agreement, the prepayment is applied to the remaining scheduled installments of principal in
direct order of maturity and the current portion of long-term debt was reduced accordingly.
Total assets decreased $201.4 million (22.0%) to $713.2 million as at September 30, 2010, from
$914.6 million as at September 30, 2009. This decrease was mainly due to the adjustments related to
the unapproved PEPs event amounting to $165.9 million. Long-term debt decreased $1.3 million (0.2%)
to $581.3 million as at September 30, 2010, from $582.6 million as at September 30, 2009.
-62-
Fiscal year ended September 30, 2009, compared to fiscal year ended September 30, 2008
Overview of results of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
For the |
|
|
|
|
|
|
For the fiscal |
|
|
For the fiscal |
|
|
seven-month |
|
|
five-month |
|
|
|
|
|
|
year ended |
|
|
year ended |
|
|
period ended |
|
|
period ended |
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
February 25, |
|
|
|
|
(in millions of U.S. dollars) |
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
Change |
|
|
|
|
|
|
|
Non U.S. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor/ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
Successor |
|
|
Successor |
|
|
Predecessor |
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
% |
|
Net product sales |
|
|
409.8 |
|
|
|
381.8 |
|
|
|
223.2 |
|
|
|
158.6 |
|
|
|
28.0 |
|
|
|
7.3 |
|
Other revenue |
|
|
7.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.1 |
|
|
|
|
|
|
Total revenue |
|
|
416.9 |
|
|
|
381.8 |
|
|
|
223.2 |
|
|
|
158.6 |
|
|
|
35.1 |
|
|
|
9.2 |
|
|
Cost of goods sold a) |
|
|
103.0 |
|
|
|
115.9 |
|
|
|
77.2 |
|
|
|
38.7 |
|
|
|
(12.9 |
) |
|
|
(11.1 |
) |
Selling and administration
expenses a) |
|
|
122.9 |
|
|
|
164.4 |
|
|
|
88.2 |
|
|
|
76.2 |
|
|
|
(41.5 |
) |
|
|
(25.2 |
) |
Management fees |
|
|
5.4 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
|
|
|
|
5.3 |
|
|
|
5,300.0 |
|
Research and development
expenses a) |
|
|
36.0 |
|
|
|
28.1 |
|
|
|
17.8 |
|
|
|
10.3 |
|
|
|
7.9 |
|
|
|
28.1 |
|
Acquired in-process research |
|
|
|
|
|
|
272.4 |
|
|
|
272.4 |
|
|
|
|
|
|
|
(272.4 |
) |
|
|
(100.0 |
) |
Depreciation and amortization |
|
|
60.3 |
|
|
|
45.2 |
|
|
|
35.6 |
|
|
|
9.6 |
|
|
|
15.1 |
|
|
|
33.4 |
|
Partial write-down of intangible
assets |
|
|
55.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55.7 |
|
|
|
|
|
|
Total operating expenses |
|
|
383.3 |
|
|
|
626.1 |
|
|
|
491.3 |
|
|
|
134.8 |
|
|
|
(242.8 |
) |
|
|
(38.8 |
) |
|
Operating income (loss) |
|
|
33.6 |
|
|
|
(244.3 |
) |
|
|
(268.1 |
) |
|
|
23.8 |
|
|
|
277.9 |
|
|
|
113.8 |
|
|
Financial expenses |
|
|
69.8 |
|
|
|
41.8 |
|
|
|
41.5 |
|
|
|
0.3 |
|
|
|
28.0 |
|
|
|
67.0 |
|
Interest income |
|
|
(0.4 |
) |
|
|
(6.2 |
) |
|
|
(0.8 |
) |
|
|
(5.4 |
) |
|
|
5.8 |
|
|
|
93.5 |
|
Other income |
|
|
(3.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3.5 |
) |
|
|
|
|
Gain on foreign currencies |
|
|
(0.3 |
) |
|
|
(2.0 |
) |
|
|
(1.8 |
) |
|
|
(0.2 |
) |
|
|
1.7 |
|
|
|
85.0 |
|
|
Total other expenses (income) |
|
|
65.6 |
|
|
|
33.6 |
|
|
|
38.9 |
|
|
|
(5.3 |
) |
|
|
32.0 |
|
|
|
95.2 |
|
|
Income (loss) before income taxes |
|
|
(32.0 |
) |
|
|
(277.9 |
) |
|
|
(307.0 |
) |
|
|
29.1 |
|
|
|
245.9 |
|
|
|
88.5 |
|
Income taxes expense (benefit) |
|
|
(24.1 |
) |
|
|
(5.7 |
) |
|
|
(17.7 |
) |
|
|
12.0 |
|
|
|
(18.4 |
) |
|
|
(322.8 |
) |
|
Net income (loss) |
|
|
(7.9 |
) |
|
|
(272.2 |
) |
|
|
(289.3 |
) |
|
|
17.1 |
|
|
|
264.3 |
|
|
|
97.1 |
|
|
|
|
|
a) |
|
Exclusive of depreciation and amortization |
Net product sales
For the fiscal year ended September 30, 2009, revenue was $409.8 million compared to $381.8 million
for the preceding fiscal year, an increase of 7.3%.
The increase was primarily derived from higher sales in the U.S., which amounted to $319.6 million
for the fiscal year ended September 30, 2009, compared to $280.4 million for the fiscal year ended
September 30, 2008, an increase of 14.0%. The increase in sales in the U.S. is mainly due to the
combined effect of price increases on our products announced during the fiscal year and a change in
prescription rates for these products compared to the previous fiscal year. It was partially offset
by increases in sales deduction as well as the decreases in sale of certain of our URSO branded
products resulting from the entry of generic versions of URSO 250 and URSO FORTE on the U.S.
market, approved by the Office of Generic Drugs on May 13, 2009. On July 2, 2009, Axcan and Prasco
Laboratories announced that they had entered into an agreement under which Prasco would market and
sell an authorized generic of URSO 250 and URSO FORTE in the U.S. market. In addition,
we also announced a price increase for our URSO products in the United States. Despite measures
taken to defend our URSO franchise in this market, we expect future sales to continue to decline.
Net product sales in the European Union decreased 11.1%, from $66.0 million for the fiscal year
ended September 30, 2008, to $58.7 million for the fiscal year ended September 30, 2009. The
decline in sales resulted principally from the negative impact of currency fluctuations compared to
the preceding fiscal year as the value of the Euro depreciated against the U.S. dollar by 11.6%.
Net product sales in Canada decreased 11.5% from $34.9 million for the fiscal year ended September
30, 2008, to $30.9 million for the fiscal year ended September 30, 2009. The decline in sales
resulted from the negative impact of currency fluctuations compared to the preceding fiscal
year as the value of the Canadian dollar depreciated against the U.S. dollar by 17.0% partially
offset by an increase in sales of SALOFALK products.
-63-
Net product sales are stated net of deductions for product returns, chargebacks, contract rebates,
DSA fees, discounts and other allowances. The following table summarizes our gross-to-net product
sales adjustments for each significant category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal |
|
|
For the fiscal |
|
|
|
|
|
|
year ended |
|
|
year ended |
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
(in millions of U.S. dollars) |
|
2009 |
|
|
2008 |
|
|
Change |
|
|
|
|
|
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor/ |
|
|
|
|
|
|
|
|
|
Successor |
|
|
Successor |
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
% |
|
Gross product sales |
|
|
503.1 |
|
|
|
447.1 |
|
|
|
56.0 |
|
|
|
12.5 |
|
|
Gross-to-net product sales adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product returns |
|
|
10.7 |
|
|
|
9.2 |
|
|
|
1.5 |
|
|
|
16.3 |
|
Chargebacks |
|
|
33.7 |
|
|
|
20.6 |
|
|
|
13.1 |
|
|
|
63.6 |
|
Contract rebates |
|
|
36.5 |
|
|
|
25.3 |
|
|
|
11.2 |
|
|
|
44.3 |
|
DSA fees |
|
|
3.6 |
|
|
|
2.1 |
|
|
|
1.5 |
|
|
|
71.4 |
|
Discounts and other allowances |
|
|
8.8 |
|
|
|
8.1 |
|
|
|
0.7 |
|
|
|
8.6 |
|
|
Total gross-to-net product sales
adjustments |
|
|
93.3 |
|
|
|
65.3 |
|
|
|
28.0 |
|
|
|
42.9 |
|
|
Total net product sales |
|
|
409.8 |
|
|
|
381.8 |
|
|
|
28.0 |
|
|
|
7.3 |
|
|
Product returns, chargebacks, contract rebates, DSA fees, discounts and other allowances totalled
$93.3 million (18.5% of gross product sales) for the fiscal year ended September 30, 2009, and
$65.3 million (14.6% of gross product sales) for the fiscal year ended September 30, 2008. The
increase in total deductions as a percentage of gross product sales was partly due to an increase
of 2.1% in chargebacks and 1.6% in contract rebates. The increase in chargebacks and contract
rebates is primarily due to the fact that we have fixed price contracts with certain third party
payors which, as a result of price increases announced during the fiscal year, resulted in a
greater rebate as a percentage of sales being awarded under those contracts. Estimated chargebacks
and rebates are recorded at the time revenue is recognized and are based on the latest information
available at that time, including estimated inventory levels in the distribution channel.
Furthermore, as a result of the approval of generic version of our URSO products in the U.S., we
expect the future sales of our URSO product line to be significantly less than historical sales. As
at September 30, 2009, an additional reserve of $1.9 million was recorded to reflect our estimated
liability for URSO related chargebacks and rebates. This estimate was developed based on the
following:
|
|
our estimate of future demand for URSO based on the actual erosion of product demand for
several comparable products that were previously genericized, and the actual demand for URSO
experienced during 2009 subsequent to the generic approvals and launch; |
|
|
|
our estimate of chargeback and rebate activity based on actual chargeback and rebate
activity during fiscal year 2009 subsequent to the generic approvals and launch; and |
|
|
|
other relevant factors. |
Deductions also increased due to increases in DSA fees resulting from new DSA agreements signed
with two additional U.S. wholesalers during the fiscal year 2009.
Performance of our main product lines
Variations in sales performance in fiscal year 2009 versus the preceding fiscal year were the
result of a combination of sales volume and price increases.
Key sales figures for our main product lines for the fiscal year 2009 were as follows:
|
|
Sales of pancreatic enzyme products (ULTRASE, PANZYTRAT and VIOKASE) amounted to $112.8
million, an increase of 24.1% over fiscal year 2008. Sales during the fiscal year were
favorably affected by an increase in both price and prescription volumes. Most unbranded
pancreatic enzyme products for which a new drug application (NDA) had not been submitted by
April 2009 have been withdrawn from the market, leaving room for ULTRASE and VIOKASE to
capture a portion of their market share in the U.S. market. |
|
|
|
Sales of ursodiol products (URSO, URSO 250, URSO FORTE, URSO DS and DELURSAN,) decreased
19.9% from fiscal year 2008 to $73.9 million. This decrease resulted from the entry of generic
versions of URSO 250 and URSO FORTE on the U.S. market, approved by the Office of Generic
Drugs on May 13, 2009. This decrease was partially offset by price increases announced on our
URSO 250 and URSO FORTE branded products, and by sales generated from the launch of
our authorized generic version of these ursodiol products. |
|
|
|
Sales of mesalamine products (CANASA and SALOFALK) amounted to $103.7 million, a 11.3%
increase from the prior fiscal year. The increase was attributed to price increases announced
during the fiscal year. |
-64-
|
|
Sales of sucralfate products (CARAFATE and SULCRATE) amounted to $68.5 million, an increase
of 30.5% over the prior fiscal year. The increase mainly resulted from price increases
announced during the fiscal year and from an increase in prescription volumes. |
|
|
|
Sales of other products amounted to $50.9 million, a 3.6% decrease over the prior fiscal
year. This decrease mainly results from foreign exchange effect on foreign denominated sales. |
Other revenue
In April 2009, we entered into a license agreement with a leading multi-national company (the
Licensee) whereby we granted the Licensee the right to use the active ingredient contained in one
of our commercialized products, LACTEOL, to develop and commercialize new food products that will
contain this active ingredient. Under the terms of the agreement, the Licensee will have exclusive
rights to commercialize these new products. We will continue to own all other rights related to the
active ingredient, including the right to use the active ingredient and develop, manufacture and
commercialize non-food products containing the active ingredient, including pharmaceutical
products. For the fiscal year ended September 30, 2009, we recorded as revenue milestones that we
are entitled to receive under the agreements in the amount of $7.1 million.
Cost of goods sold
Cost of goods sold consists principally of the costs of raw materials, royalties and manufacturing.
We outsource most of our manufacturing requirements. For the fiscal year ended September 30, 2009,
cost of goods sold decreased $12.9 million (11.1%) to $103.0 million from $115.9 million for the
preceding fiscal year. As a percentage of net product sales, cost of goods sold for the fiscal year
ended September 30, 2009, decreased as compared to the preceding fiscal year from 30.4% to 25.1%.
As part of the purchase price allocation for the Acquisition, the book value of inventory acquired
was stepped-up to fair value by $22.7 million as of February 25, 2008. The stepped-up value was
recorded in fiscal year 2008 as a charge to cost of goods sold until acquired inventory was sold.
Without this additional charge, cost of goods sold as a percentage of net product sales would have
been 24.4% for the fiscal year ended September 30, 2008. During fiscal year 2009, we also incurred
a charge of $3.1 million related to the carrying value of certain of our third party manufactured
inventory.
Selling and administrative expenses
Selling and administrative expenses, on an ongoing basis, consist principally of salaries and other
costs associated with our sales force and marketing activities. For the fiscal year ended September
30, 2009, selling and administrative expenses decreased $41.5 million (25.2%) to $122.9 million
from $164.4 million for the preceding fiscal year. This decrease in selling and administrative
expenses is largely attributable to the portion of investment banking and other professional fees
charged to operations amounting to $42.2 million and the selling and administrative portion of
stock-based compensation expenses amounting to $10.8 million both incurred in relation to the
Acquisition and charged in the previous fiscal year, partially offset by an increase in sales force
and direct marketing expenses incurred in the fiscal year ended September 30, 2009, as well as the
favourable effect of foreign exchange on expenses incurred in our European and Canadian operations.
Management fees
Management fees consist of fees and other charges associated with the Management Services Agreement
with TPG. These fees were previously unallocated to subsidiaries of Axcan Holdings Inc., the
indirect parent company of Axcan Intermediate Holdings Inc. As of September 30, 2009, they were
allocated from the closing date of February 2008 Transactions based on revenue. For the fiscal year
ended September 30, 2009, management fees amounted to $5.4 million, an increase of $5.3 million
from of the preceding fiscal year.
Research and development expenses
Research and development expenses consist principally of fees paid to outside parties that we use
to conduct clinical studies and to submit governmental approval applications on our behalf, as well
as the salaries and benefits paid to personnel involved in research and development projects. For
the fiscal year ended September 30, 2009, research and development expenses increased $7.9 million
(28.1%) to $36.0 million, from $28.1 million for the preceding fiscal year. This increase is mainly
due to the development work and regulatory submission costs on pancreatic enzyme products and
European clinical trial costs for PYLERA and professional fees related to strategic portfolio
analysis. The increase is partially offset by the effect of foreign currency fluctuations on some
of our expenses incurred in Canadian dollars and in Euros.
Acquired in-process research
The acquired in-process research of $272.4 million for the fiscal year ended September 30, 2008,
relates to the intangible assets acquired in the Acquisition. The acquired in-process research
represents the estimated fair value of acquired in-process R&D projects that had not yet reached
technological feasibility at the time of the Acquisition and had no alternative future use.
Accordingly, this amount was immediately expensed upon the Acquisition date. The value assigned to
purchased in-process technology is mainly attributable to the following projects: CANASA MAX002,
pancreatic enzymes, PYLERA in the European Union and Cx401.
-65-
Depreciation and amortization
Depreciation and amortization consists principally of the amortization of intangible assets with a
finite life. Intangible assets include trademarks, trademark licenses and manufacturing rights. For
the fiscal year ended September 30, 2009, depreciation and amortization increased $15.1 million
(33.4%) to $60.3 million from $45.2 million for the preceding fiscal year. The increase for the
fiscal year is due to the amortization of the stepped-up value of the intangible assets which were
classified as intangible assets with a finite life following the February 2008 Transactions.
Partial write-down of intangible assets
We assess the impairment of identifiable intangible assets whenever events or changes in
circumstances indicate that the carrying value might not be recoverable. As a result of certain
factors related to the ongoing marketing of certain of our products including the approval of a
generic formulation of URSO 250 and URSO FORTE, we reviewed the carrying amount of our intangible
assets specifically related to these products. During the fiscal year ended September 30, 2009,
based on a discounted cash-flow analysis and market prices, we concluded that a $55.7 million
reduction to the carrying value of the related intangible assets totalling $83.7 million prior to
the write-down was required. In addition, the remaining amortizable life of these intangible assets
was reduced to periods ranging from 6 months to 14 years.
Financial expenses
Financial expenses consist principally of interest and fees paid in connection with funds borrowed
for acquisitions. For the fiscal year ended September 30, 2009, financial expenses increased $28.0
million (67.0%) to $69.8 million from $41.8 million for the preceding fiscal year. This increase is
mainly due to an increase in the interest on long-term debt of $25.2 million to $61.8 million from
$36.6 million for the preceding fiscal year due to the length of time the debt was outstanding in
the comparable period last fiscal year.
Interest income
For the fiscal year ended September 30, 2009, total interest income decreased $5.8 million (93.5%)
to $0.4 million from $6.2 million from the preceding fiscal year. This decrease is mainly due to
the reduction in short-term investments resulting from the use of cash on hand for the February
2008 Transactions as well as lower rates paid on short-term investments compared to the previous
fiscal year.
Other income
We initiated claims in damages under the US Lanham Act against a number of defendants alleging they
falsely advertised their products to be similar or equivalent to ULTRASE. During the fiscal year
ended September 30, 2009, a settlement arrangement with respect to this claim was entered into with
certain of these defendants. Pursuant to the agreement, the settling defendants agreed to pay a
confidential global amount in several installments; the first installment, in the amount of $3.5
million was paid to us upon execution of the settlement agreement.
Income taxes
For the fiscal year ended September 30, 2009, income taxes benefits amounted to $24.1 million,
compared to $5.7 million for the preceding fiscal year. The effective tax rate was 75.3% for the
fiscal year ended September 30, 2009, compared to 2.1% for the fiscal year ended September 30,
2008. The effective tax rate for the fiscal year ended September 30, 2009, is affected by a number
of elements, the most important being the tax benefit arising from a financing structure. The
effective tax rate for the fiscal year ended September 30, 2008, was also greatly affected by the
non-deductible nature of the acquired in-process research expense amounting to $272.4 million
resulting from the Acquisition. If the effect of the acquired in-process research was removed, the
effective tax rate would have been 104.8%. The difference in our effective income tax rate and the
statutory income tax rate is summarized below:
-66-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
For the |
|
|
|
fiscal year ended |
|
|
fiscal year ended |
|
|
|
September 30, |
|
|
September 30, |
|
(in millions of US dollars) |
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
Predecessor/ |
|
|
|
Successor |
|
|
Successor |
|
|
|
% |
|
|
$ |
|
|
% |
|
|
$ |
|
Combined statutory rate applied to pre-tax
income (loss) |
|
|
35.00 |
|
|
|
(11.2 |
) |
|
|
35.33 |
|
|
|
(98.2 |
) |
Increase (decrease) in taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in promulgated rates |
|
|
(0.91 |
) |
|
|
0.3 |
|
|
|
(0.01 |
) |
|
|
|
|
Difference with foreign tax rates |
|
|
8.10 |
|
|
|
(2.6 |
) |
|
|
(0.64 |
) |
|
|
1.8 |
|
Tax benefit arising from a financing structure |
|
|
44.46 |
|
|
|
(14.2 |
) |
|
|
3.24 |
|
|
|
(9.0 |
) |
Non-deductible items |
|
|
(9.72 |
) |
|
|
3.1 |
|
|
|
(36.82 |
) |
|
|
102.3 |
|
Non-taxable items |
|
|
|
|
|
|
|
|
|
|
0.01 |
|
|
|
|
|
Investment tax credits |
|
|
4.24 |
|
|
|
(1.3 |
) |
|
|
0.60 |
|
|
|
(1.6 |
) |
State taxes |
|
|
(0.34 |
) |
|
|
0.1 |
|
|
|
1.43 |
|
|
|
(4.0 |
) |
Valuation allowance |
|
|
(2.30 |
) |
|
|
0.7 |
|
|
|
|
|
|
|
|
|
Other |
|
|
(3.22 |
) |
|
|
1.0 |
|
|
|
(1.09 |
) |
|
|
3.0 |
|
|
|
|
|
75.31 |
|
|
|
(24.1 |
) |
|
|
2.05 |
|
|
|
(5.7 |
) |
|
Net income
For the fiscal year ended September 30, 2009, net loss was $7.9 million compared to a net loss of
$272.2 million the preceding fiscal year. The decrease of $264.3 million in net loss resulted
mainly from a decrease in operating expenses of $242.8 million largely comprised of the acquired
in-process research expenses of $272.4 million for the fiscal year ended September 30, 2008. This
increase in net loss was offset by an increase in total revenue of $35.1 million, and an increase
of income taxes benefit of $18.4 million which were partly offset by an increase in financial
expenses of $28.0 million and the partial write-down of intangible assets of $55.7 million.
Balance sheets as at September 30, 2009, and September 30, 2008
The following table summarizes balance sheet information as at September 30, 2009, compared to
September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at September 30, |
|
|
|
|
(in millions of U.S. dollars) |
|
2009 |
|
|
2008 |
|
|
Change |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
% |
|
Cash and cash equivalents |
|
|
126.4 |
|
|
|
56.1 |
|
|
|
70.3 |
|
|
|
125.3 |
|
Current assets |
|
|
250.7 |
|
|
|
177.0 |
|
|
|
73.7 |
|
|
|
41.6 |
|
Total assets |
|
|
914.6 |
|
|
|
944.8 |
|
|
|
(30.2 |
) |
|
|
(3.2 |
) |
Current liabilities |
|
|
121.0 |
|
|
|
99.3 |
|
|
|
21.7 |
|
|
|
21.9 |
|
Long-term debt |
|
|
582.6 |
|
|
|
611.2 |
|
|
|
(28.6 |
) |
|
|
(4.7 |
) |
Total liabilities |
|
|
750.8 |
|
|
|
779.1 |
|
|
|
(28.3 |
) |
|
|
(3.6 |
) |
Shareholders equity |
|
|
163.8 |
|
|
|
165.7 |
|
|
|
(1.9 |
) |
|
|
(1.1 |
) |
Working capital |
|
|
129.7 |
|
|
|
77.7 |
|
|
|
52.0 |
|
|
|
66.9 |
|
Our cash and cash equivalents increased by $70.3 million (125.3%) to $126.4 million as at September
30, 2009, from $56.1 million as at September 30, 2008. As at September 30, 2009, working capital
was $129.7 million, compared to $77.7 million as at September 30, 2008, an increase of $52.0
million (66.9%). This increase was mainly derived from cash flow generated from operations.
Total assets decreased $30.2 million (3.2%) to $914.6 million as at September 30, 2009, from $944.8
million as at September 30, 2008 partially due to the partial write-down of intangible assets in
the amount of $55.7. Long-term debt decreased $28.6 million (4.7%) to $582.6 million as at
September 30, 2009, from $611.2 million as at September 30, 2008 mostly due to the reclassification
of $17.6 million from long-term debt to short-term debt. Pursuant to the annual excess cash flow
requirements defined in the credit agreement, we are required to make an offer to prepay $17.6
million of outstanding term loans in the first quarter of fiscal year 2010. For fiscal year 2008,
we were not required to prepay any outstanding term loans pursuant to the annual excess cash flow
requirements. Shareholders equity decreased $1.9 million (1.1%) to $163.8 million as at September
30, 2009, from $165.7 million as at September 30, 2008.
-67-
Selected quarterly financial data
The following tables present selected quarterly financial data for the fiscal years ended September
30, 2010, and 2009 and should be read in conjunction with our historical audited consolidated
financial statements and related notes contained elsewhere in this Annual Report. Our operating
results for any quarter are not necessarily indicative of results for any future quarter or for a
full fiscal year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarters ended |
|
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
(in millions of U.S. dollars) |
|
2010 |
|
|
2010 |
|
|
2010 |
|
|
2009 |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Net product sales b) |
|
|
69.6 |
|
|
|
80.5 |
|
|
|
94.4 |
|
|
|
110.1 |
|
|
Cost of goods sold a) b) |
|
|
15.3 |
|
|
|
20.8 |
|
|
|
68.2 |
|
|
|
26.6 |
|
Selling and administration expenses a) b) |
|
|
27.0 |
|
|
|
27.4 |
|
|
|
28.4 |
|
|
|
32.2 |
|
Management fees |
|
|
1.9 |
|
|
|
0.6 |
|
|
|
1.0 |
|
|
|
0.9 |
|
Research and development expenses a) |
|
|
7.0 |
|
|
|
8.6 |
|
|
|
7.7 |
|
|
|
8.4 |
|
Acquired in-process research |
|
|
|
|
|
|
8.0 |
|
|
|
|
|
|
|
- |
|
Depreciation and amortization |
|
|
15.2 |
|
|
|
15.1 |
|
|
|
14.0 |
|
|
|
16.7 |
|
Impairment of intangible assets and goodwill
b) |
|
|
|
|
|
|
|
|
|
|
107.2 |
|
|
|
- |
|
|
Total operating expenses |
|
|
66.4 |
|
|
|
80.5 |
|
|
|
226.5 |
|
|
|
84.8 |
|
|
Operating income (loss) |
|
|
3.2 |
|
|
|
|
|
|
|
(132.1 |
) |
|
|
25.3 |
|
|
Financial expenses |
|
|
16.2 |
|
|
|
16.3 |
|
|
|
16.3 |
|
|
|
16.2 |
|
Interest income |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
(0.1 |
) |
Other income |
|
|
(2.0 |
) |
|
|
|
|
|
|
(7.7 |
) |
|
|
|
|
Loss (gain) on foreign currencies |
|
|
0.6 |
|
|
|
(0.8 |
) |
|
|
1.4 |
|
|
|
|
|
|
Total other expenses |
|
|
14.6 |
|
|
|
15.3 |
|
|
|
9.8 |
|
|
|
16.1 |
|
|
Income (loss) before income taxes |
|
|
(11.4 |
) |
|
|
(15.3 |
) |
|
|
(141.9 |
) |
|
|
9.2 |
|
Income taxes expense (benefit) |
|
|
(5.2 |
) |
|
|
(5.4 |
) |
|
|
21.8 |
|
|
|
(0.2 |
) |
|
Net income (loss) |
|
|
(6.2 |
) |
|
|
(9.9 |
) |
|
|
(163.7 |
) |
|
|
9.4 |
|
|
EBITDA c) |
|
|
19.8 |
|
|
|
15.9 |
|
|
|
(111.8 |
) |
|
|
42.0 |
|
Adjusted EBITDA (c) |
|
|
24.5 |
|
|
|
41.7 |
|
|
|
50.0 |
|
|
|
46.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarters ended |
|
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
(in millions of U.S. dollars) |
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2008 |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Net product sales |
|
|
84.2 |
|
|
|
100.9 |
|
|
|
120.6 |
|
|
|
104.1 |
|
Other revenue |
|
|
1.9 |
|
|
|
5.2 |
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
86.1 |
|
|
|
106.1 |
|
|
|
120.6 |
|
|
|
104.1 |
|
|
Cost of goods sold (a) |
|
|
26.0 |
|
|
|
22.1 |
|
|
|
29.4 |
|
|
|
25.5 |
|
Selling and administration
expenses (a) |
|
|
30.5 |
|
|
|
28.6 |
|
|
|
31.8 |
|
|
|
32.0 |
|
Management fees |
|
|
0.5 |
|
|
|
4.7 |
|
|
|
|
|
|
|
0.2 |
|
Research and development
expenses (a) |
|
|
9.2 |
|
|
|
10.7 |
|
|
|
9.1 |
|
|
|
7.0 |
|
Depreciation and amortization |
|
|
16.5 |
|
|
|
14.8 |
|
|
|
14.5 |
|
|
|
14.5 |
|
Partial write-down of intangible
assets |
|
|
|
|
|
|
55.7 |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
82.7 |
|
|
|
136.6 |
|
|
|
84.8 |
|
|
|
79.2 |
|
|
Operating income (loss) |
|
|
3.4 |
|
|
|
(30.5 |
) |
|
|
35.8 |
|
|
|
24.9 |
|
|
Financial expenses |
|
|
16.8 |
|
|
|
16.7 |
|
|
|
17.0 |
|
|
|
19.3 |
|
Interest income |
|
|
(0.1 |
) |
|
|
|
|
|
|
(0.1 |
) |
|
|
(0.2 |
) |
Other income |
|
|
|
|
|
|
(3.5 |
) |
|
|
|
|
|
|
|
|
Loss (gain) on foreign currency |
|
|
0.8 |
|
|
|
(0.8 |
) |
|
|
(0.4 |
) |
|
|
0.1 |
|
|
Total other expenses |
|
|
17.5 |
|
|
|
12.4 |
|
|
|
16.5 |
|
|
|
19.2 |
|
|
Income (loss) before income taxes |
|
|
(14.1 |
) |
|
|
(42.9 |
) |
|
|
19.3 |
|
|
|
5.7 |
|
Income taxes expense (benefit) |
|
|
(5.4 |
) |
|
|
(21.5 |
) |
|
|
2.2 |
|
|
|
0.6 |
|
|
Net income (loss) |
|
|
(8.7 |
) |
|
|
(21.4 |
) |
|
|
17.1 |
|
|
|
5.1 |
|
|
EBITDA c) |
|
|
19.1 |
|
|
|
(11.4 |
) |
|
|
50.7 |
|
|
|
39.3 |
|
Adjusted EBITDA c) |
|
|
21.2 |
|
|
|
55.6 |
|
|
|
54.1 |
|
|
|
41.9 |
|
|
|
|
a) |
|
Exclusive of depreciation and amortization |
|
b) |
|
Including one time charges related to the unapproved PEPs event |
-68-
|
|
|
c) |
|
A reconciliation of net income to EBITDA (a-non U.S. GAAP measure) and from EBITDA to
Adjusted EBITDA (a-non U.S. GAAP measure) for each of the quarters ended in 2010 and 2009 is
as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarters ended |
|
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
(in millions of U.S. dollars) |
|
2010 |
|
|
2010 |
|
|
2010 |
|
|
2009 |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Net income (loss) |
|
|
(6.2 |
) |
|
|
(9.9 |
) |
|
|
(163.7 |
) |
|
|
9.4 |
|
Financial expenses |
|
|
16.2 |
|
|
|
16.3 |
|
|
|
16.3 |
|
|
|
16.2 |
|
Interest income |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
(0.1 |
) |
Income taxes expense (benefit) |
|
|
(5.2 |
) |
|
|
(5.4 |
) |
|
|
21.8 |
|
|
|
(0.2 |
) |
Depreciation and amortization |
|
|
15.2 |
|
|
|
15.1 |
|
|
|
14.0 |
|
|
|
16.7 |
|
|
EBITDA h) |
|
|
19.8 |
|
|
|
15.9 |
|
|
|
(111.8 |
) |
|
|
42.0 |
|
|
Transaction, integration, refinancing costs and payments to third parties a) |
|
|
3.5 |
|
|
|
1.1 |
|
|
|
2.6 |
|
|
|
1.8 |
|
Management fees b) |
|
|
1.9 |
|
|
|
0.6 |
|
|
|
1.0 |
|
|
|
0.9 |
|
Stock-based compensation expense excluding impact of the unapproved PEPs event
c) |
|
|
(0.7 |
) |
|
|
1.2 |
|
|
|
2.5 |
|
|
|
1.5 |
|
Impairment of intangible assets and goodwill related to the unapproved PEPs event
d) |
|
|
|
|
|
|
|
|
|
|
107.2 |
|
|
|
|
|
Other adjustments related to the unapproved PEP event f) |
|
|
|
|
|
|
14.9 |
|
|
|
48.5 |
|
|
|
|
|
Acquired in-process research g) |
|
|
|
|
|
|
8.0 |
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA h) |
|
|
24.5 |
|
|
|
41.7 |
|
|
|
50.0 |
|
|
|
46.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarters ended |
|
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
(in millions of U.S. dollars) |
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2008 |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Net income (loss) |
|
|
(8.7 |
) |
|
|
(21.4 |
) |
|
|
17.1 |
|
|
|
5.1 |
|
Financial expenses |
|
|
16.8 |
|
|
|
16.7 |
|
|
|
17.0 |
|
|
|
19.3 |
|
Interest income |
|
|
(0.1 |
) |
|
|
|
|
|
|
(0.1 |
) |
|
|
(0.2 |
) |
Income taxes expense (benefit) |
|
|
(5.4 |
) |
|
|
(21.5 |
) |
|
|
2.2 |
|
|
|
0.6 |
|
Depreciation and amortization |
|
|
16.5 |
|
|
|
14.8 |
|
|
|
14.5 |
|
|
|
14.5 |
|
|
EBITDA h) |
|
|
19.1 |
|
|
|
(11.4 |
) |
|
|
50.7 |
|
|
|
39.3 |
|
|
Transaction, integration, refinancing costs and
payments to third parties a) |
|
|
0.9 |
|
|
|
5.0 |
|
|
|
0.8 |
|
|
|
1.1 |
|
Management fees b) |
|
|
0.5 |
|
|
|
4.7 |
|
|
|
|
|
|
|
0.2 |
|
Stock-based compensation expense c) |
|
|
0.7 |
|
|
|
1.6 |
|
|
|
2.6 |
|
|
|
1.3 |
|
Partial write-down of intangible assets e) |
|
|
|
|
|
|
55.7 |
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA h) |
|
|
21.2 |
|
|
|
55.6 |
|
|
|
54.1 |
|
|
|
41.9 |
|
|
|
|
|
a) |
|
Represents integration and refinancing costs as well as due diligence costs related
to certain non-recurring transactions, payments to third parties in respect of research and
development milestones and other progress payments as defined within our credit agreement. |
|
b) |
|
Represents management fees and other charges associated with the Management Services
Agreement with TPG. |
|
c) |
|
Represents stock-based employee compensation expense under the provisions of FASB
guidance, excluding the impact of the unapproved PEPs event. |
|
d) |
|
Intangible assets and goodwill impairment charges related to the unapproved PEPs
event. |
|
e) |
|
Partial write-down of intangible assets related to URSO products. |
|
f) |
|
Adjustments and other charges related to the unapproved PEPs event, including an
additional product returns and other sales deduction provision of $23.4 million during the
fiscal year ended September 30, 2010, inventory net realizable value and accrual for purchases
and other materials and supply commitments of $44.9 million during the fiscal year ended September
30, 2010, and a stock-based compensation recovery of $4.9 million during the fiscal year ended
September 30, 2010. |
-69-
|
|
|
g) |
|
Represents the acquired in-process research. |
|
h) |
|
EBITDA and Adjusted EBITDA are both non-U.S. GAAP financial measures and are
presented in this report because our management considers them important supplemental measures
of our performance and believes that they are frequently used by interested parties in the
evaluation of companies in the industry. EBITDA, as we use it, is net income before financial
expenses, interest income, income taxes and depreciation and amortization. We believe that the
presentation of EBITDA enhances an investors understanding of our financial performance. We
believe that EBITDA is a useful financial metric to assess our operating performance from
period to period by excluding certain items that we believe are not representative of our core
business. The term EBITDA is not defined under U.S. GAAP, and EBITDA is not a measure of net
income, operating income or any other performance measure derived in accordance with U.S.
GAAP, and is subject to important limitations. Adjusted EBITDA, as we use it, is EBITDA
adjusted to exclude certain non-cash charges, unusual or non-recurring items and other
adjustments set forth below. Adjusted EBITDA is calculated in the same manner as EBITDA and
Consolidated EBITDA as those terms are defined under the indentures governing our notes and
Credit Facility further described in the section Liquidity and Capital Resources-Long-term
Debt and New Senior Secured Credit Facility. We believe that the inclusion of supplementary
adjustments applied to EBITDA in presenting Adjusted EBITDA are appropriate to provide
additional information to investors about certain material non-cash items and unusual or
non-recurring items that we do not expect to continue in the future and to provide additional
information with respect to our ability to meet our future debt service and to comply with
various covenants in our indentures and Credit Facility. Adjusted EBITDA is not a measure of
net income, operating income or any other performance measure derived in accordance with U.S.
GAAP, and is subject to important limitations. EBITDA and Adjusted EBITDA have limitations as
an analytical tool, and they should not be considered in isolation, or as substitutes for
analysis of our results as reported under U.S. GAAP. Some of these limitations are: |
|
|
|
EBITDA and Adjusted EBITDA do not reflect all cash expenditures, future requirements for
capital expenditures, or contractual commitments; |
|
|
|
|
EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, working
capital needs; |
|
|
|
|
EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash
requirements necessary to service interest or principal payments, on our debt; |
|
|
|
|
Although depreciation and amortization are non-cash charges, the assets being depreciated
and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA
do not reflect any cash requirements for such replacements; |
|
|
|
|
Adjusted EBITDA reflects additional adjustments as provided in the indentures governing
our secured and unsecured notes and new senior secured credit facilities; and |
|
|
|
|
Other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than
we do, limiting its usefulness as a comparative measure. |
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of
discretionary cash available to us to invest in our business. Our management compensates for these
limitations by relying primarily on the U.S. GAAP results and using EBITDA and Adjusted EBITDA as
supplemental information.
Liquidity and Capital Resources
Cash requirements
As at September 30, 2010, working capital was approximately $115.4 million and $129.7 as at
September 30, 2009. Cash generated from operations, which will be affected by the unapproved PEPs
event, is used to fund working capital, capital expenditures, milestone payments, debt service and
business development activities. We regularly review product and other acquisition opportunities
and may therefore require additional debt or equity financing. We cannot be certain that such
additional financing, if required, will be available on acceptable terms, or at all.
A significant portion of our sales are attributable to the ULTRASE and VIOKASE product lines. We
reported net sales of $37.8 million for ULTRASE and $15.6 million for VIOKASE for the
fiscal year ended September 30, 2010. Total net sales for these two products, which amounted to
$53.4 million, are net of the additional reserve of $23.4 million taken due to the effect of the
unapproved PEPs event.
The loss of revenues associated with these products is expected to continue to have a material
negative effect on our ability to generate cash used to fund our operations and meet our other
capital requirements. While there remain a number of uncertainties, including our ability to
re-introduce these products into the market, the timing of such re-introduction and the resulting
sales levels, management is currently evaluating the impact of the unapproved PEPs event on its
cash flows and measures it could take to mitigate the negative effect of the withdrawal of these
products on its cash flows.
There are
currently two rating agencies (Moodys and Standard &
Poors) rating AIHs debt. These ratings are revised from
time to time.
-70-
Contractual obligations and other commitments
The following table summarizes our significant contractual obligations as at September 30, 2010,
and the effect such obligations are expected to have on our liquidity and cash flows in future
years. This table excludes the payment of amounts already recorded on the balance sheet as current
liabilities as at September 30, 2010, and certain other purchase obligations as discussed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal years ending September 30, |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
(in millions of U.S. dollars) |
|
Total |
|
|
1 year |
|
|
1-3 years |
|
|
4-5 years |
|
|
5 years |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Long-term debt |
|
|
601.8 |
|
|
|
13.2 |
|
|
|
75.3 |
|
|
|
278.3 |
|
|
|
235.0 |
|
Operating leases |
|
|
5.7 |
|
|
|
2.4 |
|
|
|
2.7 |
|
|
|
0.6 |
|
|
|
|
|
Other commitments |
|
|
4.3 |
|
|
|
3.9 |
|
|
|
0.3 |
|
|
|
0.1 |
|
|
|
|
|
Interest on long-term debt |
|
|
271.6 |
|
|
|
56.1 |
|
|
|
112.3 |
|
|
|
90.7 |
|
|
|
12.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
883.4 |
|
|
|
75.6 |
|
|
|
190.6 |
|
|
|
369.7 |
|
|
|
247.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase orders for raw materials, finished goods and other goods and services are not included in
the above table. Management is not able to accurately determine the aggregate amount of such
purchase orders that represent contractual obligations, as purchase orders may represent
authorizations to purchase rather than binding agreements. For the purpose of this table,
contractual obligations for the purchase of goods or services are only included in other
commitments where there exist agreements that are legally binding and enforceable on us and that
specify all significant terms, including: fixed or minimum quantities to be purchased; fixed,
minimum or variable price provisions; and the approximate timing of the transaction. Our purchase
orders are based on current needs and are fulfilled by our vendors within relatively short
timetables. We do not have significant agreements for the purchase of raw materials or finished
goods specifying minimum quantities or set prices that exceed our short-term expected requirements.
We also enter into contracts for outsourced services; however, the obligations under these
contracts are not significant and the contracts generally contain clauses allowing for cancellation
without significant penalty. As milestone payments are primarily contingent upon successfully
achieving clinical milestones or on receiving regulatory approval for products under development,
they do not have defined maturities and therefore are not included in the above table.
The expected timing of payment of the obligations discussed above is estimated based on current
information. The timing of payments and actual amounts paid may differ depending on the timing of
receipt of goods or services, or, for some obligations, changes to agreed-upon amounts.
As more fully described in Note 7 to the consolidated financial statements, effective October 1,
2007, we adopted the provisions of the guidance issued by the FASB related to accounting for
uncertainty in income taxes. As at September 30, 2010, we had unrecognized tax benefits of $11.5
million ($10.4 million as at September 30, 2009). Due to the nature and timing of the ultimate
outcome of these uncertain tax positions, we cannot make a reasonably reliable estimate of the
amount and period of related future payments. Therefore, our unrecognized tax benefits with respect
to our uncertain tax positions has been excluded from the above contractual obligations table.
Long-term debt and Credit Facility
On November 29, 2007, we entered into an Arrangement Agreement with Axcan Pharma Inc., pursuant to
which we agreed to, through an indirect wholly-owned subsidiary, acquire all of the common stock of
Axcan Pharma Inc. and enter into various other transactions in accordance with the Plan of
Arrangement (the Arrangement). On February 25, 2008, we obtained various types of financing in
connection with the Arrangement. We issued $228.0 million aggregate principal amount of senior
secured notes (Senior Secured Notes). The Senior Secured Notes were priced at $0.98737 with a
yield to March 1, 2015, of 10%. The Senior Secured Notes rank pari passu with our Credit Facility.
-71-
We may redeem some or all of the Senior Secured Notes prior to March 1, 2011, at a redemption price
equal to 100% of the principal amount of the Senior Secured Notes redeemed plus a make-whole
premium and accrued and unpaid interest. On or after March 1, 2011, we may redeem some or all of
the Senior Secured Notes at the redemption prices (expressed as percentages of principal amount of
the Senior Secured Notes to be redeemed) set forth below:
|
|
|
|
|
Year |
|
% |
|
2011 |
|
|
106.938 |
|
2012 |
|
|
104.625 |
|
2013 |
|
|
102.313 |
|
2014 and thereafter |
|
|
100.000 |
|
Prior to March 1, 2011, we may also redeem up to 35% of the aggregate principal amount of the
Senior Secured Notes using the proceeds of one or more equity offerings at a redemption price equal
to 109.250% of the aggregate principal amount of the Senior Secured Notes plus accrued and unpaid
interest. If there is a change of control as specified in the indenture governing the senior notes,
we must offer to repurchase the Senior Secured Notes at a price in cash equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest.
We also obtained a Credit Facility for a total of $290.0 million composed of term loans totalling
$175.0 million and a revolving credit facility of $115.0 million. The Credit Facility bears
interest at a variable rate composed of either the Federal Funds Rate or the British Banker
Association LIBOR rate, at our option, plus the applicable rate based on our consolidated total
leverage ratio and certain of our subsidiaries for the preceding twelve months. The Credit Facility
matures on February 25, 2014, with quarterly payments on the term. As at September 30, 2010, $175.0
million of term loans had been issued and no amounts had been drawn against the revolving credit
facility. The term loans were priced at $0.96 with a yield to maturity of 8.75% before the effect
of the interest rate swaps as further disclosed in our consolidated financial statements. The
Credit Facility requires us to meet certain financial covenants, which were met as at September 30,
2010. The credit agreement governing the Credit Facility requires us to prepay outstanding term
loans contingent upon the occurrence of these events, subject to certain exceptions, with: (1) 100%
of the net cash proceeds of any incurrence of debt other than debt permitted under the Credit
Facility, (2) commencing with the fiscal year ending September 30, 2009, 50% (which percentage will
be reduced to 25% if the senior secured leverage ratio is less than a specified ratio) of the
annual excess cash flow (as defined in the credit agreement governing the Credit Facility) and (3)
100% of the net cash proceeds of all non-ordinary course asset sales or other dispositions of
property (including casualty events) by us or by our subsidiaries, subject to reinvestment rights
and certain other exceptions. Based on these requirements, for fiscal year 2010, we will be
required to offer to prepay $13.2 million of outstanding term loans in the first quarter of fiscal
year 2011 ($17.6 million for the fiscal year ended September 30, 2009, was paid in the first
quarter of fiscal year 2010). As allowed by the credit agreement, the prepayment is applied to the
remaining scheduled installments of principal in direct order of maturity and the current portion
of long-term debt was reduced accordingly.
On February 25, 2008, as part of the Arrangement financing, we also obtained $235.0 million in
financing under our senior unsecured bridge facility maturing on February 25, 2009. On May 6, 2008,
our senior unsecured bridge facility was refinanced on a long-term basis, by repaying the bridge
facility with the proceeds from our sale of $235.0 million aggregate principal amount of the Senior
Unsecured Notes. The senior notes were priced at $0.9884 with a yield to March 1, 2016 of 13.16%.
The Senior Unsecured Notes are subordinated to the Credit Facility and Senior Secured Notes.
We may redeem some or all of the senior notes prior to March 1, 2012, at a redemption price equal
to 100% of the principal amount of the Senior Unsecured Notes redeemed plus a make-whole premium
and accrued and unpaid interest. On or after March 1, 2012, we may redeem some or all of the Senior
Unsecured Notes at the redemption prices (expressed as percentages of principal amount of the
Senior Unsecured Notes to be redeemed) set forth below:
|
|
|
|
|
Year |
|
% |
|
2012 |
|
|
106.375 |
|
2013 |
|
|
103.188 |
|
2014 and thereafter |
|
|
100.000 |
|
Prior to March 1, 2011, we may also redeem up to 35% of the aggregate principal amount of the
secured senior notes using the proceeds of one or more equity offerings at a redemption price equal
to 112.750% of the aggregate principal amount of the Senior Unsecured Notes plus accrued and unpaid
interest. If there is a change of control as specified in the indenture governing the senior notes,
we must offer to repurchase the senior notes at a price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest.
Certain of our subsidiaries have been designated as guarantors with respect to the Credit Facility,
the Senior Secured Notes and the Senior Unsecured Notes. Our obligations under, and each of the
guarantors obligations under its guarantee of, the Credit Facility and the Senior Secured Notes
are secured by a first priority security interest in our assets and of such guarantor subsidiaries,
respectively.
-72-
We may from time to time seek to retire or purchase our outstanding debt through cash purchases in
open market purchases, privately negotiated transactions or otherwise. Such repurchases or
exchanges, if any, will depend on prevailing market conditions, our liquidity requirements,
contractual restrictions and other factors. The amounts involved may be material.
Operating leases
We have various long-term operating lease agreements for office space, automotive equipment and
other equipment. The latest expiry date for these agreements is in 2015.
Other commitments
Other operating commitments consist primarily of amounts relating to administrative services,
clinical studies and other research and development services.
Related party transactions
As at September 30, 2010, and September 30, 2009, we had a note receivable from our parent company
amounting to $133.2 million. During the fiscal year ended September 30, 2010, we earned interest
income on the note amounting to $7.8 million net of taxes amounting to $4.2 million ($7.8 million
net of taxes amounting to $4.2 million during the fiscal year ended September 30, 2009, and $4.7
million net of taxes amounting to $2.5 million during the seven-month period ended September 30,
2008) and the related interest receivable on the note receivable from our parent company amounting
to $27.1 million as at September 30, 2010, ($15.1 million as at September 30, 2009) has been
recorded in the shareholders equity section of the consolidated balance sheet. As at September 30,
2010, we have an account receivable from our parent company amounting to $0.5 million ($0.3 million
as at September 30, 2009).
During the fiscal year ended September 30, 2010, we recorded management fees from a controlling
shareholding company amounting to $4.4 million ($5.4 million during the fiscal year ended September
30, 2009, and we recorded fees amounting to $13.0 million of which $4.8 million was accounted for
as debt issue expenses, $6.1 million as transaction costs and $2.1 million as selling and
administrative expenses during the seven-month period ended September 30, 2008). As at September
30, 2010, we accrued fees payable to a controlling shareholding company amounting to $1.6 million
($0.4 million as at September 30, 2009).
During the fiscal year ended September 30, 2010, we paid a dividend to our parent company amounting
to $0.1 million ($0.5 million during the fiscal year ended September 30, 2009) to allow for the
payment of certain group expenses.
Balance sheet arrangements
We do not have any transactions, arrangements and other relationships with unconsolidated entities
that are likely to affect our operating results, our liquidity or capital resources. We have no
special purpose or limited purpose entities that provide off-balance sheet financing, liquidity or
market or credit risk support, and do not engage in leasing, hedging, research and development
services, or other relationships that expose us to liability that is not reflected on the face of
the consolidated financial statements.
Cash flows
Our cash flows from operating, investing and financing activities for the fiscal years ended
September 30, 2010, 2009 and 2008, as reflected in the consolidated statements of cash flows, are
summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of U.S. dollars) |
|
For the fiscal years ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
Predecessor/ |
|
|
|
Successor |
|
|
Successor |
|
|
Successor |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
Net cash provided by operating activities |
|
|
63.1 |
|
|
|
92.4 |
|
|
|
25.7 |
|
Net cash used by investing activities |
|
|
(6.1 |
) |
|
|
(10.6 |
) |
|
|
(834.9 |
) |
Net cash provided (used) by financing activities |
|
|
(21.3 |
) |
|
|
(11.6 |
) |
|
|
1,034.8 |
|
Cash flows provided by operating activities decreased $29.3 million to $63.1 million for the fiscal
year ended September 30, 2010, from $92.4 million for the fiscal year ended September 30, 2009. The
decrease in net cash provided by operating activities is mainly due to the decrease in net product
sales of $31.8 million during the fiscal year ended September 30, 2010, (net of the additional
provision in product returns of $23.4 million related to the unapproved PEPs event), compared to
the preceding fiscal year.
Cash flows used in investing activities decreased by $4.5 million to $6.1 million of cash used in
the fiscal year ended September 30, 2010, from $10.6 million of cash used in the fiscal year ended
September 30, 2009.
-73-
Cash flows used by financing activities increased $9.7 million to $21.3 million of cash used in the
fiscal year ended September 30, 2010, from $11.6 million of cash used in the fiscal year ended
September 30, 2009. The increase in cash used by financing activities in the fiscal year ended
September 30, 2010, is mainly due to the prepayment of $17.6 million of outstanding term-loans,
based on the annual excess cash flow requirements for the fiscal year 2009, as defined in the
credit agreement.
Significant accounting policies
Our consolidated financial statements are prepared in accordance with U.S. GAAP, applied on a
consistent basis. Some of our critical accounting policies require the use of judgment in their
application or require estimates of inherently uncertain matters. Therefore, a change in the facts
and circumstances of an underlying transaction could significantly change the application of our
accounting policies to that transaction, which could have an effect on our financial statements.
The policies that management believes are critical and require the use of complex judgment in their
application are discussed below.
Use of estimates
The preparation of financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the recorded amounts of assets
and liabilities and the disclosure of contingent assets and liabilities as at the date of the
financial statements and also affect the recognized amounts of revenues and expenses during the
fiscal year. Significant estimates and assumptions made by management include those related to the
charges to be recorded in conjunction with ceasing of distributing PEPs, allowances for accounts
receivable, inventories, reserves for product returns, rebates, chargebacks and DSA fees, the
classification of intangible assets between finite life and indefinite life, the useful lives of
long-lived assets, the expected cash flows used in evaluating long-lived assets, goodwill and
investments for impairment, stock based compensation costs, pending legal settlements and the
establishment of provisions for income taxes including the realizability of deferred tax assets.
The estimates are made using the historical information and various other relevant factors
available to management. We review all significant estimates affecting the financial statements on
a recurring basis and record the effect of any adjustments when necessary. Actual results could
differ from those estimates based upon future events, which could include, among other risks,
changes in regulations governing the manner in which we sell our products, changes in the
healthcare environment, foreign exchange and managed care consumption patterns.
The charges that we have recorded as a result of having ceased distribution of our PEPs also
reflect many subjective estimates that were required to be made by management. These estimates
include:
a) |
|
The quantity and expiration dates of PEPs inventory in the distribution channel; |
|
b) |
|
Short-term prescription demand during the period of time during which the products continued
to be available at the pharmacy-level; |
|
c) |
|
Assumptions regarding the probability of obtaining an eventual NDA approval for our PEPs and
the time required for such approval; |
|
d) |
|
Assumptions regarding market share growth after an eventual re-launch of our PEPs; and |
|
e) |
|
Other factors. |
In future periods, management will monitor and review the assumptions and estimates and will
prospectively record changes to provisions reflected in the current fiscal year.
Revenue recognition
Revenue is recognized when the product is delivered to our customers, provided we have not retained
any significant risks of ownership or future obligations with respect to the product delivered.
Provisions for sales discounts and estimates for chargebacks, managed care and Medicaid rebates,
product returns and DSA fees are established as a reduction of product sales revenues at the time
such revenues are recognized. These revenue reductions are established by us at the time of sale,
based on historical experience adjusted to reflect known changes in the factors that impact such
reserves. In certain circumstances, product returns are allowed under our policy and provisions are
maintained accordingly. These revenue reductions are generally reflected as an addition to accrued
liabilities. Amounts received from customers as prepayments for products to be delivered in the
future are reported as deferred revenue.
-74-
The following table summarizes the activity in the accounts related to revenue reductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related to the |
|
|
|
|
|
|
Product |
|
|
Contract |
|
|
Charge- |
|
|
DSA |
|
|
Discounts |
|
|
unapproved |
|
|
|
|
(in millions of U.S. dollars) |
|
returns |
|
|
rebates |
|
|
backs |
|
|
fees |
|
|
and other |
|
|
PEPs event |
|
|
Total |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Balance as at September 30, 2009 |
|
|
17.2 |
|
|
|
9.8 |
|
|
|
9.0 |
|
|
|
1.0 |
|
|
|
0.7 |
|
|
|
|
|
|
|
37.7 |
|
Provisions |
|
|
9.3 |
|
|
|
36.3 |
|
|
|
37.3 |
|
|
|
5.6 |
|
|
|
8.1 |
|
|
|
23.4 |
|
|
|
120.0 |
|
Settlements |
|
|
(13.1 |
) |
|
|
(40.0 |
) |
|
|
(38.2 |
) |
|
|
(5.3 |
) |
|
|
(8.6 |
) |
|
|
(12.4 |
) |
|
|
(117.6 |
) |
|
Balance as at September 30, 2010 |
|
|
13.4 |
|
|
|
6.1 |
|
|
|
8.1 |
|
|
|
1.3 |
|
|
|
0.2 |
|
|
|
11.0 |
|
|
|
40.1 |
|
|
Product returns
We do not provide any form of price protection to our wholesale customers and we generally permit
product returns only if the product is returned in the six months prior to and twelve months
following its expiration date. Under our policy, credit for returns is issued to the original
purchaser at current wholesale acquisition cost less 10%.
We estimate the proportion of recorded revenue that will result in a return by considering relevant
factors, including:
|
|
past product returns activity; |
|
|
|
the duration of time taken for products to be returned; |
|
|
|
the estimated level of inventory in the distribution channels; |
|
|
|
product recalls and discontinuances; |
|
|
|
the shelf life of products; |
|
|
|
the launch of new drugs or new formulations; and |
|
|
|
the loss of patent protection or new competition. |
Our estimate of the level of inventory in the distribution channels is based on inventory data
provided by wholesalers, third-party prescription data and, for some product return provisions,
estimated retail pharmacy information.
Returns for new products are more difficult to estimate than for established products. For
shipments made to support the commercial launch of a new product under standard terms, our estimate
of sales return accruals are primarily based on the historical sales returns experience of similar
products. Once sufficient historical data on actual returns of the product are available, the
returns provision is based on this data and any other relevant factors as noted above.
The accrual estimation process for product returns involves in each case a number of interrelating
assumptions, which vary for each combination of product and customer. Accordingly, it would not be
meaningful to quantify the sensitivity to change for any individual assumption or uncertainty.
However, we do not believe that the effect of uncertainties, as a whole, significantly impacts our
financial condition or results of operations.
The accrued liabilities include reserves of $13.4 million as at September 30, 2010, ($17.2 million
as at September 30, 2009) for estimated product returns, excluding the additional provision related
to the unapproved PEPs event.
As at September 30, 2010, the product returns reserve were increased by $11.0 million, net of
settlement of $12.4 million, due to the unapproved PEPs event, which represents primarily
managements current estimate of the balance of ULTRASE MT and VIOKASE inventory in the
distribution channels. Due to the subjectivity of this estimate, we prepared various sensitivity
analyses to ensure our final estimate is within a reasonable range. A change in assumptions that
resulted in a 10% change in the quantity of ULTRASE MT and VIOKASE inventory in the distribution
channel would have resulted in a change in the return reserve of approximately $1.1 million.
Rebates, chargebacks and other sales deduction
In the U.S., we establish and maintain reserves for amounts payable to managed care organizations,
state Medicaid and other government programs for the reimbursement of portions of the retail price
of prescriptions filled that are covered by these programs. We also establish and maintain reserves
for amounts payable to wholesale distributors for the difference between their regular sale price
and the contract price for the products sold to our contract customers.
The amounts are recognized as revenue reductions at the time of sale based on our best estimate of
the products utilization by these managed care and state Medicaid patients and sales to our
contract customers, using historical experience, the timing of payments, the level of reimbursement
claims, changes in prices (both normal selling prices and statutory or negotiated prices), changes
in prescription demand patterns, and the levels of inventory in the distribution channel.
-75-
Amounts payable to managed care organizations and state Medicaid programs are based on statutory or
negotiated discounts to the selling price. Medicaid rebates generally increase as a percentage of
the selling price over the life of the product. As it can take up to six months for
information to reach the Company on actual usage of the Companys products in managed care and
Medicaid programs and on the total discounts to be reimbursed, the Company maintains reserves for
amounts payable under these programs relating to sold products. We estimate the level of inventory
in the distribution channels based on inventory data provided by wholesalers and third-party
prescription data.
Revisions or clarification of guidelines related to state Medicaid and other government program
reimbursement practices which are meant to apply to prior periods, or retrospectively, can result
in changes to managements estimates of the rebates reported in prior periods. However, since the
prices of the Companys products are fixed at the time of sale and the quantum of rebates is
therefore reasonably determinable at the outset of each transaction, these factors would not impact
the recording of revenues in accordance with generally accepted accounting principles.
The accrual estimation process for managed care organizations, state Medicaid and other government
programs rebates involves in each case a number of interrelating assumptions, which vary for each
combination of products and programs. Accordingly, it would not be meaningful to quantify the
sensitivity to change for any individual assumption or uncertainty. However, we do not believe that
the effect of uncertainties, as a whole, significantly impacts the Companys financial condition or
results of operations.
Accrued liabilities include reserves of $6.1 million and $8.1 million as at September 30, 2010,
($9.8 million and $9.0 million as at September 30, 2009) for estimated contract rebates and
chargebacks.
If the levels of chargebacks, fees pursuant to DSAs, managed care, Medicaid and other government
rebates, product returns and discounts fluctuate significantly and/or if our estimates do not
adequately reserve for these reductions of net product revenues, our reported revenue could be
negatively affected.
Intangible assets and goodwill
Intangible assets with a finite life are amortized over their estimated useful lives according to
the straight-line method over periods varying from 6 months to 20 years. The straight-line method
of amortization is used because it reflects, in the opinion of management, the pattern in which the
intangible assets with a finite life are used. In determining the useful life of intangible assets,
we consider many factors including the intention of management to support the asset on a long-term
basis by maintaining the level of expenditure necessary to support the asset, the use of the asset,
the existence and expiration date of a patent, the existence of a generic version of, or competitor
to, the product and any legal or regulatory provisions that could limit the use of the asset.
The following table summarizes the changes to the carrying value of the intangible assets and
goodwill from September 30, 2009, to September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
Intangible |
|
|
|
|
|
|
assets |
|
|
Goodwill |
|
|
|
$ |
|
|
$ |
|
Balance as at September 30, 2009 |
|
|
421.3 |
|
|
|
165.8 |
|
Depreciation and amortization |
|
|
(52.4 |
) |
|
|
|
|
Partial write-down of intangible assets |
|
|
(15.8 |
) |
|
|
(91.4 |
) |
Foreign exchange translation adjustments |
|
|
(5.1 |
) |
|
|
(0.9 |
) |
|
Balance as at September 30, 2010 |
|
|
348.0 |
|
|
|
73.5 |
|
|
Research and development expenses
Research and development expenses are charged to operations in the period they are incurred. The
cost of intangibles that are purchased from others for a particular research and development
project that have no alternative future use are expensed at the time of acquisition.
Income taxes
Income taxes are calculated using the asset and liability method. Under this method, deferred
income tax assets and liabilities are recognized to account for the estimated taxes that will
result from the recovery or settlement of assets and liabilities recorded at their financial
statement carrying amounts. Deferred income tax assets and liabilities are measured based on
enacted tax rates and laws at the date of the financial statements for the fiscal years in which
the temporary differences are expected to reverse. A valuation allowance is provided for the
portion of deferred tax assets that is more likely than not to remain unrealized. Adjustments to
the deferred income tax asset and liability balances are recognized in net income as they occur.
We conduct business in various countries throughout the world and is subject to tax in numerous
jurisdictions. As a result of our business activities, we file a significant number of tax returns
that are subject to examination by various federal, state, and local tax authorities. Tax
examinations are often complex as tax authorities may disagree with the treatment of items reported
by us and this may require several years to resolve.
-76-
Changes in accounting standards
In March 2010, the FASB issued guidance related to revenue recognition that applies to arrangements
with milestones relating to research or development deliverables. This guidance provides criteria
that must be met to recognize consideration that is contingent upon achievement of a substantive
milestone in its entirety in the period in which the milestone is achieved. The guidance provides a
definition of substantive milestone
and should be applied regardless of whether the arrangement includes single or multiple
deliverables or units of accounting. This guidance is effective prospectively to milestones
achieved in fiscal years, and interim periods within those years, after June 15, 2010, with early
adoption permitted. The adoption of this guidance is not expected to have a material impact on our
consolidated financial statements.
In March 2010, the FASB amended the existing guidance on stock compensation to clarify that an
employee share-based payment award with an exercise price denominated in the currency of a market
in which a substantial portion of the entitys equity securities trades should not be considered to
contain a condition that is not a market, performance, or service condition. Therefore, such an
award should not be classified as a liability if it otherwise qualifies as equity. This guidance is
effective for fiscal years, and interim periods within those fiscal years, beginning on or after
December 15, 2010.The adoption of this guidance did not have a material impact on our consolidated
financial statements.
In January 2010, the FASB amended the existing authoritative guidance on disclosures of fair value
measurements and clarifies and provides additional disclosure requirements related to recurring and
non-recurring fair value measurements. The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning after December 15,
2009. The disclosure of the roll forward of activity in Level 3 measurements on a gross basis is
effective for fiscal years beginning after December 15, 2010, and for interim periods within those
fiscal years. The adoption of this guidance did not have a material impact on our consolidated
financial statements.
In October 2009, the FASB amended the existing guidance on revenue recognition related to
accounting for multiple-element arrangements. This amendment addresses how to determine whether an
arrangement involving multiple deliverables contains more than one unit of accounting, and how the
arrangement consideration should be allocated among the separate units of accounting. This guidance
is effective prospectively for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010, and early adoption is permitted. We are currently
evaluating the impact of the adoption of this guidance on our consolidated financial statements.
In August 2009, the FASB amended the existing guidance on fair value measurements and disclosures
to provide clarification in measuring the fair value of liabilities in circumstances when a quoted
price in an active market for the identical liability is not available. In such circumstances, a
reporting entity is required to measure fair value using one or more of the following methods: 1) a
valuation technique that uses the quoted price of the identical liability when traded as an asset
or quoted prices for similar liabilities or similar liabilities when traded as assets; and/or 2) a
valuation technique that is consistent with the principles of fair value measurements (e.g. an
income approach or market approach). This guidance is effective for reporting periods including
interim periods beginning after August 28, 2009. We do not expect that the adoption of this
guidance will have a material impact on our consolidated financial statements.
In June 2009, the FASB amended the existing authoritative guidance on consolidation regarding
variable interest entities for determining whether an entity is a variable interest entity (VIE)
and requires an enterprise to perform an analysis to determine whether the enterprises variable
interest or interests give it a controlling financial interest in a VIE. Per the revised guidance,
an enterprise has a controlling financial interest when it has a) the power to direct the
activities of a VIE that most significantly impact the entitys economic performance and b) the
obligation to absorb losses of the entity or the right to receive benefits from the entity that
could potentially be significant to the VIE. The guidance also requires an enterprise to assess
whether it has an implicit financial responsibility to ensure that a VIE operates as designed when
determining whether it has power to direct the activities of the VIE that most significantly impact
the entitys economic performance. The guidance also requires ongoing assessments of whether an
enterprise is the primary beneficiary of a VIE, requires enhanced disclosures and eliminates the
scope exclusion for qualifying special-purpose entities. The revised guidance is effective for
fiscal years beginning after November 15, 2009 with early adoption prohibited. We are currently
evaluating the impact of the adoption of the revised guidance on our consolidated financial
statements.
In May 2009, the FASB issued authoritative guidance on subsequent events. This guidance establishes
general standards of accounting for and disclosures of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued. Specifically, the
guidance sets forth the period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements, the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in our financial statements and the
disclosures that an entity should make about events or transactions that occurred after the balance
sheet date. The guidance is effective for fiscal years and interim periods ended after June 15,
2009 and will be applied prospectively. The adoption of this guidance did not have a material
impact on the Companys consolidated financial statements.
In April 2009, the FASB amended the authoritative guidance on financial instruments to require
disclosures about fair value of financial instruments in interim as well as in annual financial
statements of publicly traded companies. The guidance is effective for interim and annual periods
ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.
The adoption of this guidance did not have a material impact on our consolidated financial
statements since we have disclosures about fair value of financial instruments in our interim
financial statements prior to the issuance of this guidance.
-77-
In April 2009, the FASB issued additional guidance on estimating fair value when the volume and
level of activity for an asset or liability have significantly decreased in relation to normal
market activity for the asset or liability. Guidance on identifying circumstances that indicate a
transaction is not orderly was also issued and required additional disclosures. This guidance is to
be applied prospectively and is effective for interim and annual periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this
guidance did not have a material impact on our consolidated financial statements.
In April 2008, the FASB issued guidance that amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset. The intent of this guidance is to improve the consistency between the useful life
of a recognized intangible asset determined per the guidance on intangible assets and the period of
expected cash flows used to measure the fair value
of the asset determined per the amended guidance for business combinations and other authoritative
guidance. This guidance is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. Early adoption is
prohibited. We are currently evaluating the impact of the adoption of this guidance on our
consolidated financial statements.
In March 2008, the FASB amended the guidance on disclosure requirements related to derivative
instruments and hedging activities. The new guidance requires that objectives for using derivative
instruments be disclosed in terms of underlying risk and accounting designation. Pursuant to the
new guidance, enhanced disclosures are required about (a) how and why derivative instruments are
used, (b) how derivative instruments and related hedged items are accounted for and (c) how
derivative instruments and related hedged items affect an entitys financial position, financial
performance and cash flows. The fair value of derivative instruments and their gains and losses
will need to be presented in tabular format in order to present a more complete picture of the
effects of using derivative instruments. This guidance is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008. The adoption of this
guidance did not have a material impact on our consolidated financial statements (See note 16 to
our consolidated financial statements).
In December 2007, the FASB issued guidance related to collaborative arrangements. The guidance
defines collaborative arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement and between participants in the arrangement and third
parties. The guidance also establishes the appropriate income statement presentation and
classification for joint operating activities and payments between participants, as well as the
sufficiency of the disclosures related to these arrangements. This guidance is effective for fiscal
years and interim periods within those fiscal years, beginning after December 15, 2008, and shall
be applied retrospectively to all prior periods presented for all collaborative arrangements
existing as of the effective date. The Company is currently evaluating the impact of the adoption
of this guidance on our consolidated financial statements.
In September 2006, the FASB issued guidance on fair value measurements, which defines fair value,
establishes a framework for measuring fair value and expands disclosures about fair value
measurements and is effective for fair-value measurements already required or permitted by other
guidance for financial statements issued for fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years. In February 2008, the FASB issued guidance, that
deferred the effective date of the guidance for fair value measurement for one year for
non-financial assets and non-financial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at least annually). In
October 2008, the FASB issued guidance which clarifies the application of the guidance on fair
value measurements in determining the fair value of a financial asset when the market for that
asset is not active. This guidance was effective upon issuance, including prior periods for which
financial statements had not been issued. The adoption of the guidance on fair value measurements
for financial assets and liabilities carried at fair value did not have a material impact on the
Companys consolidated financial statements (see Note 19).
Subsequent Events
On December 1, 2010, Axcan Holdings Inc. (Axcan Holdings), our indirect parent, and Axcan Pharma
Holding B.V. (Axcan Pharma), our subsidiary, announced that they had entered into a definitive
agreement with Eurand N.V. (Eurand), a global specialty pharmaceutical company with headquarters
in the Netherlands, under which Axcan Holdings will acquire all of the outstanding shares of Eurand
for $12.00 per share in cash, resulting in a purchase price of approximately $583 million. The
transaction is subject to a condition that a minimum of 80% of Eurand shares be tendered, as well
as receipt of antitrust approval. We have secured committed debt financing from BofA Merrill Lynch,
Barclays Capital, RBC Capital Markets and HSBC Securities (USA) for the transaction.
-78-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosure about Market Risk
We are exposed to financial market risks, including changes in foreign currency exchange
rates and interest rates. We do not use derivative financial instruments for speculative or
trading purposes. We do not use off-balance sheet financing or similar special purpose entities.
Inflation has not had a significant impact on our results of operations.
Foreign Currency Risk
We operate internationally; however, a substantial portion of revenue and expense activities
as well as capital expenditures are transacted in U.S. dollars. Our results of operations are also
affected by fluctuations of currencies other than the U.S. dollar, in particular Euros and
Canadian dollars. Our exposure to exchange rate fluctuations in these currencies is reduced
because, in general, our revenues denominated in currencies other than the U.S. dollar are
partially offset by a corresponding amount of costs denominated in the same currency. However,
significant long-term fluctuations in relative currency values could have an adverse effect on
future profitability.
A 1% change in the value of foreign currencies as compared the U.S. dollar to in which we had
sales, income or expense in 2010 would have increased or decreased the translation of foreign
sales by $0.9 million and income by $0.1 million.
Interest Rate Risk
The primary objective of our investment policy is the protection of capital. Accordingly,
investments are made in high-grade government and corporate securities with varying maturities,
but typically, less than 180 days. Therefore, we do not have a material exposure to interest rate
risk on our investments, and a 100 basis-point adverse change in interest rates would not have a
material effect on our consolidated results of operations, financial position or cash flows. We
are exposed to interest rate risk on borrowings under the new senior secured credit facilities and
the senior unsecured bridge facility, entered into as part of the February 2008 Transactions. The
new senior secured credit facilities and the senior unsecured bridge facility bear interest based
on British Banker Association LIBOR. On May 6, 2008, we refinanced the senior unsecured bridge
facility by repaying the existing loan using the proceeds of the senior notes. Based on projected
advances under the new senior secured credit facilities and considering the interest swap
agreements in place discussed below, a 100 basis-point increase or decrease in interest rates
would result in a $0.6 million change in our interest rate expense per year.
Effective March 3, 2008, we entered into two pay-fixed, receive-floating interest rate swap
agreements, effectively converting $115.0 million of variable-rate debt under the $175.0 million
secured senior credit facilities to fixed-rate debt. Through the first two quarters of 2008, our
two interest rate swaps were designated as effective hedges of cash flows. For the quarter ended
September 30, 2008, due to the increased volatility in short-term interest rates and a realignment
of our LIBOR rate election on our debt capital repayment schedule, hedge accounting was
discontinued as the hedge relationship ceased to satisfy the strict conditions of hedge
accounting. On December 1, 2008, we redesignated our $50.0 million notional interest rate swap
that matures in February 2010 anew as a cash flow hedge using an improved method of assessing the
effectiveness of the hedging relationship. Our $65.0 million notional interest rate swap matured
in February 2009. Effective March 2009, we entered into a pay-fixed, receive-floating interest
rate swap of a notional amount of $52.0 million amortizing to $13.0 million through February 2010.
During the fiscal year ended September 30, 2010, our two interest rate swaps with a combined $63
million notional that were designated as cash flow hedges of interest rate risk matured during the
quarter ended March 31, 2010 and we have not entered into any new derivative agreement. The
weighted average fixed interest rate on these swaps was 1.91%. Absent any such interest rate swap
agreements, a change of 1/8% in floating rates would affect our annual interest expense on the
senior secured borrowings by approximately $0.2 million.
Derivative financial instruments are measured at fair value and are recognized as assets or
liabilities on the balance sheet, with changes in the fair value of the derivatives recognized in
either net income (loss) or other comprehensive income (loss), depending on the timing and
designated purpose of the derivative. When we pay interest on the portion of the debt designated
as hedged, the gain or loss on the swap designated as hedging the interest payment will be
reclassified from accumulated other comprehensive income to interest expense. These derivative
instruments are designated as cash flow hedges with the related gains or losses recorded in other
comprehensive income, with an offsetting amount included in other long-term liabilities. The fair
value of the interest rate swap as at September 30, 2010, was
$0.0 million (a liability of $0.6 million as at September 30, 2009).
-79-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AXCAN
INTERMEDIATE HOLDINGS INC. (Successor)
and
AXCAN
PHARMA INC. (Predecessor)
INDEX
|
|
|
|
|
Report Of Independent Registered Public Accounting Firm
|
|
|
|
|
To The Board Of Directors And Shareholder Of Axcan Intermediate Holdings Inc. |
|
|
81 |
|
|
|
|
|
|
Report Of Independent Registered Public Accounting Firm
|
|
|
|
|
To The Board Of Directors And Shareholder Of Axcan Pharma Inc. |
|
|
82 |
|
|
|
|
|
|
Consolidated Balance Sheets as of September 30, 2010 and September 30, 2009 |
|
|
83 |
|
|
|
|
|
|
Consolidated Statements Of Operations for the twelve-month periods ended September 30, 2010 and September 30, 2009 and
for the period from February 26, 2008 to September 30, 2008 (Successor), the period from October 1, 2007 to February 25, 2008 |
|
|
84 |
|
|
|
|
|
|
Consolidated Shareholders Equity (Deficiency) And Comprehensive Income (Loss) for the twelve-month
periods
ended September 30, 2010 and September 30, 2009 and for the period from February 26, 2008 to
September 30, 2008 (Successor),
the period from October 1, 2007 to February 25, 2008 |
|
|
85 |
|
|
|
|
|
|
Consolidated Cash Flows for the twelve-month periods ended September 30, 2010 and September 30, 2009 and for
the period from February 26, 2008 to September 30, 2008 (Successor), the period from October 1, 2007 to February 25, 2008 |
|
|
86 |
|
|
|
|
|
|
Notes To Consolidated Financial Statements |
|
|
87 |
|
-80-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF AXCAN INTERMEDIATE HOLDINGS INC.
We have audited the consolidated balance sheets of Axcan Intermediate Holdings Inc. and
subsidiaries as of September 30, 2010, and 2009 and the consolidated statements of operations,
shareholders equity (deficiency) and comprehensive income (loss) and cash flows for the years
ended September 30, 2010, and 2009 and the period from February 26, 2008 to September 30, 2008.
These financial statements are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform an audit of its internal control
over financial reporting. An audit includes consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Axcan Intermediate Holdings Inc. and subsidiaries as
of September 30, 2010, and 2009 and the results of their operations and their cash flows for the
years ended September 30, 2010, and 2009 and the period from February 26, 2008 to September 30,
2008, in conformity with accounting principles generally accepted in the United States of America.
/s/ Raymond Chabot Grant Thornton LLP1
Chartered Accountants
Montreal, Quebec, Canada
December 1, 2010
|
|
|
1 |
|
Chartered Accountant Auditor permit No. 10019 |
-81-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF AXCAN PHARMA INC.
We have audited the consolidated statements of operations, shareholders equity and comprehensive
income and cash flows of Axcan Pharma Inc. and subsidiaries for the period from October 1, 2007 to
February 25, 2008. These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the results of operations and cash flows of Axcan Pharma Inc. and subsidiaries
for the period from October 1, 2007 to February 25, 2008, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Raymond Chabot Grant Thornton LLP
Chartered Accountants
Montreal, Quebec, Canada
December 9, 2008
-82-
AXCAN INTERMEDIATE HOLDINGS INC.
Consolidated Balance Sheets
(in thousands of U.S. dollars, except share related data)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
$ |
|
|
$ |
|
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
161,503 |
|
|
|
126,435 |
|
Accounts receivable, net (Note 5) |
|
|
32,379 |
|
|
|
57,124 |
|
Accounts receivable from the parent company (Note 18) |
|
|
487 |
|
|
|
306 |
|
Income taxes receivable |
|
|
2,906 |
|
|
|
3,391 |
|
Inventories, net (Note 6) |
|
|
23,866 |
|
|
|
44,706 |
|
Prepaid expenses and deposits |
|
|
3,277 |
|
|
|
2,868 |
|
Deferred income taxes, net (Note 7) |
|
|
2,331 |
|
|
|
15,852 |
|
|
Total current assets |
|
|
226,749 |
|
|
|
250,682 |
|
Property, plant and equipment, net (Note 8) |
|
|
35,777 |
|
|
|
39,344 |
|
Intangible assets, net (Note 9) |
|
|
347,962 |
|
|
|
421,290 |
|
Goodwill, net (Note 9) |
|
|
73,540 |
|
|
|
165,823 |
|
Deferred debt issue expenses, net of accumulated amortization of $14,136 ($9,168 as at September 30, 2009) |
|
|
20,443 |
|
|
|
25,411 |
|
Deferred income taxes, net (Note 7) |
|
|
8,706 |
|
|
|
12,052 |
|
|
Total assets |
|
|
713,177 |
|
|
|
914,602 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities (Note 10) |
|
|
94,673 |
|
|
|
87,684 |
|
Income taxes payable (Note 7) |
|
|
3,446 |
|
|
|
2,493 |
|
Installments on long-term debt (Note 11) |
|
|
13,163 |
|
|
|
30,708 |
|
Deferred income taxes (Note 7) |
|
|
47 |
|
|
|
137 |
|
|
Total current liabilities |
|
|
111,329 |
|
|
|
121,022 |
|
Long-term debt (Note 11) |
|
|
581,312 |
|
|
|
582,586 |
|
Other long-term liabilities |
|
|
10,028 |
|
|
|
9,448 |
|
Deferred income taxes (Note 7) |
|
|
31,540 |
|
|
|
37,782 |
|
|
Total liabilities |
|
|
734,209 |
|
|
|
750,838 |
|
|
Commitments and contingencies (Note 19) |
|
|
|
|
|
|
|
|
Shareholders Equity (Deficiency) |
|
|
|
|
|
|
|
|
Capital Stock (Note 12) |
|
|
|
|
|
|
|
|
Common shares, par value $0.001; 100 shares authorized: 100 issued and outstanding as at September 30,
2010, and September 30, 2009 |
|
|
1 |
|
|
|
1 |
|
Deficit |
|
|
(468,152 |
) |
|
|
(297,658 |
) |
9.05% Note receivable from the parent company (Note 18) |
|
|
(133,154 |
) |
|
|
(133,154 |
) |
Additional paid-in capital |
|
|
614,113 |
|
|
|
619,053 |
|
Accumulated other comprehensive loss |
|
|
(33,840 |
) |
|
|
(24,478 |
) |
|
Total shareholders equity (deficiency) |
|
|
(21,032 |
) |
|
|
163,764 |
|
|
Total liabilities and shareholders equity (deficiency) |
|
|
713,177 |
|
|
|
914,602 |
|
|
The accompanying notes are an integral part of the consolidated financial statements.
-83-
AXCAN INTERMEDIATE HOLDINGS INC.
Consolidated Statements of Operations
(in thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
Predecessor |
|
|
|
For the |
|
|
For the |
|
|
For the |
|
|
For the |
|
|
|
twelve-month |
|
|
twelve-month |
|
|
seven-month |
|
|
five-month |
|
|
|
period ended |
|
|
period ended |
|
|
period ended |
|
|
period ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
February 25, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Net product sales |
|
|
354,587 |
|
|
|
409,826 |
|
|
|
223,179 |
|
|
|
158,579 |
|
Other revenue |
|
|
|
|
|
|
7,113 |
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
354,587 |
|
|
|
416,939 |
|
|
|
223,179 |
|
|
|
158,579 |
|
|
Cost of goods sold (a) (Note 2) |
|
|
130,915 |
|
|
|
103,023 |
|
|
|
77,227 |
|
|
|
38,739 |
|
Selling and administrative expenses (a) (Note 13) |
|
|
115,033 |
|
|
|
122,942 |
|
|
|
88,246 |
|
|
|
76,198 |
|
Management fees (Note 18) |
|
|
4,412 |
|
|
|
5,351 |
|
|
|
99 |
|
|
|
|
|
Research and development expenses (a) |
|
|
31,715 |
|
|
|
36,037 |
|
|
|
17,768 |
|
|
|
10,256 |
|
Acquired in-process research (Note 4) |
|
|
7,948 |
|
|
|
|
|
|
|
272,400 |
|
|
|
|
|
Depreciation and amortization (Note 13) |
|
|
61,011 |
|
|
|
60,305 |
|
|
|
35,579 |
|
|
|
9,595 |
|
Impairment of intangible assets and goodwill (Note 9) |
|
|
107,158 |
|
|
|
55,665 |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
458,192 |
|
|
|
383,323 |
|
|
|
491,319 |
|
|
|
134,788 |
|
|
Operating income (loss) |
|
|
(103,605 |
) |
|
|
33,616 |
|
|
|
(268,140 |
) |
|
|
23,791 |
|
|
Financial expenses (Note 13) |
|
|
64,956 |
|
|
|
69,809 |
|
|
|
41,513 |
|
|
|
262 |
|
Interest income |
|
|
(688 |
) |
|
|
(389 |
) |
|
|
(808 |
) |
|
|
(5,440 |
) |
Other income (Note 19) |
|
|
(9,704 |
) |
|
|
(3,500 |
) |
|
|
|
|
|
|
|
|
Loss (gain) on foreign currencies |
|
|
1,247 |
|
|
|
(328 |
) |
|
|
(1,841 |
) |
|
|
(198 |
) |
|
Total other expenses (income) |
|
|
55,811 |
|
|
|
65,592 |
|
|
|
38,864 |
|
|
|
(5,376 |
) |
|
Income (loss) before income taxes |
|
|
(159,416 |
) |
|
|
(31,976 |
) |
|
|
(307,004 |
) |
|
|
29,167 |
|
|
Income taxes expense (benefit) (Note 7) |
|
|
10,950 |
|
|
|
(24,082 |
) |
|
|
(17,740 |
) |
|
|
12,042 |
|
|
Net income (loss) |
|
|
(170,366 |
) |
|
|
(7,894 |
) |
|
|
(289,264 |
) |
|
|
17,125 |
|
|
|
|
|
(a) |
|
Excluding depreciation and amortization |
The accompanying notes are an integral part of the consolidated financial statements.
-84-
AXCAN INTERMEDIATE HOLDINGS INC.
Consolidated Shareholders Equity (Deficiency) and Comprehensive Income (Loss)
(in thousands of U.S. dollars, except share related data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
Predecessor |
|
|
|
For the |
|
|
For the |
|
|
For the |
|
|
For the |
|
|
|
twelve-month |
|
|
twelve-month |
|
|
seven-month |
|
|
five-month |
|
|
|
period ended |
|
|
period ended |
|
|
period ended |
|
|
period ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
February 25, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
Common shares (number) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
100 |
|
|
|
100 |
|
|
|
|
|
|
|
55,359,652 |
|
Shares issued for cash |
|
|
|
|
|
|
|
|
|
|
100 |
|
|
|
|
|
Shares issued pursuant to stock incentive plans for cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,299 |
|
|
Balance, end of period |
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
55,376,951 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
Common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
395,888 |
|
Shares issued for cash |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Stock-based compensation on exercised options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41 |
|
Shares issued pursuant to stock incentive plans for cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
224 |
|
|
Balance, end of period |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
396,153 |
|
|
Retained earnings (deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
(297,658 |
) |
|
|
(289,264 |
) |
|
|
|
|
|
|
249,371 |
|
Stock-based compensation cancellation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,821 |
) |
Dividends paid |
|
|
(128 |
) |
|
|
(500 |
) |
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(170,366 |
) |
|
|
(7,894 |
) |
|
|
(289,264 |
) |
|
|
17,125 |
|
|
Balance, end of period |
|
|
(468,152 |
) |
|
|
(297,658 |
) |
|
|
(289,264 |
) |
|
|
257,675 |
|
|
Additional paid-in capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
619,053 |
|
|
|
617,255 |
|
|
|
|
|
|
|
9,089 |
|
Shares issued for cash |
|
|
|
|
|
|
|
|
|
|
608,154 |
|
|
|
|
|
Stock-based compensation expense (recovery) |
|
|
(378 |
) |
|
|
6,172 |
|
|
|
7,443 |
|
|
|
7,474 |
|
Stock-based compensation on exercised options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41 |
) |
Stock-based compensation plan redemptions and
settlements |
|
|
(345 |
) |
|
|
(157 |
) |
|
|
|
|
|
|
(16,395 |
) |
Income tax deductions on stock options exercise |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(127 |
) |
Provision on interest receivable from the parent company |
|
|
(12,050 |
) |
|
|
(12,050 |
) |
|
|
(3,028 |
) |
|
|
|
|
Interest income from the parent company (net of taxes
of $4, 217, $4,217 and $2,524) |
|
|
7,833 |
|
|
|
7,833 |
|
|
|
4,686 |
|
|
|
|
|
|
Balance, end of period |
|
|
614,113 |
|
|
|
619,053 |
|
|
|
617,255 |
|
|
|
|
|
|
9.05% Note receivable from the parent company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
(133,154 |
) |
|
|
(133,154 |
) |
|
|
|
|
|
|
|
|
Issue of notes |
|
|
|
|
|
|
|
|
|
|
(133,154 |
) |
|
|
|
|
|
Balance, end of period |
|
|
(133,154 |
) |
|
|
(133,154 |
) |
|
|
(133,154 |
) |
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
(24,478 |
) |
|
|
(29,168 |
) |
|
|
|
|
|
|
35,849 |
|
Hedging contract fair value adjustments (net of taxes
of $4,$155, and ($159)) |
|
|
(7 |
) |
|
|
(288 |
) |
|
|
295 |
|
|
|
|
|
Foreign currency translation adjustments |
|
|
(9,355 |
) |
|
|
4,978 |
|
|
|
(29,463 |
) |
|
|
5,724 |
|
|
Balance, end of period |
|
|
(33,840 |
) |
|
|
(24,478 |
) |
|
|
(29,168 |
) |
|
|
41,573 |
|
|
Total shareholders equity (deficiency) |
|
|
(21,032 |
) |
|
|
163,764 |
|
|
|
165,670 |
|
|
|
695,401 |
|
|
Comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
(9,362 |
) |
|
|
4,690 |
|
|
|
(29,168 |
) |
|
|
5,724 |
|
Net income (loss) |
|
|
(170,366 |
) |
|
|
(7,894 |
) |
|
|
(289,264 |
) |
|
|
17,125 |
|
|
Total comprehensive income (loss) |
|
|
(179,728 |
) |
|
|
(3,204 |
) |
|
|
(318,432 |
) |
|
|
22,849 |
|
|
Accumulated other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts related to foreign currency translation
adjustments |
|
|
(33,840 |
) |
|
|
(24,485 |
) |
|
|
(29,463 |
) |
|
|
41,573 |
|
Amounts related to hedging contract fair value
adjustments |
|
|
|
|
|
|
7 |
|
|
|
295 |
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
|
(33,840 |
) |
|
|
(24,478 |
) |
|
|
(29,168 |
) |
|
|
41,573 |
|
|
The accompanying notes are an integral part of the consolidated financial statements.
-85-
AXCAN INTERMEDIATE HOLDINGS INC.
Consolidated Cash Flows
(in thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
Predecessor |
|
|
|
For the |
|
|
For the |
|
|
For the |
|
|
For the |
|
|
|
twelve-month |
|
|
twelve-month |
|
|
seven-month |
|
|
five-month |
|
|
|
period ended |
|
|
period ended |
|
|
period ended |
|
|
period ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
February 25, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(170,366 |
) |
|
|
(7,894 |
) |
|
|
(289,264 |
) |
|
|
17,125 |
|
Adjustments to reconcile net income to cash flows from
operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financial expenses |
|
|
7,014 |
|
|
|
7,028 |
|
|
|
5,352 |
|
|
|
|
|
Inventories stepped-up value expensed |
|
|
|
|
|
|
|
|
|
|
22,714 |
|
|
|
|
|
Depreciation and amortization |
|
|
61,011 |
|
|
|
60,305 |
|
|
|
35,579 |
|
|
|
9,595 |
|
Acquired in-process research |
|
|
|
|
|
|
|
|
|
|
272,400 |
|
|
|
|
|
Stock-based compensation expense (recovery) (Note 13) |
|
|
(378 |
) |
|
|
6,172 |
|
|
|
7,443 |
|
|
|
7,474 |
|
Impairment of intangible assets and goodwill (Note 9) |
|
|
107,158 |
|
|
|
55,665 |
|
|
|
|
|
|
|
|
|
Loss on disposal and write-down of assets |
|
|
128 |
|
|
|
196 |
|
|
|
|
|
|
|
|
|
Non-cash loss (gain) on foreign exchange |
|
|
240 |
|
|
|
2,110 |
|
|
|
(3,302 |
) |
|
|
(67 |
) |
Change in fair value of derivatives |
|
|
(621 |
) |
|
|
734 |
|
|
|
5 |
|
|
|
|
|
Deferred income taxes (Note 7) |
|
|
5,616 |
|
|
|
(35,573 |
) |
|
|
(25,367 |
) |
|
|
432 |
|
Other non-cash adjustments related to unapproved PEPs |
|
|
68,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in working capital items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
23,437 |
|
|
|
(14,268 |
) |
|
|
6,343 |
|
|
|
(12,340 |
) |
Accounts receivable from the parent company |
|
|
(181 |
) |
|
|
681 |
|
|
|
(987 |
) |
|
|
|
|
Income taxes receivable |
|
|
61 |
|
|
|
13,936 |
|
|
|
3,097 |
|
|
|
(5,929 |
) |
Inventories |
|
|
(9,572 |
) |
|
|
(7,721 |
) |
|
|
(6,818 |
) |
|
|
(3,803 |
) |
Prepaid expenses and deposits |
|
|
(431 |
) |
|
|
428 |
|
|
|
(149 |
) |
|
|
(49 |
) |
Accounts payable and accrued liabilities |
|
|
(30,361 |
) |
|
|
9,056 |
|
|
|
(71,205 |
) |
|
|
67,865 |
|
Income taxes payable |
|
|
2,030 |
|
|
|
1,527 |
|
|
|
(3,353 |
) |
|
|
(7,058 |
) |
|
Net cash provided by (used in) operating activities |
|
|
63,120 |
|
|
|
92,382 |
|
|
|
(47,512 |
) |
|
|
73,245 |
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposal of short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129,958 |
|
|
Acquisition of property, plant and equipment |
|
|
(6,058 |
) |
|
|
(10,590 |
) |
|
|
(3,061 |
) |
|
|
(3,314 |
) |
|
Acquisition of intangible assets |
|
|
|
|
|
|
(10 |
) |
|
|
(32 |
) |
|
|
(14 |
) |
Net cash used for the Acquisition |
|
|
|
|
|
|
|
|
|
|
(958,463 |
) |
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(6,058 |
) |
|
|
(10,600 |
) |
|
|
(961,556 |
) |
|
|
126,630 |
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of long-term debt |
|
|
|
|
|
|
|
|
|
|
634,120 |
|
|
|
|
|
Repayment of long-term debt |
|
|
(20,865 |
) |
|
|
(10,937 |
) |
|
|
(10,890 |
) |
|
|
(221 |
) |
Advances from the parent company |
|
|
|
|
|
|
|
|
|
|
4,182 |
|
|
|
|
|
Deferred debt issue expenses |
|
|
|
|
|
|
|
|
|
|
(36,360 |
) |
|
|
(889 |
) |
Stock-based compensation plan redemptions and settlements |
|
|
(345 |
) |
|
|
(157 |
) |
|
|
|
|
|
|
(30,357 |
) |
Issue of shares |
|
|
|
|
|
|
|
|
|
|
475,001 |
|
|
|
224 |
|
Dividends paid |
|
|
(128 |
) |
|
|
(500 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(21,338 |
) |
|
|
(11,594 |
) |
|
|
1,066,053 |
|
|
|
(31,243 |
) |
|
Foreign exchange gain (loss) on cash held in foreign currencies |
|
|
(656 |
) |
|
|
142 |
|
|
|
(880 |
) |
|
|
487 |
|
|
Net increase in cash and cash equivalents |
|
|
35,068 |
|
|
|
70,330 |
|
|
|
56,105 |
|
|
|
169,119 |
|
Cash and cash equivalents, beginning of period |
|
|
126,435 |
|
|
|
56,105 |
|
|
|
|
|
|
|
179,672 |
|
|
Cash and cash equivalents, end of period |
|
|
161,503 |
|
|
|
126,435 |
|
|
|
56,105 |
|
|
|
348,791 |
|
|
Additional information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest received |
|
|
689 |
|
|
|
424 |
|
|
|
918 |
|
|
|
4,507 |
|
Interest paid |
|
|
57,366 |
|
|
|
60,496 |
|
|
|
31,599 |
|
|
|
11 |
|
Income taxes received |
|
|
2,602 |
|
|
|
16,761 |
|
|
|
|
|
|
|
|
|
Income taxes paid |
|
|
5,452 |
|
|
|
13,883 |
|
|
|
8,954 |
|
|
|
24,080 |
|
|
The accompanying notes are an integral part of the consolidated financial statements.
-86-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
1. Governing Statutes, Description of Business and Basis of Presentation
Axcan Intermediate Holdings Inc., a corporation incorporated on November 28, 2007, under the
General Corporation Law of the State of Delaware and its subsidiaries (together the Company or
the Successor), commenced active operations with the purchase, through a wholly-owned indirect
subsidiary on February 25, 2008, of all of the outstanding common shares of Axcan Pharma Inc. (the
February 2008 Transactions) a company incorporated under the Canada Business Corporation Act (the
Predecessor). The Company is involved in the research, development, production and distribution
of pharmaceutical products mainly in the field of gastroenterology. Prior to the February 2008
Transactions, Axcan Intermediate Holdings Inc. had no independent operations or assets.
Accordingly, the financial information is presented separately for the period prior to the
completion of the February 2008 Transactions and the period after the completion of the February
2008 Transactions, which relate to the accounting periods preceding and succeeding the completion
of the February 2008 Transactions. The financial information presented for the Predecessor is the
financial information for Axcan Pharma Inc. and its consolidated subsidiaries and the financial
information presented for the Successor is the financial information for Axcan Intermediate
Holdings Inc. and its consolidated subsidiaries. The financial information as at September 30,
2010, and for the Successors periods is not comparable to the financial information of the
Predecessor because of the new basis of accounting resulting from the February 2008 Transactions.
These consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America (U.S. GAAP) and are presented in U.S. dollars,
the reporting currency. Unless otherwise noted, the accounting policies described were applied by
both the Predecessor and Successor, for all periods presented. The financial statements reflect all
adjustments (including those that are normal and recurring) that are necessary for a fair
presentation of the results of operations for the periods shown. Certain prior period amounts have
been reclassified to conform to the current period presentation.
2. Significant Accounting Policies
Use of estimates
The preparation of financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the recorded amounts of assets
and liabilities and the disclosure of contingent assets and liabilities as at the date of the
financial statements and also affect the recognized amounts of revenues and expenses during the
fiscal year. Significant estimates and assumptions made by management include those related to the
charges to be recorded in conjunction with ceasing of distributing PEPs, allowances for accounts
receivable, inventories, reserves for product returns, rebates, chargebacks and DSA fees, the
classification of intangible assets between finite life and indefinite life, the useful lives of
long-lived assets, the expected cash flows used in evaluating long-lived assets, goodwill and
investments for impairment, stock based compensation costs, pending legal settlements and the
establishment of provisions for income taxes including the realizability of deferred tax assets.
The estimates are made using the historical information and various other relevant factors
available to management. We review all significant estimates affecting the financial statements on
a recurring basis and record the effect of any adjustments when necessary. Actual results could
differ from those estimates based upon future events, which could include, among other risks,
changes in regulations governing the manner in which we sell our products, changes in the
healthcare environment, foreign exchange and managed care consumption patterns.
Principles of consolidation
These financial statements include the accounts of Axcan Intermediate Holdings Inc. and its
wholly-owned subsidiaries, the most significant being Axcan Pharma Inc., Axcan Pharma U.S. Inc. and
Axcan Pharma S.A. Significant intercompany balances and transactions have been eliminated on
consolidation.
Revenue recognition
Revenue is recognized when the product is delivered to the Companys customers, provided the
Company has not retained any significant risks of ownership or future obligations with respect to
the product delivered. Provisions for sales discounts and estimates for chargebacks, managed care
and Medicaid rebates, product returns and distribution service agreement fees are recorded as a
reduction of product sales revenues at the time such revenues are recognized. These revenue
reductions are established by the Company at the time of sale, based on historical experience
adjusted to reflect known changes in the factors that impact such reserves. In certain
circumstances, returns of products are allowed under the Companys policy and provisions are
maintained accordingly. These revenue reductions are generally reflected as an addition to accrued
liabilities. Amounts received from customers as prepayments for products to be delivered in the
future are reported as deferred revenue.
The Company presents, on a net basis, taxes collected from customers and remitted to governmental
authorities; that is, they are excluded from revenues.
-87-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
ULTRASE and VIOKASE, the Companys pancreatic enzyme products (PEPs) have historically
accounted for approximately a 19% of the Companys net sales in the last three years ended
September 30, 2009. Prior to April 28, 2010, products that were marketed in the U.S. to treat
exocrine pancreatic insufficiency have been available before the passage of the Federal Food, Drug,
and Cosmetic Act, or FDCA, in 1938 and, consequently, there were marketed PEPs that had not been
approved under the NDA process by the FDA. In 1995, the FDA issued a final rule requiring that
these PEPs be marketed by prescription only, and, in April 2004, the FDA mandated that all
manufacturers of exocrine pancreatic insufficiency drug products file an NDA and receive approval
for their products by April 2008 or be subject to regulatory action. In October 2007, the FDA
published a notice in the Federal Register extending the deadline within which to obtain marketing
approval for exocrine pancreatic insufficiency drug products to April 28, 2010, for those companies
that were (a) marketing unapproved pancreatic enzyme products as at April 28, 2004; (b) submitted
NDAs on or before April 28, 2009; and (c) that continue diligent pursuit of regulatory approval.
The FDA has required all manufacturers with unapproved NDAs to cease distribution of unapproved
products after April 28, 2010, until such time that NDA approval is granted. After this date, the
unapproved products may still be available on pharmacy shelves for a short time until stock is
depleted. The FDA has stated that it will continue to review NDAs that have been submitted by
manufacturers of unapproved PEPs, and will approve additional PEPs even after the April 28, 2010
deadline has passed, if they meet the required safety, effectiveness and product quality standards.
The Company completed the submission for ULTRASE MT in the fourth quarter of fiscal year
2008. The submission of the Companys rolling NDA for VIOKASE was completed in the first
quarter of fiscal year 2010.
ULTRASEMT and VIOKASE did not receive NDA approval by the April 28, 2010 deadline and
the Company has ceased distributing the two products after that date, in compliance with the FDA
guideline. The Company recorded an additional $23,453,000 sales deductions reserve for the fiscal
year ended September 30, 2010. This reserve is for product returns and other sales deductions as an
estimate of Companys liability for ULTRASE MT and VIOKASE that may be returned by the
original purchaser under the Company DSAs or applicable return policies. The cease distribution
order issued by the FDA was not considered as a product recall. As at September 30, 2010, the
reserve was $11,046,000 and was based on management estimates of ULTRASE MT and
VIOKASE inventory in the distribution channel, assumptions on related expiration dates
of this inventory as well as estimated erosion of ULTRASE MT and VIOKASE
demand, based on competition from approved PEPs and the resulting estimated sell-through of
ULTRASE MT and VIOKASE, actual return activity and other factors. In future periods, the
Company will monitor and review the estimates and will prospectively record changes to the reserve.
On November 28, 2010, the FDA issued complete response letters regarding the NDAs for ULTRASE MT
and VIOKASE. The letters require that unresolved deficiencies raised with respect to the
manufacturing and control processes at the manufacturer of the active ingredient for both ULTRASE
MT and VIOKASE be addressed before approval can be granted. The letters also require that
deficiencies identified in an FDA inspection of such manufacturer must be resolved before the NDAs
can be approved. The Company is in ongoing discussions with the FDA and continues to work with the
manufacturer of the active pharmaceutical ingredient to address the remaining open issues
identified by the FDA, as soon as possible.
Cash and cash equivalents
Cash and cash equivalents consist of U.S. Treasury backed securities, bank deposits, time deposits
and money market funds. Cash equivalents are primarily highly liquid short-term investments with
original maturities of three months or less at the time of purchase and are recorded at cost, which
approximates fair value.
Short-term investments
The Company classifies its short-term investments as available-for-sale. These investments are
recorded at their fair value, and unrealized gains or losses, net of tax, are reported in
accumulated other comprehensive income in Shareholders Equity. As at September 30, 2010, 2009 and
2008 and February 25, 2008, there were no material unrealized gains or losses.
The Company monitors its investments for impairment and other than temporary declines in fair
value. A debt security is considered impaired when its fair value is less than its amortized cost
basis. An impairment is considered other than temporary if (i) the Company has the intent to sell
the security, (ii) it is more likely than not that the Company will be required to sell the
security before recovery of the entire amortized cost basis, or (iii) the Company does not expect
to recover the entire amortized cost basis of the security. If impairment is considered other than
temporary based on condition (i) or (ii) described above, the entire impairment loss is recognized
in earnings. If an impairment is considered other than temporary based on conditions (iii), the
amount representing credit losses (defined as the difference between the present value of the cash
flows expected to be collected and the amortized cost basis of the debt security) will be
recognized in earnings and the amount relating to all other factors will be recognized in other
comprehensive income. As part of this assessment, the Company evaluates among other factors general
market conditions, credit quality of debt instrument issuers, the duration and extent to which the
fair value is less than cost and specific adverse conditions related to the financial health of and
business outlook for the investee, including industry and sector performance, changes in
technology, and operational and financing cash flow factors.
In addition, the Company reviews its equity securities for other than temporary declines in fair
value. The Company evaluates the length of time and the extent to which the market value has been
less than cost, the financial condition and near-term prospects of the portfolio company and the
Companys intent and ability to retain the investment for a period of time sufficient to allow for
any anticipated recovery in market value. The Company charges an impairment loss to earnings when
an other than temporary decline in fair value occurs.
-88-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
Accounts receivable
The majority of the Companys accounts receivable is due from companies in the pharmaceutical
industry. Credit is extended based on an evaluation of a customers financial condition and,
generally, collateral is not required. Accounts receivable are generally due within 30 to 60 days
and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts
outstanding longer than the contractual payment terms are considered past due. The Company
determines its allowance by considering a number of factors, including the length of time trade
accounts receivable are past due, the Companys previous loss history, the customers current
ability to pay its obligation to the Company and the condition of the general economy and the
industry as a whole. The Company writes off accounts receivable when they become uncollectible and
payments subsequently received on such receivables are credited to bad debt expense.
Inventory valuation
Inventories of raw materials and packaging material are valued at the lower of cost and replacement
cost. Inventories of work in progress and finished goods are valued at the lower of cost and net
realizable value. Cost is determined by the first-in, first-out method. Cost for work in progress
and finished goods include raw materials, direct labor, subcontracts and an allocation for
overhead. Allowances are maintained for slow-moving inventories based on the remaining shelf life
of products and estimated time required to sell such inventories. Obsolete inventory and rejected
products are written-off to cost of goods sold.
Inventory costs associated with products that have not yet received regulatory approval are
capitalized if the Company believes there is probable future commercial use and future economic
benefit. If future commercial use and future economic benefit are not considered probable, then
costs associated with pre-launch inventory that has not yet received regulatory approval are
expensed as research and development expense during the period the costs are incurred. The Company
could be required to expense previously capitalized costs related to pre-approval inventory if the
probability of future commercial use and future economic benefit changes due to denial or delay of
regulatory approval, a delay in commercialization, or other factors.
The Company recorded a charge of $44,883,000 during the twelve-month period ended September 30,
2010, to cost of goods sold to reduce inventories to their net realizable value and for estimated
loss for purchase and other materials and supply commitments related to ULTRASE MT and VIOKASE
products.
Research and development
Research and development expenses are expensed as incurred. Upfront and milestone payments made to
third parties in connection with agreements with third parties (or research and development
collaborations) are expensed as incurred up to the point of regulatory approval, in the absence of
an alternative future uses. Payments made to third parties subsequent to regulatory approval are
capitalized and amortized over the remaining useful life of the related product. Amounts
capitalized for such payments are included in intangible assets.
In-process research and development
In-process research and development (IPR&D) represents the fair value assigned to incomplete
research and development projects acquired in a business combination or asset acquisition which, at
the time of acquisition, are determined to have no alternative future use. For business
combinations that closed prior to October 1, 2009, the fair value of such project was expensed upon
acquisition. For business combinations that closed after October 1, 2009, the fair value of such
acquired IPR&D projects are capitalized as indefinite lived intangible assets, subject to
impairment testing until completion or abandonment of the projects. Alternatively, the fair value
of IPR&D projects acquired as part of an asset acquisition is expensed on acquisition.
Depreciation and amortization
Property, plant and equipment and intangible assets with a finite life are reported at acquisition
cost, less accumulated depreciation and amortization are depreciated or amortized over their
estimated useful lives according to the straight-line method over the following periods:
|
|
|
Buildings
|
|
10 to 25 years |
Furniture and equipment
|
|
5 to 10 years |
Computer equipment and software
|
|
2 to 5 years |
Leasehold and building improvements
|
|
5 to 10 years |
Trademarks, trademark licenses and manufacturing rights
|
|
6 months to 20 years |
Depreciation or amortization commences when an asset is substantially completed and becomes
available for productive commercial use.
-89-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
Impairment of long lived-assets and goodwill
The value of goodwill and intangible assets with an indefinite life are subject to an annual
impairment test unless events or changes in circumstances indicate that the carrying amounts of
these assets may not be recoverable.
The intangible assets with a finite life and property, plant and equipment are subject to an
impairment test whenever events or changes in circumstances indicate that the carrying amounts of
these assets may not be recoverable. The Company compares the carrying value of the unamortized
portion of property, plant and equipment and intangible assets with a finite life to estimated
future undiscounted cash flows. If the carrying value exceeds estimated undiscounted future cash
flows, an impairment loss equal to the excess is recorded in earnings and the cost basis is
adjusted.
The goodwill impairment test is a two-step process. Step one consists of a comparison of the fair
value of a reporting unit with its carrying amount, including the goodwill allocated to the
reporting unit. Measurement of the fair value of a reporting unit may be based on one or more fair
value measures including present value technique of estimated future cash flows and estimated
amounts at which the unit as a whole could be bought or sold in a current transaction between
willing parties. If the carrying amount of the reporting unit exceeds the fair value, step two
requires the fair value of the reporting unit to be allocated to the underlying tangible and
intangible assets and liabilities of that reporting unit, resulting in an implied fair value of
goodwill. If the carrying amount of the goodwill of the reporting unit exceeds the implied fair
value of that goodwill, an impairment loss equal to the excess is recorded in earnings.
The Companys pancreatic enzyme products did not receive NDA approval from the FDA by the April 28,
2010 deadline. This is a change in circumstance that caused the Company to review the carrying
value of its associated long-lived assets including goodwill. Based on this review, an impairment
charge of $107,158,000 was recorded during the twelve-month period ended September 30, 2010 (Note
9).
Income taxes
Income taxes are calculated using the asset and liability method. Under this method, deferred
income tax assets and liabilities are recognized to account for the estimated taxes that will
result from the recovery or settlement of assets and liabilities recorded at their financial
statement carrying amounts. Deferred income tax assets and liabilities are measured based on
enacted tax rates and laws at the date of the financial statements for the years in which the
temporary differences are expected to reverse. A valuation allowance is provided for the portion of
deferred tax assets that is more likely than not to remain unrealized. Adjustments to the deferred
income tax asset and liability balances are recognized in net income as they occur.
The Company conducts business in various countries throughout the world and is subject to tax in
numerous jurisdictions. As a result of its business activities, the Company files a significant
number of tax returns that are subject to examination by various federal, state and local tax
authorities. Tax examinations are often complex as tax authorities may disagree with the treatment
of items reported by the Company and this may require several years to resolve.
Selling and administrative expenses
Selling and administrative expenses include shipping and handling expenses, other than distribution
service agreement fees and advertising expenses. Distribution service agreement fees are deducted
from revenue. Advertising costs are expensed as incurred.
Foreign currency translation
The Company has operations in the United States of America, Canada and some Western European
countries. For foreign subsidiaries where the local currencies have been determined to be the
functional currency, the net assets of these subsidiaries are translated into U.S. dollars for
consolidation purposes using the current rate method. Gains and losses arising from the translation
of the financial statements of subsidiaries are deferred in a cumulative foreign currency
translation adjustments account reported as a component of Accumulated other comprehensive income
in Shareholders Equity (Deficiency).
On October 1, 2008, the Company changed the functional currency of its Canadian business unit from
the Canadian dollar to the U.S. dollar. For the operations in the United States of America and in
Canada for the period after September 30, 2008, monetary foreign currency assets and liabilities
are translated into U.S. dollars, the functional currency, at the exchange rates in effect at the
balance sheet date whereas non-monetary assets and liabilities are translated at exchange rates in
effect at transaction dates. Revenue and operating expenses in foreign currency are translated at
the average rates in effect during the year, except for depreciation and amortization, translated
at historical rates. Gains and losses are included in net income for the year.
-90-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
Deferred debt issue expenses
Financing costs incurred in connection with the issuance of senior secured notes (Senior Secured
Notes), a credit facility (Credit Facility) and a Senior Unsecured Interim Loan (Senior
Unsecured Interim Loan) on February 25, 2008, have been deferred and are included in deferred debt
issue expenses on the consolidated balance sheets. These financing costs are being expensed over
the terms of the respective debt using the effective interest method. Financing costs incurred in
connection with the repayment of the bridge financing (Bridge Financing) and the issuance of
senior unsecured notes (Senior Unsecured Notes) on May 6, 2008, have also been deferred and are
included in deferred debt issue expenses related to the Senior Unsecured Interim Loan are being
expensed over the terms of the Senior Unsecured Notes using the effective interest method.
Derivative instruments and hedging activities
The Company records all derivatives on the balance sheets at fair value. The accounting for changes
in the fair value of derivatives depends on the intended use of the derivatives, whether the
consolidated Company has elected to designate a derivative in a hedging relationship and apply
hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply
hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in
the fair value of an asset, liability, or firm commitment attributable to a particular risk, such
as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a
hedge of the exposure to variability in expected future cash flows, or other types of forecasted
transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching
of the timing of gain or loss recognition on the hedging instrument with the recognition of the
changes in the fair value of the hedged asset or liability that are attributable to the hedged risk
in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow
hedge. The Company may enter into derivative contracts that are intended to economically hedge
certain of its risk, even though hedge accounting does not apply or the Company elects not to apply
hedge accounting.
The Company has designated its interest rate swaps as cash flow hedges of interest rate risk. On an
ongoing basis, the Company assesses whether each derivative continues to be highly effective in
offsetting changes in the cash flows of hedged items. Hedge ineffectiveness, if any, is immediately
recognized in earnings.
Stock incentive plans
The Company recognizes the fair value of stock-based awards granted pursuant to its stock incentive
plans as expense over the requisite service period, which generally equals the vesting period. All
stock-based awards are approved by the Board of Directors prior to the grant.
3. Recently Issued Accounting Standards
In March 2010, the FASB issued guidance related to revenue recognition that applies to arrangements
with milestones relating to research or development deliverables. This guidance provides criteria
that must be met to recognize consideration that is contingent upon achievement of a substantive
milestone in its entirety in the period in which the milestone is achieved. The guidance provides a
definition of substantive milestone and should be applied regardless of whether the arrangement
includes single or multiple deliverables or units of accounting. This guidance is effective
prospectively to milestones achieved in fiscal years, and interim periods within those years, after
June 15, 2010, with early adoption permitted. The adoption of this guidance did not have a material
impact on the Companys consolidated financial statements.
In March 2010, the FASB amended the existing guidance on stock compensation to clarify that an
employee share-based payment award with an exercise price denominated in the currency of a market
in which a substantial portion of the entitys equity securities trades should not be considered to
contain a condition that is not a market, performance, or service condition. Therefore, such an
award should not be classified as a liability if it otherwise qualifies as equity. This guidance is
effective for fiscal years, and interim periods within those fiscal years, beginning on or after
December 15, 2010.The adoption of this guidance is not expected to have a material impact on the
Companys consolidated financial statements.
In January 2010, the FASB amended the existing authoritative guidance on disclosures of fair value
measurements and clarifies and provides additional disclosure requirements related to recurring and
non-recurring fair value measurements. The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning after December 15,
2009. The disclosure of the roll forward of activity in Level 3 measurements on a gross basis is
effective for fiscal years beginning after December 15, 2010, and for interim periods within those
fiscal years. The adoption of this guidance did not have a material impact on the Companys
consolidated financial statements.
In October 2009, the FASB amended the existing guidance on revenue recognition related to
accounting for multiple-element arrangements. This amendment addresses how to determine whether an
arrangement involving multiple deliverables contains more than one unit of accounting, and how the
arrangement consideration should be allocated among the separate units of accounting. This guidance
is effective prospectively for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010, and early adoption is permitted. The Company is
currently evaluating the impact of the adoption of this guidance on its consolidated financial
statements.
-91-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
In August 2009, the FASB amended the existing guidance on fair value measurements and disclosures
to provide clarification in measuring the fair value of liabilities in circumstances when a quoted
price in an active market for the identical liability is not available. In such circumstances, a
reporting entity is required to measure fair value using one or more of the following methods: 1) a
valuation technique that uses the quoted price of the identical liability when traded as an asset
or quoted prices for similar liabilities or similar liabilities when traded as assets; and/or 2) a
valuation technique that is consistent with the principles of fair value measurements (e.g. an
income approach or market approach). This guidance is effective for reporting periods including
interim periods beginning after August 28, 2009. The adoption of this guidance did not have a
material impact on the Companys consolidated financial statements.
In June 2009, the FASB amended the existing authoritative guidance on consolidation regarding
variable interest entities for determining whether an entity is a variable interest entity (VIE)
and requires an enterprise to perform an analysis to determine whether the enterprises variable
interest or interests give it a controlling
financial interest in a VIE. According to the revised guidance, an enterprise has a controlling
financial interest when it has a) the power to direct the activities of a VIE that most
significantly impact the entitys economic performance and b) the obligation to absorb losses of
the entity or the right to receive benefits from the entity that could potentially be significant
to the VIE. The guidance also requires an enterprise to assess whether it has an implicit financial
responsibility to ensure that a VIE operates as designed when determining whether it has power to
direct the activities of the VIE that most significantly impact the entitys economic performance.
The guidance also requires ongoing assessments of whether an enterprise is the primary beneficiary
of a VIE, requires enhanced disclosures and eliminates the scope exclusion for qualifying
special-purpose entities. The revised guidance is effective for fiscal years beginning after
November 15, 2009, with early adoption prohibited. The Company is currently evaluating the impact
of the adoption of the revised guidance on its consolidated financial statements.
In May 2009, the FASB issued authoritative guidance on subsequent events. This guidance establishes
general standards of accounting for and disclosures of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued. Specifically, the
guidance sets forth the period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements, the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its financial statements and the
disclosures that an entity should make about events or transactions that occurred after the balance
sheet date. The guidance is effective for fiscal years and interim periods ended after June 15,
2009, and will be applied prospectively. In February 2010, the FASB amended the authoritative
guidance on subsequent events to amend disclosures related to events occurring subsequent to year
end. The amendment removes the requirement for an SEC filer to disclose a date through which
subsequent events were evaluated in both issued and revised financial statements. The amendment
removes potential conflicts with SEC guidance and is effective upon issuance. The adoption of this
guidance did not have a material impact on the Companys consolidated financial statements.
In April 2009, the FASB amended the authoritative guidance on financial instruments to require
disclosures about fair value of financial instruments in interim as well as in annual financial
statements of publicly traded companies. The guidance is effective for interim and annual periods
ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.
The adoption of this guidance did not have a material impact on its consolidated financial
statements since the Company has provided disclosures about fair value of financial instruments in
its interim financial statements prior to the issuance of this guidance.
In April 2009, the FASB issued additional guidance on estimating fair value when the volume and
level of activity for an asset or liability have significantly decreased in relation to normal
market activity for the asset or liability. Guidance on identifying circumstances that indicate a
transaction is not orderly was also issued and required additional disclosures. This guidance is to
be applied prospectively and is effective for interim and annual periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this
guidance did not have a material impact on the Companys consolidated financial statements.
In April 2008, the FASB issued guidance that amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset. The intent of this guidance is to improve the consistency between the useful life
of a recognized intangible asset determined in accordance with the guidance on intangible assets
and the period of expected cash flows used to measure the fair value of the asset determined in
accordance with the amended guidance for business combinations and other authoritative guidance.
This guidance is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The
adoption of this guidance did not have a material impact on the Companys consolidated financial
statements.
-92-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
In March 2008, the FASB amended the guidance on disclosure requirements related to derivative
instruments and hedging activities. The new guidance requires that objectives for using derivative
instruments be disclosed in terms of underlying risk and accounting designation. Pursuant to the
new guidance, enhanced disclosures are required about (a) how and why derivative instruments are
used, (b) how derivative instruments and related hedged items are accounted for and (c) how
derivative instruments and related hedged items affect an entitys financial position, financial
performance and cash flows. The fair value of derivative instruments and their gains and losses
will need to be presented in tabular format in order to present a more complete picture of the
effects of using derivative instruments. This guidance is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008. The adoption of this
guidance did not have a material impact on the Companys consolidated financial statements (see
Note 16).
In December 2007, the FASB issued guidance related to collaborative arrangements. The guidance
defines collaborative arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement and between participants in the arrangement and third
parties. The guidance also establishes the appropriate income statement presentation and
classification for joint operating activities and payments between participants, as well as the
sufficiency of the disclosures related to these arrangements. This guidance is effective for fiscal
years and interim periods within those fiscal years, beginning after December 15, 2008, and shall
be applied retrospectively to all prior periods presented for all collaborative arrangements
existing as at the effective date. The adoption of this guidance did not have a material impact on
the Companys consolidated financial statements.
In September 2006, the FASB issued guidance on fair value measurements, which defines fair value,
establishes a framework for measuring fair value and expands disclosures about fair value
measurements and is effective for fair value measurements already required or permitted by other
guidance for financial statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. In February 2008, the FASB issued guidance, that
deferred the effective date of the guidance for fair value measurement for one year for
non-financial assets and non-financial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at least annually). In
October 2008, the FASB issued guidance which clarifies the application of the guidance on fair
value measurements in determining the fair value of a financial asset when the market for that
asset is not active. This guidance was effective upon issuance, including prior periods for which
financial statements had not been issued. On October 1, 2008, the Company adopted the guidance on
fair value measurements for financial assets and liabilities. The adoption of the guidance on fair
value measurements for financial assets and liabilities carried at fair value did not have a
material impact on the Companys consolidated financial statements (see Note 17). On October 1,
2009, the Company adopted the guidance on fair value measurements for non-financial assets and
liabilities. The adoption of the guidance on fair value measurements for non-financial assets and
liabilities did not have a material impact on the Companys consolidated financial statements.
4. Acquisition
On February 25, 2008, the Company, pursuant to a Plan of Arrangement dated November 29, 2007 and
through a wholly-owned indirect subsidiary, completed the acquisition of all common shares of Axcan
Pharma Inc. at a price of $23.35 per share and entered into various related transactions (the
Acquisition). The cash consideration of $1,293,000,000 plus the capitalized portion of
acquisition costs of approximately $14,100,000 were funded by cash equity contributions from
affiliates of TPG Capital L.P. (the Sponsor) and certain co-investors of $475,000,000, the
proceeds from long-term debt of $634,100,000 and $198,200,000 in cash on hand from Axcan Pharma
Inc. The business acquired is a specialty pharmaceutical company concentrating in the field of
gastroenterology, with operations in North America and the European Union.
-93-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
The Company accounted for this acquisition as a business combination and, accordingly, the cost was
allocated to the assets acquired and liabilities assumed based on their estimated fair values at
the acquisition date. As at September 30, 2008, the Company finalized its allocation of the
purchase price. As at September 30, 2008, the final purchase price allocation was as follows:
|
|
|
|
|
|
|
$ |
|
Cash |
|
|
348,791 |
|
Inventories a) |
|
|
54,055 |
|
Other current assets |
|
|
91,951 |
|
Property, plant and equipment |
|
|
36,912 |
|
Intangible assets |
|
|
581,653 |
|
Acquired in-process research b) |
|
|
272,400 |
|
Goodwill |
|
|
169,625 |
|
Deferred debt issue expenses |
|
|
889 |
|
Deferred income taxes assets |
|
|
7,246 |
|
Current liabilities |
|
|
(174,554 |
) |
Long-term debt |
|
|
(68 |
) |
Deferred income taxes liabilities |
|
|
(81,646 |
) |
|
Total |
|
|
1,307,254 |
|
|
|
|
|
a) |
|
As part of the purchase price allocation for the acquisition, the carrying value of
inventory acquired was stepped-up to fair value by $22,714,000 as at February 25, 2008. The
stepped-up value is recorded as a charge to cost of goods sold as acquired inventory is sold. |
|
b) |
|
Represents the estimated fair value of acquired in-process R&D projects that had not
yet reached technological feasibility and had no alternative future use. Accordingly, this
amount was immediately expensed upon the acquisition date. The value assigned to purchased
in-process technology is mainly attributable to the following projects: CANASA MAX 002,
pancreatic enzymes, PYLERA in the European Union, AGI 010 and Cx401. |
The pro-forma results of operations for the Company, assuming that the transaction occurred on
October 1, 2007 and excluding any pro-forma charges for acquired in-process research, inventory
stepped-up value adjustments, transaction and integration costs are as follows:
|
|
|
|
|
|
|
For the |
|
|
|
twelve-month |
|
|
|
period ended |
|
|
|
September 30, 2008 |
|
|
|
(unaudited) |
|
|
|
$ |
|
Revenue |
|
|
381,758 |
|
Income before income taxes a) |
|
|
259 |
|
Net income a) |
|
|
3,964 |
|
|
|
|
|
|
|
|
a) |
|
The pro-forma financial information for the fiscal year ended September 30, 2008, has
not been adjusted for the acquired in-process research of $272,400,000 and inventory
stepped-up value adjustments of $22,714,000, which form part of the purchase price allocation,
transaction and integration costs of $37,569,000 because they are non-recurring in nature. |
The pro-forma information is presented for informational purposes only and is not necessarily
indicative of the results of operations that actually would have been achieved had the acquisition
been consummated as of the time, nor is it intended to be a projection of future results.
-94-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
Product acquisitions
During the twelve-month period ended September 30, 2010, the Company entered into an asset purchase
and license agreement to acquire rights in and to the intellectual property, assigned contracts,
permits and inventories related to a compound to be used in the development of an undisclosed
product in the field of gastroenterology. Certain other rights were licensed under the agreement.
Pursuant to the agreement, the Company made an upfront payment of $8,000,000 on closing and
additional payments of up to $86,000,000 may be required based on the achievement of certain
development, regulatory and commercialization milestones. In addition, the Company will pay
royalties on the basis of net sales. The Company completed the asset acquisition in April 2010 and
recorded an expense of $7,948,000 and $52,000 in property, plant and equipment for the payment of
acquired in-process research and development in the third quarter of fiscal year 2010.
5. Accounts receivable
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
$ |
|
|
$ |
|
Trade
accounts, net of allowance for doubtful amounts of $117 ($117 in 2009)
a) |
|
|
31,404 |
|
|
|
54,094 |
|
Taxes receivable |
|
|
364 |
|
|
|
612 |
|
Other |
|
|
611 |
|
|
|
2,418 |
|
|
|
|
|
32,379 |
|
|
|
57,124 |
|
|
The Company believes that there is no unusual exposure associated with the collection of these
accounts receivable.
a) |
|
As at September 30, 2010, the accounts receivable include amounts receivable from
three major customers which represent approximately 42% (57% as at September 30, 2009) of the
Companys total accounts receivable (Note 14). |
6. Inventories
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
$ |
|
|
$ |
|
Raw material and packaging material |
|
|
10,316 |
|
|
|
8,416 |
|
Work in progress |
|
|
595 |
|
|
|
886 |
|
Finished goods net of reserve for obsolescence of $758 ($4,159 as at September 30, 2009) |
|
|
12,955 |
|
|
|
35,404 |
|
|
|
|
|
23,866 |
|
|
|
44,706 |
|
|
As disclosed in Note 2, the Companys PEPs did not obtain regulatory approval by the April 28, 2010
deadline established by the FDA. As a result, a charge of $44,883,000 was recorded during the
twelve-month period ended September 30, 2010, to cost of goods sold to reduce inventories to their
net realizable value and for estimated loss for purchase and other materials and supply commitments
related to ULTRASE MT and VIOKASE products.
-95-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
7. Income Taxes
Income taxes included in the statement of operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
Predecessor |
|
|
|
For the |
|
|
For the |
|
|
For the |
|
|
For the |
|
|
|
twelve-month |
|
|
twelve-month |
|
|
seven-month |
|
|
five-month |
|
|
|
period ended |
|
|
period ended |
|
|
period ended |
|
|
period ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
February 25, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Current |
|
|
5,334 |
|
|
|
11,491 |
|
|
|
7,627 |
|
|
|
11,888 |
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Creation and reversal of temporary differences |
|
|
5,638 |
|
|
|
(35,863 |
) |
|
|
(25,367 |
) |
|
|
154 |
|
Change in promulgated rates |
|
|
(22 |
) |
|
|
290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
5,616 |
|
|
|
(35,573 |
) |
|
|
(25,367 |
) |
|
|
154 |
|
|
|
|
|
10,950 |
|
|
|
(24,082 |
) |
|
|
(17,740 |
) |
|
|
12,042 |
|
|
Domestic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
274 |
|
|
|
7,430 |
|
|
|
4,057 |
|
|
|
(4,264 |
) |
Deferred |
|
|
10,945 |
|
|
|
(37,510 |
) |
|
|
(10,461 |
) |
|
|
1,977 |
|
|
|
|
|
11,219 |
|
|
|
(30,080 |
) |
|
|
(6,404 |
) |
|
|
(2,287 |
) |
|
Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
5,060 |
|
|
|
4,061 |
|
|
|
3,570 |
|
|
|
16,152 |
|
Deferred |
|
|
(5,329 |
) |
|
|
1,937 |
|
|
|
(14,906 |
) |
|
|
(1,823 |
) |
|
|
|
|
(269 |
) |
|
|
5,998 |
|
|
|
(11,336 |
) |
|
|
14,329 |
|
|
|
|
|
10,950 |
|
|
|
(24,082 |
) |
|
|
(17,740 |
) |
|
|
12,042 |
|
|
The Companys effective income tax rate differs from the statutory federal income tax rate in the
United States of America of 35.00% for the Successor and the combined statutory federal and
provincial income tax rate in Canada for the Predecessor of 31.83%. This difference arises from the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
Predecessor |
|
|
|
For the |
|
|
For the |
|
|
For the |
|
|
For the |
|
|
|
twelve-month |
|
|
twelve-month |
|
|
seven-month |
|
|
five-month |
|
|
|
period ended |
|
|
period ended |
|
|
period ended |
|
|
period ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
February 25, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
|
% |
|
|
|
$ |
|
|
% |
|
|
|
$ |
|
|
% |
|
|
|
$ |
|
|
% |
|
|
|
$ |
|
Combined statutory rate applied to pre-tax
income (loss) |
|
|
35.00 |
|
|
|
(55,796 |
) |
|
|
35.00 |
|
|
|
(11,192 |
) |
|
|
35.00 |
|
|
|
(107,451 |
) |
|
|
31.83 |
|
|
|
9,284 |
|
Increase (decrease) in taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in promulgated rates |
|
|
0.01 |
|
|
|
(22 |
) |
|
|
(0.91 |
) |
|
|
290 |
|
|
|
|
|
|
|
|
|
|
|
0.15 |
|
|
|
42 |
|
Difference with foreign tax rates |
|
|
1.70 |
|
|
|
(2,717 |
) |
|
|
8.10 |
|
|
|
(2,591 |
) |
|
|
(1.12 |
) |
|
|
3,428 |
|
|
|
(5.63 |
) |
|
|
(1,643 |
) |
Tax benefit arising from a financing structure |
|
|
11.18 |
|
|
|
(17,824 |
) |
|
|
44.46 |
|
|
|
(14,218 |
) |
|
|
2.94 |
|
|
|
(9,014 |
) |
|
|
|
|
|
|
|
|
Non-deductible items |
|
|
(21.89 |
) |
|
|
34,892 |
|
|
|
(9.72 |
) |
|
|
3,108 |
|
|
|
(31.81 |
) |
|
|
97,647 |
|
|
|
15.91 |
|
|
|
4,641 |
|
Non-taxable items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.06 |
) |
|
|
(17 |
) |
Investment tax credits |
|
|
0.96 |
|
|
|
(1,524 |
) |
|
|
4.24 |
|
|
|
(1,355 |
) |
|
|
0.29 |
|
|
|
(885 |
) |
|
|
(2.72 |
) |
|
|
(793 |
) |
State taxes |
|
|
1.95 |
|
|
|
(3,107 |
) |
|
|
(0.34 |
) |
|
|
110 |
|
|
|
1.29 |
|
|
|
(3,974 |
) |
|
|
|
|
|
|
|
|
Change in valuation allowance |
|
|
(36.09 |
) |
|
|
57,544 |
|
|
|
(2.30 |
) |
|
|
736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
0.31 |
|
|
|
(496 |
) |
|
|
(3.22 |
) |
|
|
1,030 |
|
|
|
(0.81 |
) |
|
|
2,509 |
|
|
|
1.81 |
|
|
|
528 |
|
|
|
|
|
(6.87 |
) |
|
|
10,950 |
|
|
|
75.31 |
|
|
|
(24,082 |
) |
|
|
5.78 |
|
|
|
(17,740 |
) |
|
|
41.29 |
|
|
|
12,042 |
|
|
As at September 30, 2010, no provision has been made for income taxes on the undistributed earnings
of the Companys foreign subsidiaries that the Company intends to indefinitely reinvest.
-96-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
The deferred income tax assets and liabilities result from differences between the tax value and
book value of the following items:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
$ |
|
|
$ |
|
Assets |
|
|
|
|
|
|
|
|
Inventories |
|
|
2,897 |
|
|
|
3,519 |
|
Accounts payable and accrued liabilities |
|
|
12,257 |
|
|
|
12,464 |
|
Intangible assets |
|
|
7,849 |
|
|
|
|
|
Research and development tax credits |
|
|
2,022 |
|
|
|
2,355 |
|
Deferred debt issue expenses |
|
|
2,332 |
|
|
|
1,812 |
|
Unused tax losses |
|
|
42,046 |
|
|
|
20,983 |
|
Financing expenses |
|
|
1,038 |
|
|
|
736 |
|
Stock-based compensation |
|
|
2,123 |
|
|
|
1,984 |
|
Other |
|
|
176 |
|
|
|
485 |
|
Liabilities |
|
|
|
|
|
|
|
|
Prepaid expenses and deposits |
|
|
(832 |
) |
|
|
(786 |
) |
Property, plant and equipment |
|
|
(1,183 |
) |
|
|
(1,305 |
) |
Intangible assets |
|
|
(32,915 |
) |
|
|
(45,312 |
) |
Sub Part F income |
|
|
|
|
|
|
(3,660 |
) |
Undistributed earnings of foreign subsidiaries |
|
|
|
|
|
|
(2,097 |
) |
Other |
|
|
(80 |
) |
|
|
(457 |
) |
|
|
|
|
37,730 |
|
|
|
(9,279 |
) |
Valuation allowance |
|
|
(58,280 |
) |
|
|
(736 |
) |
|
Net deferred income tax liabilities |
|
|
(20,550 |
) |
|
|
(10,015 |
) |
|
Recorded as:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
$ |
|
|
$ |
|
Deferred
income tax assets Current |
|
|
2,331 |
|
|
|
15,852 |
|
Deferred income tax assets Non-current |
|
|
8,706 |
|
|
|
12,052 |
|
Deferred income tax liabilities Current |
|
|
(47 |
) |
|
|
(137 |
) |
Deferred income tax liabilities Non-Current |
|
|
(31,540 |
) |
|
|
(37,782 |
) |
|
Net deferred income tax liabilities |
|
|
(20,550 |
) |
|
|
(10,015 |
) |
|
Current and non-current deferred income tax assets and liabilities within the same jurisdiction are
generally offset for presentation in the Consolidated Balance sheets.
-97-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
As at September 30, 2010, the Company had tax benefit carryovers of $42,046,000 ($20,983,000 as at
September 30, 2009) relating to operating losses and $3,032,000 ($2,355,000 as at September 30,
2009) relating to tax credits. These tax benefits, in the amounts indicated below, are available
until the following fiscal years:
|
|
|
|
|
|
|
|
|
|
|
Operating losses |
|
|
Tax credits |
|
|
|
$ |
|
|
$ |
|
2028 |
|
|
4,046 |
|
|
|
343 |
|
2029 |
|
|
2,302 |
|
|
|
1,457 |
|
2030 |
|
|
26,998 |
|
|
|
1,232 |
|
Indefinitely |
|
|
8,700 |
|
|
|
|
|
|
A valuation allowance against deferred tax assets is established when it is not more likely than
not that the deferred tax assets will be realized. Based on all available evidence, both positive
and negative, the Company determined that it is more likely than not that the deferred tax assets
related to substantially all of the U.S. jurisdictions cumulative gross net operating loss carry
forwards, and certain other deferred assets, will not be realized. Accordingly, the Company
recorded a valuation allowance of $57,242,000 for the year ended September 30, 2010, against the
following net deferred tax assets generated in the U.S. reporting unit: $33,347,000 for unused
losses, $10,696,000 for accounts payable and accrued liabilities, $7,849,000 for intangible assets,
$2,333,000 for deferred debt issue expenses, $2,123,000 for stock-based compensation liability, and
$894,000 for others. The Company has also recorded valuation allowances for the years ended
September 30, 2010, and 2009 of $302,000 and $736,000 respectively against the deferred tax assets
relating to financing expenses generated in its France reporting unit.
In future periods, if the deferred tax assets are determined by management to be more likely than
not to be realized, the recognized tax benefits relating to the reversal of the valuation allowance
will be recorded.
Effective October 1, 2007, the Company adopted the provisions of the guidance issued by the FASB
related to accounting for uncertainty in income taxes. The guidance prescribes a recognition
threshold and a measurement attribute for the financial statement recognition and measurement of
tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a
tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.
The adoption of the provisions of this guidance did not have a material impact on the Companys
consolidated financial position and results of operations and a cumulative effect adjustment to the
opening balance of retained earnings was not necessary. If recognized, the total amount of
unrecognized tax benefits of $11,485,000 as at September 30, 2010, ($10,409,000 as at September 30,
2009) would affect the Companys effective tax rate.
The following table presents a summary of the changes to unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
Predecessor |
|
|
|
For the |
|
|
For the |
|
|
For the |
|
|
For the |
|
|
|
twelve-month |
|
|
twelve-month |
|
|
seven-month |
|
|
five-month |
|
|
|
period ended |
|
|
period ended |
|
|
period ended |
|
|
period ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
February 25, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Balance, beginning of period |
|
|
10,409 |
|
|
|
10,446 |
|
|
|
2,015 |
|
|
|
1,245 |
|
Additions based on tax positions related
to the current year |
|
|
31 |
|
|
|
31 |
|
|
|
249 |
|
|
|
904 |
|
Additions for tax positions of prior years |
|
|
1,179 |
|
|
|
279 |
|
|
|
8,182 |
|
|
|
15 |
|
Reductions for tax positions of prior years |
|
|
(134 |
) |
|
|
(347 |
) |
|
|
|
|
|
|
(149 |
) |
|
Balance, end of period |
|
|
11,485 |
|
|
|
10,409 |
|
|
|
10,446 |
|
|
|
2,015 |
|
|
-98-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
The Company has historically recognized interest relating to income tax matters as a component of
financial expenses and penalties related to income tax matters as a component of income tax
expense. As at September 30, 2010, the company had accrued $1,075,000 ($649,000 as at September 30,
2009) for interest relating to income tax matters. There were no amounts recorded for penalties as
at September 30, 2010, and 2009.
The Company and its subsidiaries file tax returns in the U.S. federal jurisdiction and various
states, local and foreign jurisdictions including Canada and France. In many cases, the Companys
uncertain tax positions are related to tax years that remain subject to examination by relevant tax
authorities. The Company is subject to federal and state income tax examination by U.S. tax
authorities for fiscal years 2005 through 2010. The Company is subject to Canadian and provincial
income tax examination for fiscal years 2005 through 2010. There are numerous other income
jurisdictions for which tax returns are not yet settled, none of which is individually significant.
The Company is currently being audited by Canada Revenue Agency for fiscal year 2005 to fiscal year
2008.
The Company and its U.S. subsidiaries file as members of a U.S. Federal income tax return, of which
Axcan Holdings Inc. is the parent. The consolidated income tax liability is allocated among the
members of the group in accordance with a tax allocation agreement. The tax allocation agreement
provides that each member of the group is allocated its share of the consolidated tax provision
determined generally on a separate income tax return method.
8. Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Cost |
|
|
depreciation |
|
|
Net |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
Land |
|
|
2,240 |
|
|
|
|
|
|
|
2,240 |
|
Buildings |
|
|
23,252 |
|
|
|
4,490 |
|
|
|
18,762 |
|
Furniture and equipment |
|
|
8,534 |
|
|
|
3,515 |
|
|
|
5,019 |
|
Computer equipment and software |
|
|
18,419 |
|
|
|
9,588 |
|
|
|
8,831 |
|
Leasehold and building improvements |
|
|
1,220 |
|
|
|
295 |
|
|
|
925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,665 |
|
|
|
17,888 |
|
|
|
35,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Cost |
|
|
depreciation |
|
|
Net |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
Land |
|
|
2,276 |
|
|
|
|
|
|
|
2,276 |
|
Buildings |
|
|
22,739 |
|
|
|
2,931 |
|
|
|
19,808 |
|
Furniture and equipment |
|
|
8,321 |
|
|
|
2,598 |
|
|
|
5,723 |
|
Computer equipment and software |
|
|
15,218 |
|
|
|
4,805 |
|
|
|
10,413 |
|
Leasehold and building improvements |
|
|
1,181 |
|
|
|
57 |
|
|
|
1,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,735 |
|
|
|
10,391 |
|
|
|
39,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of property, plant and equipment amount to $5,577,000 for the twelve-month period
ended September 30, 2010, ($11,023,000 for the twelve-month period ended September 30, 2009,
$3,134,000 for the seven-month period ended September 30, 2008, and $2,963,000 for the five-month
period ended February 25, 2008).
The cost and accumulated depreciation of equipment under capital leases amount to $1,401,000 and
$1,077,000 respectively ($1,697,000 and $1,173,000 in 2009).
-99-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
9. Impairment of Long-Lived Assets, Including Goodwill
Goodwill
The FDA mandated that all manufacturers of exocrine pancreatic insufficiency drug products file an
NDA and receive approval for their products by April 28, 2010. On April 28, 2010, neither of the
Companys two pancreatic insufficiency drug products, ULTRASEMT and VIOKASE, had
obtained FDA approval. The Company plans to continue to seek to obtain an NDA approval for these
products. The Company is currently not distributing these products and expects that the future cash
flows that would be generated from these products will be negatively impacted by market share
erosion that will occur between April 28, 2010 and the date of eventual re-launch of the products
on the market, and management cannot provide any assurances that the Company will be able to
re-launch the products. The Company has considered the FDA April 28, 2010 approval deadline to be a
triggering event which causes the Company to assess whether any portion of its recorded goodwill
balance was impaired. As a result, an estimate of the impact of these developments was reflected in
certain valuation assumptions of the Companys interim goodwill impairment test performed as at
March 31, 2010.
The goodwill impairment test is a two step process. Step one of the impairment analysis consisted
of a comparison of the fair value of the U.S. reporting unit with its net carrying value, including
the goodwill. The Company performed extensive valuation analyses, utilizing both income and
market-based approaches, in its goodwill assessment process. The following describes the valuation
methodologies used to derive the estimated fair value of the reporting unit.
Income approach
To determine the fair value, the Company discounted the expected future cash flows of the U.S.
reporting unit, using a discount rate, which reflected the overall level of inherent risk and the
rate of return an outside investor would have expected to earn. To estimate cash flows beyond the
final year of its model, the Company used a terminal value approach. Under this approach, the
Company used estimated operating income before interest, taxes, depreciation and amortization in
the final year of its model, adjusted to estimate a normalized cash flow, applied a perpetuity
growth assumption, and discounted by a perpetuity discount factor to determine the terminal value.
The Company incorporated the present value of the resulting terminal value into its estimate of the
fair value.
Based on the step one analysis that was performed for the U.S. reporting unit, the Company
determined that the carrying amount of the net assets of the reporting unit was in excess of its
estimated fair value. As such, the Company was required to perform the step two analysis for its
U.S. reporting unit, in order to determine the amount of any goodwill impairment. The step two
analysis consisted of comparing the implied fair value of the goodwill with the carrying amount of
the goodwill, with an impairment charge resulting from any excess of the carrying value of the
goodwill over the implied fair value of the goodwill, based on a hypothetical allocation of the
estimated fair value to the net assets. Based on the preliminary step two analysis, the Company
determined that the goodwill allocated to the U.S. reporting unit, in the amount of $91,400,000 was
impaired. As a result, the Company recorded a preliminary goodwill impairment charge of $91,400,000
during the three-month period ended March 31, 2010, which represented the Companys best estimate
as at March 31, 2010. The hypothetical allocation of the fair value of the reporting unit to
individual assets and liabilities within the reporting unit also requires the Company to make
significant estimates and assumptions. The hypothetical allocation required several analyses to
determine the estimate of the fair value of assets and liabilities of the reporting unit. During
the three-month period ended June 30, 2010, the Company finalized its step two analysis. The
finalization of this analysis did not result in any adjustment to the previously recorded
impairment.
The determination of the fair value of the reporting unit required the Company to make significant
estimates and assumptions that affected the reporting units expected future cash flows. These
estimates and assumptions primarily include, but are not limited to, the discount rate, terminal
growth rates, operating income before depreciation and amortization, and capital expenditure
forecasts. Additionally, the Company has made assumptions relating to the expected amount of time
required to eventually obtain FDA approval for the Companys pancreatic enzyme products and the
eventual market share of these products. Due to the inherent uncertainty involved in making these
estimates, actual results could differ significantly from those estimates.
The following table reflects the changes in carrying amount of goodwill:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
$ |
|
|
$ |
|
Balance, beginning of period |
|
|
165,823 |
|
|
|
165,014 |
|
Impairment |
|
|
(91,400 |
) |
|
|
|
|
Foreign exchange |
|
|
(883 |
) |
|
|
809 |
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
73,540 |
|
|
|
165,823 |
|
|
|
|
|
|
|
|
|
|
-100-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
Intangible assets
In conjunction with the goodwill impairment identified during the twelve-month period ended
September 30, 2010, the Company completed its review of the impairment test for intangible assets
with a finite life related to PEPs within the U.S. reporting unit for recoverability and recorded a
non-cash charge for impairment of intangible assets other than goodwill of $15,758,000. The Company
used a discounted cash flow based approach to value these assets.
During the twelve-month period ended September 30, 2009, as a result of certain factors related to
the ongoing marketing of certain of the Companys products including the approval of a generic
formulation of URSO 250 and URSO FORTE, the Company reviewed the carrying amount of the intangible
assets specifically related to these products. Based on a discounted cash flow analysis and market
prices, the Company concluded that a $55,665,000 reduction to the carrying value of the related
intangible assets totalling $83,709,000 prior to the write-down was required. In addition, the
estimated remaining amortizable life of these intangible assets was reduced to periods ranging from
6 months to 14 years.
The following table reflects the changes in the carrying amount of intangible assets:
Trademarks, trademark licenses and manufacturing rights with a finite life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Cost |
|
|
amortization |
|
|
Net |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
Balance, beginning of period |
|
|
491,411 |
|
|
|
70,121 |
|
|
|
421,290 |
|
Impairment |
|
|
(26,400 |
) |
|
|
(10,642 |
) |
|
|
(15,758 |
) |
Amortization |
|
|
|
|
|
|
52,465 |
|
|
|
(52,465 |
) |
Foreign exchange |
|
|
(5,804 |
) |
|
|
(699 |
) |
|
|
(5,105 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
459,207 |
|
|
|
111,245 |
|
|
|
347,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Cost |
|
|
amortization |
|
|
Net |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
Balance, beginning of period |
|
|
559,146 |
|
|
|
30,770 |
|
|
|
528,376 |
|
Acquisition |
|
|
10 |
|
|
|
|
|
|
|
10 |
|
Impairment |
|
|
(70,857 |
) |
|
|
(15,192 |
) |
|
|
(55,665 |
) |
Amortization |
|
|
|
|
|
|
53,936 |
|
|
|
(53,936 |
) |
Foreign exchange |
|
|
3,112 |
|
|
|
607 |
|
|
|
2,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
491,411 |
|
|
|
70,121 |
|
|
|
421,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at September 30, 2010, the current intangible assets with a finite life have a weighted average
remaining amortization period of approximately 11 years (12 years as at September 30, 2009).
The annual amortization expenses, without taking into account any future acquisitions expected for
the years 2011 through 2015, are as follows:
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
2011 |
|
|
44,497 |
|
2012 |
|
|
40,409 |
|
2013 |
|
|
32,269 |
|
2014 |
|
|
26,455 |
|
2015 |
|
|
26,455 |
|
-101-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
10. Accounts Payable and Accrued Liabilities
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
$ |
|
|
$ |
|
Accounts payable |
|
|
18,677 |
|
|
|
20,781 |
|
Accounts payable to a shareholding company |
|
|
1,574 |
|
|
|
436 |
|
Contract rebates, product returns and accrued chargebacks |
|
|
29,039 |
|
|
|
38,189 |
|
Accrued interest on long-term debt |
|
|
4,254 |
|
|
|
4,377 |
|
Accrued royalty fees |
|
|
4,010 |
|
|
|
6,516 |
|
Accrued salaries |
|
|
4,790 |
|
|
|
5,502 |
|
Accrued bonuses |
|
|
6,695 |
|
|
|
6,649 |
|
Accrued research and development expenses |
|
|
853 |
|
|
|
308 |
|
Accrued liability related to Unapproved Peps |
|
|
18,607 |
|
|
|
|
|
Other accrued liabilities |
|
|
6,174 |
|
|
|
4,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
94,673 |
|
|
|
87,684 |
|
|
|
|
|
|
|
|
|
|
11. Long-term Debt
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
$ |
|
|
$ |
|
Senior notes secured by substantially all of the present and future assets
of the Company, bearing interest at 9.25% and maturing in March 2015 |
|
|
226,171 |
|
|
|
225,764 |
|
Term loans of $138,823 at September 30, 2010, ($159,688 at September 30,
2009), of which $138,823 ($109,668 at September 30, 2009) bearing interest
at the one-month British Banker Association LIBOR (0.26% as at September 30,
2010, and 0.25% as at September 30, 2009), and $0 ($50,000 at September 30,
2009) bearing interest at the three-month British Banker Association LIBOR
(0.28% as at September 30, 2009), plus the applicable rate based on the
consolidated total leverage ratio of the Company and certain of its
subsidiaries for the preceding twelve months, secured by substantially all
of the present and future assets of the Company, payable in quarterly
installments, maturing in February 2014. |
|
|
135,210 |
|
|
|
154,779 |
|
Senior unsecured notes, bearing interest at 12.75% and maturing in March 2016 |
|
|
233,094 |
|
|
|
232,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
594,475 |
|
|
|
613,294 |
|
Installments due within one year |
|
|
13,163 |
|
|
|
30,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
581,312 |
|
|
|
582,586 |
|
|
|
|
|
|
|
|
|
|
-102-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
On February 25, 2008, the Company obtained various types of financing in connection with the
Acquisition. The Company issued $228,000,000 aggregate principal amount of its 9.25% senior secured
notes (the Senior Secured Notes) due March 1, 2015. The Senior Secured Notes were priced at
$0.98737 with a 10% yield to March 1, 2015. The Senior Secured Notes rank pari passu with the
credit facility.
The Company may redeem some or all of the Senior Secured Notes prior to March 1, 2011, at a
redemption price equal to 100% of the principal amount of the Senior Secured Notes redeemed plus a
make-whole premium and accrued and unpaid interest. On or after March 1, 2011, the Company may
redeem some or all of the Senior Secured Notes at the redemption prices (expressed as percentages
of principal amount of the Senior Secured Notes to be redeemed) set forth below:
|
|
|
|
|
|
|
Senior |
|
|
|
Secured Notes |
|
|
|
% |
|
2011 |
|
|
106.938 |
|
2012 |
|
|
104.625 |
|
2013 |
|
|
102.313 |
|
2014 and thereafter |
|
|
100.000 |
|
Prior to March 1, 2011, the Company may also redeem up to 35% of the aggregate principal amount of
the Senior Secured Notes using the proceeds of one or more equity offerings at a redemption price
equal to 109.250% of the aggregate principal amount of the Senior Secured Notes plus accrued and
unpaid interest. If there is a change of control as specified in the indenture governing the Senior
Secured Notes, the Company must offer to repurchase the Senior Secured Notes at a price in cash
equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest.
The Company has a credit facility for a total amount of $290,000,000 composed of available term
loans totaling $175,000,000 and of a revolving credit facility of $115,000,000 (Credit Facility).
The Credit Facility bears interest at a variable rate available composed of either the Federal
Funds Rate or the British Banker Association LIBOR rate, at the option of the Company, plus the
applicable rate based on the consolidated total leverage ratio of the Company and certain of its
subsidiaries for the preceding twelve months. The Credit Facility matures on February 25, 2014,
with payments on the term loans beginning in fiscal year 2008. As at September 30, 2010,
$175,000,000 of term loans had been issued and no amounts had been drawn during the year against
the revolving credit facility. The term loans were priced at $0.96 with a yield to maturity of
8.75% before the effect of the interest rate swaps as disclosed in Note 16. The Credit Facility
requires the Company to meet certain financial covenants, which were met as at September 30, 2010.
The credit agreement governing the Credit Facility requires the Company to prepay outstanding term
loans contingent upon the occurrence of events, subject to certain exceptions, with: (1) 100% of
the net cash proceeds of any incurrence of debt other than debt permitted under the Credit
Facility, (2) commencing with the fiscal year ended September 30, 2009, 50% (which percentage will
be reduced to 25% if the senior secured leverage ratio is less than a specified ratio) of the
annual excess cash flow (as defined in the credit agreement governing the Credit Facility) and (3)
100% of the net cash proceeds of all non-ordinary course asset sales or other dispositions of
property (including casualty events) by the Company or by its subsidiaries, subject to
reinvestments rights and certain other exceptions. Pursuant to the annual excess cash flow
requirements defined in the credit agreement, the Company will be required to offer to prepay
$13,163,000 of outstanding term loans in the first quarter of fiscal year 2011 ($17,583,000 for the
fiscal year 2009 was paid in the first quarter of fiscal year 2010). As allowed by the credit
agreement, the prepayment has been applied to the remaining scheduled installments of principal in
direct order of maturity.
On February 25, 2008, as part of the acquisition financing, the Company also obtained $235,000,000
in financing under a senior unsecured bridge facility (the Bridge Financing) maturing on February
25, 2009. On May 6, 2008, the Bridge Financing was refinanced on a long-term basis, by repaying the
bridge facility with the proceeds from the sale by the Company of $235,000,000 aggregate principal
amount of its 12.75% senior unsecured notes due March 1, 2016, (the Senior Unsecured Notes). The
Senior Unsecured Notes were priced at $0.9884 with a yield to maturity of 13.16%. The Senior
Unsecured Notes are subordinated to the Credit Facility and Senior Secured Notes.
-103-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
The Company may redeem some or all of the Senior Unsecured Notes prior to March 1, 2012, at a
redemption price equal to 100% of the principal amount of the Senior Unsecured Notes redeemed plus
a make-whole premium and accrued and unpaid interest. On or after March 1, 2012, the Company may
redeem some or all of the Senior Unsecured Notes at the redemption prices (expressed as percentages
of principal amount of the Senior Unsecured Notes to be redeemed) set forth below:
|
|
|
|
|
|
|
Senior |
|
|
|
Unsecured Notes |
|
|
|
% |
|
2012 |
|
|
106.375 |
|
2013 |
|
|
103.188 |
|
2014 and thereafter |
|
|
100.000 |
|
Prior to March 1, 2011, the Company may also redeem up to 35% of the aggregate principal amount of
the Senior Unsecured Notes using the proceeds of one or more equity offerings at a redemption price
equal to 112.750% of the aggregate principal amount of the Senior Unsecured Notes plus accrued and
unpaid interest. If there is a change of control as specified in the indenture governing the Senior
Unsecured Notes, the Company must offer to repurchase the Senior Unsecured Notes at a price in cash
equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest.
Payments required in each of the next five twelve-month periods to meet the retirement provisions
of the long-term debt are as follows:
|
|
|
|
|
|
|
$ |
|
2011 |
|
|
13,163 |
|
2012 |
|
|
14,098 |
|
2013 |
|
|
61,250 |
|
2014 |
|
|
50,312 |
|
2015 |
|
|
228,000 |
|
Thereafter |
|
|
235,000 |
|
|
|
|
|
|
|
|
|
601,823 |
|
Unamortized original issuance discount |
|
|
7,348 |
|
|
|
|
|
|
|
|
|
594,475 |
|
|
|
|
|
|
-104-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
12. Capital Stock
Stock incentive plans
Predecessor
In 2006, the Predecessor adopted a new stock incentive plan (the 2006 plan) in replacement of its
previous stock option plan and pursuant to which the Predecessor grant, among other instruments,
options, restricted share units (RSUs) and deferred share units (DSUs) to eligible employees
and directors of the Predecessor. The 2006 plan provided that a maximum of 2,300,000 common shares
were issuable pursuant to awards made under the 2006 plan, of which a maximum of 800,000 shares
were available in the form of RSUs and DSUs. The per share purchase price could not be less than
the market price of the common stock on the last trading day prior to the date of grant and the
options expired no later than seven years from that date. Options could be exercised over a period
established at the date of grant except for the annual options granted to outside directors which
were exercisable one year after the date of grant.
Under the Predecessors previous stock option plan established in 1995 (the 1995 plan), a maximum
of 4,500,000 common shares were issuable pursuant to the exercise of options. Options were granted
at the market price of one common share on the last trading day prior to the granting date. Options
granted under the 1995 plan were exercisable at a rate of 20% per year and expired ten years after
the granting date except for the annual options granted to outside directors, which vested one year
after the granting date. At February 22, 2006, Axcan Pharma no longer issued options under the 1995
plan.
Generally, any RSUs granted under the 2006 plan vested three years after grant and any options
granted under the 2006 plan vested in equal annual increments over a three-year period, except for
new hire grants which vested ratably over five years. Upon consummation of the Acquisition, all
outstanding options under the 1995 and 2006 plans at the time of the closing of February 25, 2008,
were immediately vested, transferred by the holder of such option to Axcan Pharma Inc. and
cancelled in exchange for an amount in cash equal to the excess, if any, of the offer price of
$23.35 over the applicable option exercise price for each share of common stock subject to such
option, less any required withholding taxes. In addition, each RSU held by the Predecessors named
executive officers at the time of the closing of the Acquisition was vested and terminated in
exchange for the offer price of $23.35, less any required withholding taxes.
The following table presents a summary of the changes to the number of stock options outstanding:
|
|
|
|
|
|
|
|
|
|
|
For the five-month period |
|
|
|
ended February 25, 2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
average |
|
|
|
Number of |
|
|
exercise |
|
|
|
options |
|
|
price |
|
|
|
|
|
|
|
$ |
|
Balance, beginning of period |
|
|
2,684,835 |
|
|
|
13.61 |
|
Exercised |
|
|
(17,299 |
) |
|
|
12.72 |
|
Expired |
|
|
(4,000 |
) |
|
|
11.99 |
|
Forfeited |
|
|
(47,710 |
) |
|
|
14.62 |
|
Settled upon consummation of the Acquisition |
|
|
(2,615,826 |
) |
|
|
13.85 |
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at the end of the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-105-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
The following table presents a summary of the changes to the number of non-vested stock options in
the Predecessor five month-period ended February 25, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
average |
|
|
|
Number of |
|
|
grant date |
|
|
|
options |
|
|
fair value |
|
|
|
|
|
|
|
$ |
|
Balance, beginning of period |
|
|
1,238,064 |
|
|
|
6.26 |
|
Vested (1) |
|
|
(1,190,354 |
) |
|
|
6.25 |
|
Forfeited |
|
|
(47,710 |
) |
|
|
6.44 |
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Upon consummation of the Acquisition, all non-vested stock options became vested; as
a result, the Predecessor recorded $2,572,085 in share-based compensation expense for the
five-month period ended February 25, 2008, $8,821,215 in reduction of retained earnings and
$16,394,611 in reduction of additional paid-in capital. |
Excluding the expenses recorded upon the consummation of the Acquisition, the Predecessor recorded
$7,473,061 or share-based compensation expense relative to stock options for the five-month period
ended February 25, 2008 in accordance with the guidance issued by the FASB on compensation related
to share-based payment transactions. The amount of expense has been reduced to take into account
the forfeitures.
As at the Acquisition date, there were 199,050 outstanding RSUs.
Since 2006, directors received an annual grant of DSUs having a value of $15,000 and each of the
eligible persons may have elected to receive a portion of their annual compensation in the form of
DSUs. DSUs were credited with dividend equivalents when dividends were paid on the Predecessors
common shares. Directors may not have received any distribution in respect of the DSUs until they
withdrew from the Board and members of management until cessation of employment. The amount of
compensation was converted into DSUs based on the market price of the common stock on the last
trading day prior to the date of grant. At the Acquisition date, the Predecessors directors held
16,211 DSUs.
Successor
Management equity incentive plan
In April 2008, the Companys indirect parent company adopted a Management Equity Incentive Plan
(the MEIP Plan), pursuant to which the indirect parent company grants options to selected
employees and directors of the Company. The MEIP Plan provides that a maximum of 3,833,307 shares
of common stock of the indirect parent company are issuable pursuant to the exercise of options.
The per share purchase price cannot be less than the fair value of the share of common stock of the
indirect parent company at the grant date and the option expires no later than ten years from the
date of grant. Vesting of these stock options is split into 3 categories: 1) time-based options:
50% of option grants generally vest ratably over 5 years and feature a fixed exercise price equal
to the fair value of common stock of the indirect parent company on grant date; 2) premium options:
25% of stock option grants with an exercise price initially equal to the fair value of common stock
on grant date that will increase by 10% each year and generally vesting ratably over 5 years; and
3) performance-based options: 25% of stock option grants with a fixed exercise price equal to the
fair value of common stock on grant date which vest upon the occurrence of a liquidity event (as
defined under the terms of the MEIP Plan) based on the achievement of return targets calculated
based on the return received by majority shareholders from the liquidity event. While the
time-based options and the premium options are expensed over the requisite service period, the
performance-based options will not be expensed until the occurrence of the liquidity event.
-106-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
The following table presents the changes to the number of stock options outstanding under the MEIP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
For the |
|
|
For the |
|
|
|
twelve-month |
|
|
twelve-month |
|
|
seven-month |
|
|
|
period ended |
|
|
period ended |
|
|
period ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
Number |
|
|
average |
|
|
Number |
|
|
average |
|
|
Number |
|
|
average |
|
|
|
of |
|
|
exercise |
|
|
of |
|
|
exercise |
|
|
of |
|
|
exercise |
|
|
|
options |
|
|
price |
|
|
options |
|
|
price |
|
|
options |
|
|
price |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
Balance, beginning of period |
|
|
3,724,375 |
|
|
|
10.34 |
|
|
|
3,648,000 |
|
|
|
10.00 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
190,000 |
|
|
|
12.31 |
|
|
|
197,000 |
|
|
|
12.40 |
|
|
|
3,723,000 |
|
|
|
10.00 |
|
Exercised |
|
|
(18,750 |
) |
|
|
10.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(253,375 |
) |
|
|
10.27 |
|
|
|
(120,625 |
) |
|
|
10.16 |
|
|
|
(75,000 |
) |
|
|
10.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
3,642,250 |
|
|
|
10.69 |
|
|
|
3,724,375 |
|
|
|
10.34 |
|
|
|
3,648,000 |
|
|
|
10.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of year |
|
|
1,021,012 |
|
|
|
10.70 |
|
|
|
526,450 |
|
|
|
10.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding as at September 30, 2010, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding |
|
|
Options exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
average |
|
|
Weighted |
|
|
|
|
|
|
average |
|
|
Weighted |
|
|
|
|
|
|
|
remaining |
|
|
average |
|
|
|
|
|
|
remaining |
|
|
average |
|
|
|
Number |
|
|
contractual |
|
|
exercise |
|
|
Number |
|
|
contractual |
|
|
exercise |
|
|
|
of options |
|
|
life |
|
|
price |
|
|
of options |
|
|
life |
|
|
price |
|
Exercise price |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
$ |
|
$10.00 - $11.00 |
|
|
2,537,750 |
|
|
|
7.59 |
|
|
|
10.01 |
|
|
|
693,612 |
|
|
|
7.59 |
|
|
|
10.01 |
|
$11.01 - $12.53 |
|
|
1,104,500 |
|
|
|
8.08 |
|
|
|
12.26 |
|
|
|
327,400 |
|
|
|
7.67 |
|
|
|
12.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,642,250 |
|
|
|
7.74 |
|
|
|
10.69 |
|
|
|
1,021,012 |
|
|
|
7.62 |
|
|
|
10.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding as at September 30, 2009, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding |
|
|
Options exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
average |
|
|
Weighted |
|
|
|
|
|
|
average |
|
|
Weighted |
|
|
|
|
|
|
|
remaining |
|
|
average |
|
|
|
|
|
|
remaining |
|
|
average |
|
|
|
Number |
|
|
contractual |
|
|
exercise |
|
|
Number |
|
|
contractual |
|
|
exercise |
|
|
|
of options |
|
|
life |
|
|
price |
|
|
of options |
|
|
life |
|
|
price |
|
Exercise price |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
$ |
|
$10.00 - $11.00 |
|
|
3,544,375 |
|
|
|
8.58 |
|
|
|
10.23 |
|
|
|
526,450 |
|
|
|
8.59 |
|
|
|
10.31 |
|
$11.01 - $12.53 |
|
|
180,000 |
|
|
|
9.64 |
|
|
|
12.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,724,375 |
|
|
|
8.63 |
|
|
|
10.34 |
|
|
|
526,450 |
|
|
|
8.59 |
|
|
|
10.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-107-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
The changes to the number of non-vested stock options for the fiscal years ended September 30,
2010, and September 30, 2009, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
average |
|
|
|
|
|
|
average |
|
|
|
Number of |
|
|
grant date |
|
|
Number of |
|
|
grant date |
|
|
|
options |
|
|
fair value |
|
|
options |
|
|
fair value |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
Balance, beginning of period |
|
|
3,197,925 |
|
|
|
3.52 |
|
|
|
3,648,000 |
|
|
|
3.43 |
|
Granted |
|
|
190,000 |
|
|
|
5.18 |
|
|
|
197,000 |
|
|
|
5.12 |
|
Vested |
|
|
(513,312 |
) |
|
|
3.59 |
|
|
|
(526,450 |
) |
|
|
3.45 |
|
Forfeited |
|
|
(253,375 |
) |
|
|
3.37 |
|
|
|
(120,625 |
) |
|
|
3.52 |
|
|
Balance, end of period |
|
|
2,621,238 |
|
|
|
3.63 |
|
|
|
3,197,925 |
|
|
|
3.52 |
|
|
The weighted average fair value of stock options granted under the MEIP was $5.18 for the year
ended September 30, 2010, ($5.12 for the fiscal year ended September 30, 2009, and $3.43 for the
seven-month period ended September 30, 2008).
The fair value of each option award is estimated on the date of grant using the Black-Scholes
valuation model for the service-based options and the Monte Carlo simulation model for the
performance-based options. The expected life of options is based on the weighted contractual life
based on the probability of change in control/liquidity event. The expected volatility is based on
historical volatility of Axcan Pharma Inc. and peer companies. The risk free interest rate is based
on the average rate of return on U.S. Government Strips with a remaining term equal to the expected
term of the option. The dividend yield reflects that the indirect parent Company has not paid any
cash dividends since inception and does not intend to pay any cash dividends in the foreseeable
future.
The fair value estimates are based on the following weighted average assumptions for options
granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
For the |
|
|
For the |
|
|
|
twelve-month |
|
|
twelve-month |
|
|
seven-month |
|
|
|
period ended |
|
|
period ended |
|
|
period ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Expected term of options (years) |
|
|
5.50 |
|
|
|
5.40 |
|
|
|
4.15 |
|
Expected stock price volatility |
|
|
58.4 |
% |
|
|
57.6 |
% |
|
|
46.0 |
% |
Risk-free interest rate |
|
|
2.34 |
% |
|
|
2.38 |
% |
|
|
2.80 |
% |
Expected dividend |
|
|
|
|
|
|
|
|
|
|
|
|
-108-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
Special equity grant
In April 2008, the indirect parent company approved the Restricted Stock Unit grant agreement and
the penny option grant agreement (collectively Equity Grant Agreements) pursuant to which a
one-time grant of equity-based awards of either restricted stock units (RSUs) or options to
purchase shares of common stock of the indirect parent company for a penny (Penny Options) was
made to certain employees of the Company. A maximum of 1,343,348 shares of common stock of the
indirect parent company are issuable with respect to the special grants. As a result of the option
to allow the recipients to elect to have an amount withheld that is in excess of the required
minimum withholding under the current tax law, the special grants will be accounted for as
liability awards. As a liability award, the fair value on which the expense is based is remeasured
each period based on the estimated fair value and the final expense will be based on the fair value
of the shares on the date the award is settled. The RSUs and Penny Options expire no later than
four years and ten years from the date of grant. One third of the granted RSUs and Penny Options
vested immediately on date of grant; one third vested on August 25, 2009, and the remainder vested
on August 25, 2010.
The carrying value of an RSU or Penny Option is always equal to the estimated fair value of one
common share of the indirect parent company. The RSUs and Penny Options entitle the holders to
receive common shares of the indirect parent company at the end of a vesting period. The total
number of RSUs and Penny Options granted were 1,348,348 with an initial fair value of $10 equal to
the share price at the date of grant. As at September 30, 2010, there were 1,172,396 outstanding
RSUs and Penny Options (1,275,220 as at September 30, 2009) of which 1,167,396 (851,490 as at
September 30, 2009) were vested.
The Company recorded a net recovery of $378,000 of share-based compensation expense relative to the
MEIP and the Special Equity Grant for the twelve-month period ended September 30, 2010, ($6,172,000
for the twelve-month period ended September 30, 2009, and $7,443,000 for the seven-month period
ended September 30, 2008) with related income tax benefits of $300,000 ($1,098,000 and $1,092,000)
respectively. The amount of expense has been reduced to take into account estimated forfeitures. As
at September 30, 2010, there were $5,404,000 ($10,341,000 as at September 30, 2009) of total
unrecognized compensation costs related to MEIP and the Special Equity Grant based on the recorded
fair value. These costs are expected to be recognized over a weighted average period of 4.44 years.
At September 30, 2010, there was $3,108,000 ($3,107,000 as at September 30, 2009) of compensation
expense related to the performance based options that will be recognized upon the occurrence of a
liquidity event.
Annual grant
In June 2008, the Companys indirect parent company adopted a Long Term Incentive Plan (the
LTIP), pursuant to which the indirect parent company is expected to grant annual awards to
certain employees of the Company (the participants). The value of an award is initially based on
the participants pay grade and base salary and is subsequently adjusted based on the outcome of
certain performance conditions relating to the fiscal year. Each award that vests is ultimately
settleable, at the option of the participant, in cash or in parent company common stock of
equivalent value. The awards vest (i) upon the occurrence of a liquidity event (as defined under
the terms of the LTIP) and (ii) in varying percentages based on the level of return realized by
majority shareholders as a result of the liquidity event.
The awards granted under this LTIP are classified as liabilities in accordance with the FSAB issued
guidance on distinguishing liabilities from equity, since the award is for a fixed amount of value
that can be settled, at the option of the participant, in (i) cash, or (ii) a variable number of
parent company common stock of equivalent value.
The Company will not recognize any compensation expense until such time as the occurrence of a
liquidity event generating sufficient return to the majority shareholders (in order for the award
to vest) is probable. If such an event was probable as at September 30, 2010, the value of the
awards to be expensed by the Company would range between $5,358,000 and $6,430,000 depending on the
level of return expected to be realized by the majority shareholders.
-109-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
13. Financial Information Included in the Consolidated Operations
a) Financial expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
Predecessor |
|
|
|
For the |
|
|
For the |
|
|
For the |
|
|
For the |
|
|
|
twelve-month |
|
|
twelve-month |
|
|
seven-month |
|
|
five-month |
|
|
|
period ended |
|
|
period ended |
|
|
period ended |
|
|
period ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
February 25, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Interest on long-term debt (including
amortization of original issuance discount
of $2,046, $2,061 in 2009 and $1,150 for
the seven-month period ended September 30,
2008) |
|
|
58,609 |
|
|
|
61,821 |
|
|
|
36,631 |
|
|
|
14 |
|
Interest and bank charges |
|
|
806 |
|
|
|
444 |
|
|
|
207 |
|
|
|
76 |
|
Interest rate swaps (Note 16) |
|
|
17 |
|
|
|
1,531 |
|
|
|
5 |
|
|
|
|
|
Financing fees |
|
|
556 |
|
|
|
1,046 |
|
|
|
469 |
|
|
|
172 |
|
Amortization of deferred debt issue expenses |
|
|
4,968 |
|
|
|
4,967 |
|
|
|
4,201 |
|
|
|
|
|
|
|
|
|
64,956 |
|
|
|
69,809 |
|
|
|
41,513 |
|
|
|
262 |
|
|
b) Other information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
Predecessor |
|
|
|
For the |
|
|
For the |
|
|
For the |
|
|
For the |
|
|
|
twelve-month |
|
|
twelve-month |
|
|
seven-month |
|
|
five-month |
|
|
|
period ended |
|
|
period ended |
|
|
period ended |
|
|
period ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
February 25, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Rental expenses |
|
|
3,724 |
|
|
|
2,881 |
|
|
|
1,831 |
|
|
|
1,052 |
|
Shipping and handling expenses |
|
|
6,308 |
|
|
|
7,066 |
|
|
|
3,748 |
|
|
|
2,263 |
|
Advertizing expenses |
|
|
9,847 |
|
|
|
16,449 |
|
|
|
8,803 |
|
|
|
4,628 |
|
Depreciation of property, plant and equipment |
|
|
8,546 |
|
|
|
6,369 |
|
|
|
3,824 |
|
|
|
2,526 |
|
Amortization of intangible assets |
|
|
52,465 |
|
|
|
53,936 |
|
|
|
31,755 |
|
|
|
7,069 |
|
Stock-based compensation expense |
|
|
(378 |
) |
|
|
6,172 |
|
|
|
7,443 |
|
|
|
10,046 |
|
Transaction and integration costs |
|
|
5,602 |
|
|
|
2,871 |
|
|
|
11,780 |
|
|
|
26,489 |
|
|
-110-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
14. Segmented Information
The Company operates in a single field of activity, the pharmaceutical industry.
Three major customers in the U.S. market for which the sales represent 70.2% of revenue for the
twelve-month period ended September 30, 2010, (79.5% of revenue for the twelve-month period ended
September 30, 2009, 77.1% for the seven-month period ended September 30, 2008, and 74.2% for the
five-month period ended February 25, 2008) are detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
Predecessor |
|
|
|
For the |
|
|
For the |
|
|
For the |
|
|
For the |
|
|
|
twelve-month |
|
|
twelve-month |
|
|
seven-month |
|
|
five-month |
|
|
|
period ended |
|
|
period ended |
|
|
period ended |
|
|
period ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
February 25, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
|
% |
|
|
% |
|
|
% |
|
|
% |
|
Customer A |
|
|
29.9 |
|
|
|
30.4 |
|
|
|
43.7 |
|
|
|
32.4 |
|
Customer B |
|
|
28.1 |
|
|
|
37.4 |
|
|
|
24.3 |
|
|
|
29.8 |
|
Customer C |
|
|
12.2 |
|
|
|
11.7 |
|
|
|
9.1 |
|
|
|
12.0 |
|
|
|
|
|
70.2 |
|
|
|
79.5 |
|
|
|
77.1 |
|
|
|
74.2 |
|
|
Purchases from one supplier represent approximately 32% of the cost of goods sold for the
twelve-month period ended September 30, 2010, (two suppliers for 51% for the twelve-month period
ended September 30, 2009, two for 38% for the seven-month period ended September 30, 2008, and two
for 40% for the five-month period ended February 25, 2008).
The Company purchases its inventory from third party manufacturers, many of whom are the sole
source of products for the Company. The failure of such manufacturers to provide an uninterrupted
supply of products could adversely impact the Companys ability to sell such products.
The Company operates in the following geographic areas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
Predecessor |
|
|
|
For the |
|
|
For the |
|
|
For the |
|
|
For the |
|
|
|
twelve-month |
|
|
twelve-month |
|
|
seven-month |
|
|
five-month |
|
|
|
period ended |
|
|
period ended |
|
|
period ended |
|
|
period ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
February 25, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Total Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic sales |
|
|
255,506 |
|
|
|
314,783 |
|
|
|
162,908 |
|
|
|
112,146 |
|
Foreign sales |
|
|
3,513 |
|
|
|
4,821 |
|
|
|
3,076 |
|
|
|
2,221 |
|
Canada |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic sales |
|
|
31,867 |
|
|
|
30,755 |
|
|
|
19,614 |
|
|
|
15,302 |
|
Foreign sales |
|
|
522 |
|
|
|
165 |
|
|
|
|
|
|
|
|
|
European Union |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic sales |
|
|
52,253 |
|
|
|
58,634 |
|
|
|
33,082 |
|
|
|
24,608 |
|
Foreign sales |
|
|
10,911 |
|
|
|
7,168 |
|
|
|
4,258 |
|
|
|
4,093 |
|
Other |
|
|
15 |
|
|
|
613 |
|
|
|
241 |
|
|
|
209 |
|
|
|
|
|
354,587 |
|
|
|
416,939 |
|
|
|
223,179 |
|
|
|
158,579 |
|
|
-111-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
Revenue is attributed to geographic area as based on the country of origin of the sales.
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
$ |
|
|
$ |
|
Property, plant, equipment and intangible assets |
|
|
|
|
|
|
|
|
Canada |
|
|
299,180 |
|
|
|
333,001 |
|
United States |
|
|
13,906 |
|
|
|
44,448 |
|
European Union |
|
|
70,653 |
|
|
|
83,185 |
|
|
|
|
|
383,739 |
|
|
|
460,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
$ |
|
|
$ |
|
Goodwill |
|
|
|
|
|
|
|
|
Canada |
|
|
61,887 |
|
|
|
61,887 |
|
United States |
|
|
|
|
|
|
91,400 |
|
European Union |
|
|
11,653 |
|
|
|
12,536 |
|
|
|
|
|
73,540 |
|
|
|
165,823 |
|
|
15. Financial Instruments
Interest rate risk
The Company is exposed to interest rate risk on its variable interest bearing term loans. The term
loans bear interest based on British Banker Association LIBOR. As further disclosed in Note 16, the
Company may enter into derivative financial instruments to manage its exposure to interest rate
changes and reduce its overall cost of borrowing.
Currency risk
The Company is exposed to financial risk arising from fluctuations in foreign exchange rates and
the degree of volatility of the rates. The Company does not use derivative instruments to reduce
its exposure to foreign currencies risk. As at September 30, 2010, the financial assets totaling
$194,005,000 ($183,252,000 as at September 30, 2009) include cash and cash equivalents and accounts
receivable for CAN$4,073,000, 18,658,000 Euros and 1,820,000 Swiss francs (CAN$3,525,000,
19,014,000 Euros and 2,000,000 Swiss francs as at September 30, 2009). As at September 30, 2010,
the financial liabilities totaling $689,148,000 ($700,978,000 as at September 30, 2009) include
accounts payable and accrued liabilities and long-term debt of CAN$10,234,000 and 8,158,000 Euros
respectively(CAN$11,432,000 and 8,044,000 Euros as at September 30, 2009).
Credit risk
As at September 30, 2010, the Company had $134,299,000 ($98,630,000 as at September 30, 2009) of
cash with one financial institution. At times, such deposits may exceed the amount insured by the
Federal Deposit Insurance Corporation.
-112-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
Fair value of the financial instruments on the balance sheet
The estimated fair value of the financial instruments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
|
value |
|
|
amount |
|
|
value |
|
|
amount |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
161,503 |
|
|
|
161,503 |
|
|
|
126,435 |
|
|
|
126,435 |
|
Accounts receivable from the parent company |
|
|
487 |
|
|
|
487 |
|
|
|
306 |
|
|
|
306 |
|
Accounts receivable, net |
|
|
32,015 |
|
|
|
32,015 |
|
|
|
56,511 |
|
|
|
56,511 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
94,673 |
|
|
|
94,673 |
|
|
|
87,684 |
|
|
|
87,684 |
|
Long-term debt |
|
|
608,535 |
|
|
|
594,475 |
|
|
|
649,689 |
|
|
|
613,294 |
|
The following methods and assumptions were used to calculate the estimated fair value of the
financial instruments on the balance sheet.
a) Financial instruments for which fair value is deemed equivalent to carrying amount
The estimated fair value of certain financial instruments shown on the consolidated balance
sheet is equivalent to their carrying amount. These financial instruments include cash and cash
equivalents, accounts receivable, net, accounts receivable from the parent company, accounts
payable and accrued liabilities.
b) Long-term debt
The fair value of the long-term debt bearing interest at fixed rates has been established
according to market prices obtained from a large U.S. financial institution. The fair value of the
variable interest bearing term loan at September 30, 2010, has been established based on
broker-dealer quotes. The fair value of the variable interest bearing term loan at September 30,
2009, is estimated to be equal to book value.
16. Derivatives and Hedging Activities
Risk management objective of using derivatives
The Company is exposed to certain risk arising from both its business operations and economic
conditions. The Company principally manages its exposures to a wide variety of business and
operational risks through management of its core business activities. The Company manages economic
risks, including interest rate, liquidity and credit risk primarily by managing the amount,
sources, conditions and duration of its debt funding and the use of derivative financial
instruments. Specifically, the Company enters into derivative financial instruments to manage
exposures that arise from business activities that result in the payment of future known and
uncertain cash amounts, the value of which are determined by interest rates. The Companys
derivative financial instruments, if any, are used to manage differences in the amount, timing and
duration of the Companys known or expected cash payments principally related to the Companys
borrowings.
Cash flow hedges of interest rate risk
The Companys objectives in using interest rate derivatives are to add stability to interest
expense and to manage its exposure to interest rate movements. To accomplish this objective, the
Company primarily uses interest rate swaps as part of its interest rate risk management strategy.
Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts
from a counterparty in exchange for the Company making fixed-rate payments over the life of the
agreements without exchange of the underlying notional amount. Such derivatives were used to hedge
the variable cash flows associated with existing variable-rate debt.
The effective portion of changes in the fair value of derivatives designated and that qualify as
cash flow hedges is recorded in Accumulated Other Comprehensive Income and is subsequently
reclassified into earnings in the period that the hedged forecasted transaction affects earnings.
The ineffective portion of the change in fair value of the derivatives is recognized directly in
earnings.
Amounts reported in Accumulated Other Comprehensive Income related to derivatives will be
reclassified to interest expense as interest payments are made on the Companys variable-rate debt.
-113-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
Effective March 3, 2008, the Company entered into two pay-fixed, receive-floating interest rate
swap agreements, effectively converting $115,000,000 of variable-rate debt under its secured senior
credit facilities to fixed-rate debt. Through the first two quarters of 2008, the Companys two
interest rate swaps were designated as effective hedges of cash flows. For the quarter ended
September 30, 2008, due to the increased volatility in short-term interest rates and a realignment
of the Companys LIBOR rate election on its debt capital repayment schedule, hedge accounting was
discontinued as the hedge relationship ceased to satisfy the strict conditions of hedge accounting.
On December 1, 2008, the Company redesignated its $50,000,000 notional interest rate swap that
matures in February 2010 anew as a cash flow hedge using an improved method of assessing the
effectiveness of the hedging relationship. The Companys $65,000,000 notional interest rate swap
matured in February 2009. Effective March 2009, the Company entered into a pay-fixed,
receive-floating interest rate swap of a notional amount of $52,000,000 amortizing to $13,000,000
through February 2010. The Companys two interest rate swaps with a combined notional amount of
$63,000,000 that were designated as cash flow hedges of interest rate risk matured during the
quarter ended March 31, 2010, and the Company has not entered into new derivative agreements.
The table below presents the fair value of the Companys derivative financial instruments as well
as their classification on the consolidated balance sheet as at September 30, 2010, and September
30, 2009.
Tabular disclosure of fair values of derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives |
|
|
|
|
|
|
|
Successor |
|
|
Successor |
|
|
|
|
|
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
|
|
Balance sheet location |
|
|
Fair value |
|
|
Fair value |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
Derivatives designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
Other long-term liabilities |
|
|
|
|
|
|
|
610 |
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
610 |
|
|
The table below presents the effect of the Companys derivative financial instruments on the
consolidated operations as at September 30, 2010, and 2009.
Tabular disclosure of the effect of derivative instruments for the twelve-month period ended
September 30, 2010, and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
For the |
|
|
|
Location in the |
|
|
twelve-month |
|
|
twelve-month |
|
|
|
Consolidated |
|
|
period ended |
|
|
period ended |
|
|
|
Financial |
|
|
September 30, |
|
|
September 30, |
|
|
|
Statements |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
Interest rate swaps in cash flow hedging relationships |
|
|
|
|
|
|
|
|
|
|
|
|
Loss recognized in other comprehensive income on
derivatives (effective portion), net of tax of $166 ($330
in 2009) |
|
OCI |
|
|
|
(309 |
) |
|
|
(612 |
) |
Loss reclassified from accumulated comprehensive income
into income (effective portion) |
|
Financial expenses |
|
|
|
(464 |
) |
|
|
(499 |
) |
Gain recognized in income on derivatives (ineffective
portion and amount excluded from effectiveness testing) |
|
Financial expenses |
|
|
|
447 |
|
|
|
|
|
Interest rate swaps not designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
Loss recognized in income on derivatives |
|
Financial expenses |
|
|
|
|
|
|
|
(1,032 |
) |
|
-114-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
17. Fair Value Measurements
Effective October 1, 2008, the Company adopted the authoritative guidance for fair value
measurements. Fair value is defined as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the measurement date.
The guidance also establishes a fair value hierarchy which requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring fair value. The
guidance describes three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or
liabilities; or other inputs that are observable or can be corroborated by observable market data
for substantially the full term of the assets or liabilities.
Level 3 Inputs that are unobservable and significant to the overall fair value measurement.
If the inputs used to measure the financial assets and liabilities fall within the different levels
described above, the categorization is based on the lowest level input that is significant to the
fair value measurement of the instrument.
Financial assets and liabilities measured at fair value on a recurring basis as at September 30,
2010, and September 30, 2009, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted prices in |
|
|
|
|
|
|
|
|
|
|
|
|
active markets |
|
|
Significant |
|
|
|
|
|
|
|
|
|
for identical |
|
|
other |
|
|
Significant |
|
|
|
|
|
|
assets and |
|
|
observable |
|
|
unobservable |
|
|
Balance as at |
|
|
|
liabilities |
|
|
inputs |
|
|
inputs |
|
|
September 30, |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
2010 |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
active markets for |
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
identical assets |
|
|
Significant other |
|
|
unobservable |
|
|
Balance as at |
|
|
|
and liabilities |
|
|
observable inputs |
|
|
inputs |
|
|
September 30, |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
2009 |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments |
|
|
|
|
|
|
610 |
|
|
|
|
|
|
|
610 |
|
|
Derivative financial instruments consist of interest rate swap agreements as more fully described
in Note 16 and are measured at fair value based on observable market interest rate curves as at the
measurement date.
During the twelve-month period ended September 30, 2010, the Company recorded a goodwill impairment
charge of $91,400,000 and an intangible assets impairment charge of $15,758,000. The fair value
measurement method used in the Companys impairment analysis utilized a discounted cash flow model
and market approach that incorporates significant unobservable inputs or Level 3 assumptions. These
assumptions include, among others, projections of the Companys future operating results, the
implied fair value using an income approach by preparing a discounted cash flow analysis and other
subjective assumptions.
18. Related Party Transactions
As at September 30, 2010, and September 30, 2009, the Company had a note receivable from its parent
company amounting to $133,154,000. During the twelve-month period ended September 30, 2010, the
Company earned interest income on the note amounting to $7,833,000 net of taxes amounting to
$4,217,000 ($7,833,000 net of taxes amounting to $4,217,000 during the twelve-month period ended
September 30, 2009, and $4,686,000 net of taxes amounting to $2,524,000 during the seven-month
period ended September 30, 2008) and the related interest receivable from the parent company
amounting to $27,130,000 as at September 30, 2010, ($15,078,000 as at September 30, 2009) has been
recorded in the shareholders equity section of the consolidated balance sheet. As at September 30,
2010, the Company has an account receivable from the parent company amounting to $487,000 ($306,000
as at September 30, 2009).
-115-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
During the twelve-month period ended September 30, 2010, the Company recorded charges pursuant to
the terms of a management fee arrangement with a controlling shareholding company amounting to
$4,412,000 ($5,351,000 during the twelve-month period ended September 30, 2009, and the Company
recorded fees amounting to $12,975,000 during the seven-month period ended September 30, 2008, of
which $4,785,000 was accounted for as debt issue expenses, $6,128,000 as transaction costs,
$1,963,000 as selling and administrative expenses and $99,000 as management fees). As at September
30, 2010, the Company accrued fees payable to a controlling shareholding company amounting to
$1,574,000 ($436,000 as at September 30, 2009).
During the twelve-month period ended September 30, 2010, the Company paid a dividend to its parent
company amounting to $128,000 ($500,000 during the twelve-month period ended September 30, 2009).
For the five-month period ended February 25, 2008, the Predecessor incurred professional fees with
entities, in which directors of the Company were partners or shareholders totaling $126,000. These
transactions were concluded in the normal course of operations, at the amounts agreed to by related
parties.
19. Commitments and Contingencies
a) Commitments
The Company and the Predecessor have entered into non-cancellable operating leases and service
agreements with fixed minimum payment obligations expiring on different dates for the rental of
office space, automotive equipment and other equipment and for administrative, research and
development and other services.
Minimum future payments under these commitments for the next years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ending September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 and |
|
|
|
|
(in millions of U.S. dollars) |
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
thereafter |
|
|
Total |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Operating leases |
|
|
2,356 |
|
|
|
1,532 |
|
|
|
1,189 |
|
|
|
613 |
|
|
|
8 |
|
|
|
5,698 |
|
Other commitments |
|
|
3,907 |
|
|
|
165 |
|
|
|
103 |
|
|
|
103 |
|
|
|
|
|
|
|
4,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,263 |
|
|
|
1,697 |
|
|
|
1,292 |
|
|
|
716 |
|
|
|
8 |
|
|
|
9,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
b) Licensing agreements
In September 2006, the Predecessor entered into a license and co-development agreement with AGI
Therapeutics Research Ltd. (AGI). Pursuant to this agreement, AGI and the Predecessor will
co-develop a controlled release omeprazole product, AGI-010, for the treatment of
gastro-oesophageal reflux disease. On August 14, 2009, AGI and Axcan announced that their license
and co-development agreement for AGI-010 had been terminated by mutual agreement. As a consequence,
AGI regained full control of AGI-010.
In September 2007, the Predecessor entered into an exclusive license and development agreement with
Cellerix SL (Cellerix) of Spain, for the North American (United States, Canada and Mexico) rights
to Cx401, a biological product in development for the treatment of perianal fistulas. Cx401 uses
non-embryonic stem-cells to treat perianal fistulas in Crohns and non Crohns diseased patients.
Under the terms of the agreement, the Predecessor paid a $10,000,000 upfront payment and agreed to
pay regulatory milestone payments that could total up to another $30,000,000. The Predecessors had
also undertaken to make an equity investment of up to $5,000,000 in Cellerix in the event it
completed an initial public offering, but this undertaking has now expired without an equity
investment being made. Finally, the Predecessor agreed to pay royalties varying between 10% and 18%
of net sales of an approved product. Based on the results of a Phase III study conducted by
Cellerix in Europe, the Company has decided to not pursue the development of this formulation. The
Company is awaiting the results of trials related to a new formulation to which the Company has
certain exercisable development rights.
In March 2010, the Company entered into an asset purchase and license agreement to acquire rights
in and to the intellectual property, assigned contracts, permits and inventories related to a
compound to be used in the development of an undisclosed product in the field of gastroenterology.
Certain other rights were licensed under the agreement. Pursuant to the agreement, the Company made
an upfront payment of $8,000,000 on closing and additional payments of up to $86,000,000 based on
the achievement of certain development, regulatory and commercialization milestones. In addition,
the Company will pay royalties on the basis of net sales of an approved product.
-116-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S .dollars, except share related data)
c) Royalties
The Company pays royalties on the sales of certain of its marketed products to unrelated third
parties under license and similar agreements, at rates ranging between 1% and 6%.
During the twelve-month period ended September 30, 2010, the Company charged to cost of goods sold
a total of $2,404,000 ($5,330,000 for the twelve-month period ended September 30, 2009, $2,302,000
for the seven-month period ended September 30, 2008, and $1,936,000 for the five-month period ended
February 25, 2008) in royalties in connection with the sales of its URSO, ULTRASE, VIOKASE,
PHOTOFRIN, ADEKs and PYLERA products.
d) Contingencies
The Company and its subsidiaries are involved in litigation matters arising in the ordinary course
and conduct of its business. Although the resolution of such matters cannot be predicted with
certainty, management does not consider the Companys exposure to litigation to be material to
these consolidated financial statements. As at September 30, 2005, the Predecessor had accrued
$2,900,000 to cover any future settlements in connection with an indemnification claim being
arbitrated and product liability lawsuits initiated against its subsidiary Axcan Scandipharm (now
known as Axcan Pharma US Inc.), relating to the ULTRASE product line. During the year ended
September 30, 2006, following a series of favorable decisions in the arbitration of the
indemnification claim, the Predecessor re-evaluated its exposure and this accrual was reversed,
thus reducing the selling and administrative expenses by the same amount. One of the Plaintiffs in
this matter subsequently appealed the favorable arbitration decisions and in January 2010, the
Court dismissed the appeal. In November 2006, a new complaint alleging a claim for damages related
to these products was received in the Supreme Court of the State of New York. This complaint was
settled in March 2009.
In May 2009, the Company entered into an agreement with the U.S. Department of Defense, or DOD, to
remain eligible for inclusion on the DODs formulary and pursuant to which the Company agreed to
pay rebates under the TRICARE retail pharmacy program. The Company began accounting for these
rebates in the third quarter of fiscal year 2009. Under its contracting process, the DOD is further
seeking rebates from pharmaceutical manufacturers on all prescriptions of covered prescription
drugs filled under TRICARE from January 28, 2008, forward, unless DOD agrees to a waiver or
compromise of amounts due. On November 30, 2009, in litigation initiated by third parties seeking
to have the DODs ability to seek retroactive rebates invalidated, the Court affirmed DODs
position that it is entitled to retroactive refunds on prescriptions filled on or after January 28,
2008. In October 2010, the DOD affirmed its former rulemaking which was the subject of litigation
and its intention to seek to collect rebates for periods prior to the contract date. The Company
has estimated that its exposure to the retroactive rebates claimed by the DOD would not be material
and has recorded an accrual in fiscal year 2010.
e) Employee benefit plan
A subsidiary of the Company has a defined contribution plan (the Plan) for its U.S. employees.
Participation is available to substantially all U.S. employees. Employees may contribute up to 15%
of their gross pay or up to limits set by the U.S. Internal Revenue Service. The Company may make
matching contributions of a discretionary percentage. The Company charged to operations
contributions to the Plan totaling $751,000 for the twelve-month period ended September 30, 2010,
($554,000 for the twelve-month period ended September 30, 2009, $233,000 for the seven-month period
ended September 30, 2008, and $219,000 for the five-month period ended February 25, 2008).
f) Litigation settlement
The Company initiated claims in damages under the U.S. Lanham Act against a number of defendants
alleging they falsely advertised their products to be similar or equivalent to ULTRASE. During the
fiscal year ended September 30, 2009, a settlement arrangement with respect to these claims was
entered into with certain of these defendants and in the second quarter of fiscal year 2010,
another settlement agreement was entered into with the remaining defendants. Pursuant to each of
the agreements, the settling defendants agreed to pay a confidential global amount in one or
several installments; all of which have now been paid. Additionally, in the fourth quarter of
fiscal year 2010, pursuant to the settlement of another matter in which the Company was a
defendant, the Company received compensation for legal fees incurred by reason of having to defend
against unfounded claims made by the plaintiff. A total amount of $9,704,000 was paid to the
Company during the twelve-month period ended September 30, 2010, ($3,500,000 during the
twelve-month period ended September 30, 2009) in respect of these settlement agreements. These
amounts were recorded as other income in the statement of operations.
20. Condensed Consolidated Financial Information
As at September 30, 2010, the Company had outstanding $228,000,000 aggregate principal amount of
the Senior Secured Notes. The Secured Notes are fully and unconditionally guaranteed, jointly and
severally by certain of the Companys wholly-owned subsidiaries.
The following supplemental tables present condensed consolidated balance sheets for the Company and
its subsidiary guarantors and non-guarantors as at September 30, 2010, and September 30, 2009, the
condensed consolidated statements of operations for the twelve-month periods ended September 30,
2010, and 2009, the seven-month period ended September 30, 2008, and the five-month period ended
February 25, 2008 (Predecessor) and the condensed consolidated statement of cash flows for the
twelve-month periods ended September 30, 2010, and 2009, the seven-month period ended September 30,
2008, and the five-month period ended February 25, 2008 (Predecessor).
-117-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S .dollars, except share related data)
Condensed consolidated balance sheet as at September 30, 2010 (Successor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Axcan |
|
|
|
|
|
|
Subsidiary |
|
|
|
|
|
|
|
|
|
Intermediate |
|
|
Subsidiary |
|
|
non- |
|
|
|
|
|
|
|
|
|
Holdings Inc. |
|
|
guarantors |
|
|
guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
864 |
|
|
|
104,608 |
|
|
|
56,031 |
|
|
|
|
|
|
|
161,503 |
|
Accounts receivable, net |
|
|
|
|
|
|
19,262 |
|
|
|
13,117 |
|
|
|
|
|
|
|
32,379 |
|
Accounts receivable from the parent company |
|
|
50 |
|
|
|
437 |
|
|
|
|
|
|
|
|
|
|
|
487 |
|
Intercompany receivables |
|
|
11,092 |
|
|
|
1,618 |
|
|
|
4,265 |
|
|
|
(16,975 |
) |
|
|
|
|
Income taxes receivable |
|
|
|
|
|
|
2,906 |
|
|
|
|
|
|
|
|
|
|
|
2,906 |
|
Inventories, net |
|
|
|
|
|
|
17,697 |
|
|
|
6,563 |
|
|
|
(394 |
) |
|
|
23,866 |
|
Prepaid expenses and deposits |
|
|
48 |
|
|
|
2,385 |
|
|
|
844 |
|
|
|
|
|
|
|
3,277 |
|
Deferred income taxes |
|
|
|
|
|
|
1,355 |
|
|
|
857 |
|
|
|
119 |
|
|
|
2,331 |
|
|
Total current assets |
|
|
12,054 |
|
|
|
150,268 |
|
|
|
81,677 |
|
|
|
(17,250 |
) |
|
|
226,749 |
|
Property, plant and equipment, net |
|
|
|
|
|
|
27,383 |
|
|
|
8,394 |
|
|
|
|
|
|
|
35,777 |
|
Intangible assets, net |
|
|
|
|
|
|
285,703 |
|
|
|
62,259 |
|
|
|
|
|
|
|
347,962 |
|
Investments in subsidiaries |
|
|
(354,104 |
) |
|
|
830,813 |
|
|
|
78,175 |
|
|
|
(554,884 |
) |
|
|
|
|
Intercompany advances |
|
|
826,431 |
|
|
|
91,811 |
|
|
|
679,391 |
|
|
|
(1,597,633 |
) |
|
|
|
|
Goodwill, net |
|
|
|
|
|
|
61,887 |
|
|
|
11,653 |
|
|
|
|
|
|
|
73,540 |
|
Deferred debt issue expenses, net |
|
|
18,021 |
|
|
|
2,422 |
|
|
|
|
|
|
|
|
|
|
|
20,443 |
|
Deferred income taxes |
|
|
|
|
|
|
|
|
|
|
8,706 |
|
|
|
|
|
|
|
8,706 |
|
|
Total assets |
|
|
502,402 |
|
|
|
1,450,287 |
|
|
|
930,255 |
|
|
|
(2,169,767 |
) |
|
|
713,177 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
5,975 |
|
|
|
77,887 |
|
|
|
10,811 |
|
|
|
|
|
|
|
94,673 |
|
Income taxes payable |
|
|
|
|
|
|
1,938 |
|
|
|
1,508 |
|
|
|
|
|
|
|
3,446 |
|
Short-term intercompany payables |
|
|
449 |
|
|
|
15,340 |
|
|
|
1,186 |
|
|
|
(16,975 |
) |
|
|
|
|
Installments on long-term debt |
|
|
5,546 |
|
|
|
7,617 |
|
|
|
|
|
|
|
|
|
|
|
13,163 |
|
Deferred income taxes |
|
|
|
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
47 |
|
|
Total current liabilities |
|
|
11,970 |
|
|
|
102,829 |
|
|
|
13,505 |
|
|
|
(16,975 |
) |
|
|
111,329 |
|
|
Long-term debt |
|
|
510,663 |
|
|
|
70,649 |
|
|
|
|
|
|
|
|
|
|
|
581,312 |
|
Intercompany advances |
|
|
801 |
|
|
|
1,512,092 |
|
|
|
84,740 |
|
|
|
(1,597,633 |
) |
|
|
|
|
Other long-term liabilities |
|
|
|
|
|
|
10,028 |
|
|
|
|
|
|
|
|
|
|
|
10,028 |
|
Deferred income taxes |
|
|
|
|
|
|
30,618 |
|
|
|
922 |
|
|
|
|
|
|
|
31,540 |
|
|
Total liabilities |
|
|
523,434 |
|
|
|
1,726,216 |
|
|
|
99,167 |
|
|
|
(1,614,608 |
) |
|
|
734,209 |
|
|
Shareholders Equity (Deficiency) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares |
|
|
1 |
|
|
|
21,020 |
|
|
|
735,742 |
|
|
|
(756,762 |
) |
|
|
1 |
|
Preferred shares |
|
|
|
|
|
|
78,175 |
|
|
|
|
|
|
|
(78,175 |
) |
|
|
|
|
Retained earnings (deficit) |
|
|
(468,152 |
) |
|
|
(354,020 |
) |
|
|
98,657 |
|
|
|
255,363 |
|
|
|
(468,152 |
) |
9.05% Note receivable from the parent company |
|
|
(133,154 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(133,154 |
) |
Additional paid-in capital |
|
|
614,113 |
|
|
|
12,736 |
|
|
|
689 |
|
|
|
(13,425 |
) |
|
|
614,113 |
|
Accumulated other comprehensive loss |
|
|
(33,840 |
) |
|
|
(33,840 |
) |
|
|
(4,000 |
) |
|
|
37,840 |
|
|
|
(33,840 |
) |
|
Total shareholders equity (deficiency) |
|
|
(21,032 |
) |
|
|
(275,929 |
) |
|
|
831,088 |
|
|
|
(555,159 |
) |
|
|
(21,032 |
) |
|
Total liabilities and shareholders equity (deficiency) |
|
|
502,402 |
|
|
|
1,450,287 |
|
|
|
930,255 |
|
|
|
(2,169,767 |
) |
|
|
713,177 |
|
|
-118-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S .dollars, except share related data)
Condensed consolidated balance sheet as at September 30, 2009 (Successor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Axcan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intermediate |
|
|
Subsidiary |
|
|
Subsidiary |
|
|
|
|
|
|
|
|
|
Holdings Inc. |
|
|
guarantors |
|
|
non-guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
702 |
|
|
|
41,859 |
|
|
|
83,874 |
|
|
|
|
|
|
|
126,435 |
|
Accounts receivable, net |
|
|
|
|
|
|
41,151 |
|
|
|
15,973 |
|
|
|
|
|
|
|
57,124 |
|
Accounts receivable from the parent company |
|
|
42 |
|
|
|
264 |
|
|
|
|
|
|
|
|
|
|
|
306 |
|
Short-term intercompany receivables |
|
|
5,857 |
|
|
|
5,803 |
|
|
|
364 |
|
|
|
(12,024 |
) |
|
|
|
|
Income taxes receivable |
|
|
|
|
|
|
3,383 |
|
|
|
8 |
|
|
|
|
|
|
|
3,391 |
|
Inventories, net |
|
|
|
|
|
|
39,162 |
|
|
|
5,688 |
|
|
|
(144 |
) |
|
|
44,706 |
|
Prepaid expenses and deposits |
|
|
|
|
|
|
2,289 |
|
|
|
579 |
|
|
|
|
|
|
|
2,868 |
|
Deferred income taxes |
|
|
588 |
|
|
|
14,960 |
|
|
|
304 |
|
|
|
|
|
|
|
15,852 |
|
|
Total current assets |
|
|
7,189 |
|
|
|
148,871 |
|
|
|
106,790 |
|
|
|
(12,168 |
) |
|
|
250,682 |
|
Property, plant and equipment, net |
|
|
|
|
|
|
29,846 |
|
|
|
9,498 |
|
|
|
|
|
|
|
39,344 |
|
Intangible assets, net |
|
|
|
|
|
|
347,604 |
|
|
|
73,686 |
|
|
|
|
|
|
|
421,290 |
|
Investments in subsidiaries |
|
|
(231,940 |
) |
|
|
782,206 |
|
|
|
|
|
|
|
(550,266 |
) |
|
|
|
|
Intercompany advances |
|
|
898,272 |
|
|
|
128,793 |
|
|
|
669,195 |
|
|
|
(1,696,260 |
) |
|
|
|
|
Goodwill, net |
|
|
|
|
|
|
153,287 |
|
|
|
12,536 |
|
|
|
|
|
|
|
165,823 |
|
Deferred debt issue expenses, net |
|
|
23,371 |
|
|
|
2,040 |
|
|
|
|
|
|
|
|
|
|
|
25,411 |
|
Deferred income taxes |
|
|
3,962 |
|
|
|
4,653 |
|
|
|
3,437 |
|
|
|
|
|
|
|
12,052 |
|
|
Total assets |
|
|
700,854 |
|
|
|
1,597,300 |
|
|
|
875,142 |
|
|
|
(2,258,694 |
) |
|
|
914,602 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
5,091 |
|
|
|
71,305 |
|
|
|
11,432 |
|
|
|
(144 |
) |
|
|
87,684 |
|
Income taxes payable |
|
|
3,425 |
|
|
|
(940 |
) |
|
|
8 |
|
|
|
|
|
|
|
2,493 |
|
Short-term intercompany payables |
|
|
4,795 |
|
|
|
6,206 |
|
|
|
1,023 |
|
|
|
(12,024 |
) |
|
|
|
|
Installments on long-term debt |
|
|
12,939 |
|
|
|
17,769 |
|
|
|
|
|
|
|
|
|
|
|
30,708 |
|
Deferred income taxes |
|
|
588 |
|
|
|
257 |
|
|
|
(708 |
) |
|
|
|
|
|
|
137 |
|
|
Total current liabilities |
|
|
26,838 |
|
|
|
94,597 |
|
|
|
11,755 |
|
|
|
(12,168 |
) |
|
|
121,022 |
|
|
Long-term debt |
|
|
510,755 |
|
|
|
71,831 |
|
|
|
|
|
|
|
|
|
|
|
582,586 |
|
Intercompany advances |
|
|
19,224 |
|
|
|
1,593,115 |
|
|
|
83,921 |
|
|
|
(1,696,260 |
) |
|
|
|
|
Other long-term liabilities |
|
|
262 |
|
|
|
9,186 |
|
|
|
|
|
|
|
|
|
|
|
9,448 |
|
Deferred income taxes |
|
|
(19,989 |
) |
|
|
60,511 |
|
|
|
(2,740 |
) |
|
|
|
|
|
|
37,782 |
|
|
Total liabilities |
|
|
537,090 |
|
|
|
1,829,240 |
|
|
|
92,936 |
|
|
|
(1,708,428 |
) |
|
|
750,838 |
|
|
Shareholders Equity (Deficiency) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares |
|
|
1 |
|
|
|
21,034 |
|
|
|
745,398 |
|
|
|
(766,432 |
) |
|
|
1 |
|
Retained earnings (deficit) |
|
|
(297,658 |
) |
|
|
(242,700 |
) |
|
|
37,332 |
|
|
|
205,368 |
|
|
|
(297,658 |
) |
9.05% Note receivable from the parent company |
|
|
(133,154 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(133,154 |
) |
Additional paid-in capital |
|
|
619,053 |
|
|
|
14,204 |
|
|
|
611 |
|
|
|
(14,815 |
) |
|
|
619,053 |
|
Accumulated other comprehensive loss |
|
|
(24,478 |
) |
|
|
(24,478 |
) |
|
|
(1,135 |
) |
|
|
25,613 |
|
|
|
(24,478 |
) |
|
Total shareholders equity (deficiency) |
|
|
163,764 |
|
|
|
(231,940 |
) |
|
|
782,206 |
|
|
|
(550,266 |
) |
|
|
163,764 |
|
|
Total liabilities and shareholders equity (deficiency) |
|
|
700,854 |
|
|
|
1,597,300 |
|
|
|
875,142 |
|
|
|
(2,258,694 |
) |
|
|
914,602 |
|
|
-119-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S .dollars, except share related data)
Condensed consolidated operations for the twelve-month period ended September 30, 2010 (Successor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Axcan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intermediate |
|
|
Subsidiary |
|
|
Subsidiary |
|
|
|
|
|
|
|
|
|
Holdings Inc. |
|
|
guarantors |
|
|
non-guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Net product sales |
|
|
|
|
|
|
292,422 |
|
|
|
63,957 |
|
|
|
(1,792 |
) |
|
|
354,587 |
|
|
Cost of goods sold |
|
|
|
|
|
|
108,723 |
|
|
|
23,803 |
|
|
|
(1,611 |
) |
|
|
130,915 |
|
Selling and administrative expenses |
|
|
5,446 |
|
|
|
82,664 |
|
|
|
26,923 |
|
|
|
|
|
|
|
115,033 |
|
Management fees |
|
|
4,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,412 |
|
Research and development expenses |
|
|
|
|
|
|
26,908 |
|
|
|
4,807 |
|
|
|
|
|
|
|
31,715 |
|
Acquired in-process research |
|
|
|
|
|
|
7,948 |
|
|
|
|
|
|
|
|
|
|
|
7,948 |
|
Depreciation and amortization |
|
|
|
|
|
|
53,290 |
|
|
|
7,721 |
|
|
|
|
|
|
|
61,011 |
|
Impairment of intangible assets and goodwill |
|
|
|
|
|
|
107,158 |
|
|
|
|
|
|
|
|
|
|
|
107,158 |
|
|
Total operating expenses |
|
|
9,858 |
|
|
|
386,691 |
|
|
|
63,254 |
|
|
|
(1,611 |
) |
|
|
458,192 |
|
|
Operating income (loss) |
|
|
(9,858 |
) |
|
|
(94,269 |
) |
|
|
703 |
|
|
|
(181 |
) |
|
|
(103,605 |
) |
|
Financial expenses |
|
|
59,757 |
|
|
|
112,719 |
|
|
|
7,155 |
|
|
|
(114,675 |
) |
|
|
64,956 |
|
Interest income |
|
|
(48,961 |
) |
|
|
(7,591 |
) |
|
|
(58,811 |
) |
|
|
114,675 |
|
|
|
(688 |
) |
Other income |
|
|
|
|
|
|
(9,704 |
) |
|
|
|
|
|
|
|
|
|
|
(9,704 |
) |
Loss (gain) on foreign currencies |
|
|
21,318 |
|
|
|
(13,293 |
) |
|
|
(75 |
) |
|
|
(6,703 |
) |
|
|
1,247 |
|
|
Total other expenses (income) |
|
|
32,114 |
|
|
|
82,131 |
|
|
|
(51,731 |
) |
|
|
(6,703 |
) |
|
|
55,811 |
|
|
Income (loss) before income taxes |
|
|
(41,972 |
) |
|
|
(176,400 |
) |
|
|
52,434 |
|
|
|
6,522 |
|
|
|
(159,416 |
) |
Income taxes expense (benefit) |
|
|
15,184 |
|
|
|
(1,919 |
) |
|
|
(2,261 |
) |
|
|
(54 |
) |
|
|
10,950 |
|
Equity in earnings (loss) in subsidiaries |
|
|
(113,210 |
) |
|
|
61,271 |
|
|
|
|
|
|
|
51,939 |
|
|
|
|
|
|
Net income (loss) |
|
|
(170,366 |
) |
|
|
(113,210 |
) |
|
|
54,695 |
|
|
|
58,515 |
|
|
|
(170,366 |
) |
|
-120-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S .dollars, except share related data)
Condensed consolidated operations for the twelve-month period ended September 30, 2009 (Successor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Axcan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intermediate |
|
|
Subsidiary |
|
|
Subsidiary |
|
|
|
|
|
|
|
|
|
Holdings Inc. |
|
|
guarantors |
|
|
non-guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product sales |
|
|
|
|
|
|
350,623 |
|
|
|
61,020 |
|
|
|
(1,817 |
) |
|
|
409,826 |
|
Other revenue |
|
|
|
|
|
|
|
|
|
|
7,113 |
|
|
|
|
|
|
|
7,113 |
|
|
Total revenue |
|
|
|
|
|
|
350,623 |
|
|
|
68,133 |
|
|
|
(1,817 |
) |
|
|
416,939 |
|
|
Cost of goods sold |
|
|
|
|
|
|
79,620 |
|
|
|
24,728 |
|
|
|
(1,325 |
) |
|
|
103,023 |
|
Selling and administrative expenses |
|
|
7,893 |
|
|
|
88,087 |
|
|
|
27,134 |
|
|
|
(172 |
) |
|
|
122,942 |
|
Management fees |
|
|
5,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,351 |
|
Research and development expenses |
|
|
|
|
|
|
34,161 |
|
|
|
2,196 |
|
|
|
(320 |
) |
|
|
36,037 |
|
Depreciation and amortization |
|
|
|
|
|
|
52,352 |
|
|
|
7,953 |
|
|
|
|
|
|
|
60,305 |
|
Partial write-down of intangible assets |
|
|
|
|
|
|
55,414 |
|
|
|
251 |
|
|
|
|
|
|
|
55,665 |
|
|
Total operating expenses |
|
|
13,244 |
|
|
|
309,634 |
|
|
|
62,262 |
|
|
|
(1,817 |
) |
|
|
383,323 |
|
|
Operating income (loss) |
|
|
(13,244 |
) |
|
|
40,989 |
|
|
|
5,871 |
|
|
|
|
|
|
|
33,616 |
|
|
Financial expenses |
|
|
62,034 |
|
|
|
110,810 |
|
|
|
5,750 |
|
|
|
(108,785 |
) |
|
|
69,809 |
|
Interest income |
|
|
(45,755 |
) |
|
|
(5,911 |
) |
|
|
(57,508 |
) |
|
|
108,785 |
|
|
|
(389 |
) |
Other income |
|
|
|
|
|
|
(3,500 |
) |
|
|
|
|
|
|
|
|
|
|
(3,500 |
) |
Loss (gain) on foreign currencies |
|
|
(12,464 |
) |
|
|
(703 |
) |
|
|
78 |
|
|
|
12,761 |
|
|
|
(328 |
) |
|
Total other expenses (income) |
|
|
3,815 |
|
|
|
100,696 |
|
|
|
(51,680 |
) |
|
|
12,761 |
|
|
|
65,592 |
|
|
Income (loss) before income taxes |
|
|
(17,059 |
) |
|
|
(59,707 |
) |
|
|
57,551 |
|
|
|
(12,761 |
) |
|
|
(31,976 |
) |
Income taxes benefit |
|
|
(7,104 |
) |
|
|
(16,848 |
) |
|
|
(130 |
) |
|
|
|
|
|
|
(24,082 |
) |
Equity in earnings in subsidiaries |
|
|
2,061 |
|
|
|
44,920 |
|
|
|
|
|
|
|
(46,981 |
) |
|
|
|
|
|
Net income (loss) |
|
|
(7,894 |
) |
|
|
2,061 |
|
|
|
57,681 |
|
|
|
(59,742 |
) |
|
|
(7,894 |
) |
|
-121-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S .dollars, except share related data)
Condensed consolidated operations for the seven-month period ended September 30, 2008 (Successor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Axcan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intermediate |
|
|
Subsidiary |
|
|
Subsidiary |
|
|
|
|
|
|
|
|
|
Holdings Inc. |
|
|
guarantors |
|
|
non-guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Net product sales |
|
|
|
|
|
|
185,600 |
|
|
|
45,310 |
|
|
|
(7,731 |
) |
|
|
223,179 |
|
|
Cost of goods sold |
|
|
|
|
|
|
66,857 |
|
|
|
18,359 |
|
|
|
(7,989 |
) |
|
|
77,227 |
|
Selling and administrative expenses |
|
|
9,297 |
|
|
|
59,353 |
|
|
|
19,565 |
|
|
|
31 |
|
|
|
88,246 |
|
Management fees |
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99 |
|
Research and development expenses |
|
|
|
|
|
|
15,520 |
|
|
|
2,279 |
|
|
|
(31 |
) |
|
|
17,768 |
|
Acquired in-process research |
|
|
|
|
|
|
272,400 |
|
|
|
|
|
|
|
|
|
|
|
272,400 |
|
Depreciation and amortization |
|
|
|
|
|
|
31,876 |
|
|
|
3,703 |
|
|
|
|
|
|
|
35,579 |
|
|
Total operating expenses |
|
|
9,396 |
|
|
|
446,006 |
|
|
|
43,906 |
|
|
|
(7,989 |
) |
|
|
491,319 |
|
|
Operating income (loss) |
|
|
(9,396 |
) |
|
|
(260,406 |
) |
|
|
1,404 |
|
|
|
258 |
|
|
|
(268,140 |
) |
|
Financial expenses |
|
|
36,723 |
|
|
|
41,521 |
|
|
|
87 |
|
|
|
(36,818 |
) |
|
|
41,513 |
|
Interest income (expense) |
|
|
(41,459 |
) |
|
|
42,775 |
|
|
|
(38,942 |
) |
|
|
36,818 |
|
|
|
(808 |
) |
Loss (gain) on foreign currencies |
|
|
52,151 |
|
|
|
(87,691 |
) |
|
|
41,692 |
|
|
|
(7,993 |
) |
|
|
(1,841 |
) |
|
Total other expenses (income) |
|
|
47,415 |
|
|
|
(3,395 |
) |
|
|
2,837 |
|
|
|
(7,993 |
) |
|
|
38,864 |
|
|
Loss before income taxes |
|
|
(56,811 |
) |
|
|
(257,011 |
) |
|
|
(1,433 |
) |
|
|
8,251 |
|
|
|
(307,004 |
) |
Income taxes expense (benefit) |
|
|
(16,250 |
) |
|
|
2,473 |
|
|
|
(3,966 |
) |
|
|
3 |
|
|
|
(17,740 |
) |
Equity in earnings (loss) in subsidiaries |
|
|
(248,703 |
) |
|
|
10,781 |
|
|
|
|
|
|
|
237,922 |
|
|
|
|
|
|
Net income (loss) |
|
|
(289,264 |
) |
|
|
(248,703 |
) |
|
|
2,533 |
|
|
|
246,170 |
|
|
|
(289,264 |
) |
|
-122-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S .dollars, except share related data)
Condensed consolidated operations for the five-month period ended February 25, 2008 (Predecessor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Axcan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intermediate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holdings |
|
|
Subsidiary |
|
|
Subsidiary |
|
|
|
|
|
|
|
|
|
Inc. |
|
|
guarantors |
|
|
non-guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Net product sales |
|
|
|
|
|
|
129,669 |
|
|
|
38,142 |
|
|
|
(9,232 |
) |
|
|
158,579 |
|
|
Cost of goods sold |
|
|
|
|
|
|
37,346 |
|
|
|
10,869 |
|
|
|
(9,476 |
) |
|
|
38,739 |
|
Selling and administrative expenses |
|
|
|
|
|
|
65,595 |
|
|
|
10,581 |
|
|
|
22 |
|
|
|
76,198 |
|
Research and development expenses |
|
|
|
|
|
|
7,826 |
|
|
|
2,452 |
|
|
|
(22 |
) |
|
|
10,256 |
|
Depreciation and amortization |
|
|
|
|
|
|
2,952 |
|
|
|
6,643 |
|
|
|
|
|
|
|
9,595 |
|
|
Total operating expenses |
|
|
|
|
|
|
113,719 |
|
|
|
30,545 |
|
|
|
(9,476 |
) |
|
|
134,788 |
|
|
Operating income |
|
|
|
|
|
|
15,950 |
|
|
|
7,597 |
|
|
|
244 |
|
|
|
23,791 |
|
|
Financial expenses |
|
|
|
|
|
|
3,238 |
|
|
|
41 |
|
|
|
(3,017 |
) |
|
|
262 |
|
Interest income |
|
|
|
|
|
|
(5,096 |
) |
|
|
(3,361 |
) |
|
|
3,017 |
|
|
|
(5,440 |
) |
Loss (gain) on foreign currencies |
|
|
|
|
|
|
8,267 |
|
|
|
76 |
|
|
|
(8,541 |
) |
|
|
(198 |
) |
|
Total other expenses (income) |
|
|
|
|
|
|
6,409 |
|
|
|
(3,244 |
) |
|
|
(8,541 |
) |
|
|
(5,376 |
) |
|
Income before income taxes |
|
|
|
|
|
|
9,541 |
|
|
|
10,841 |
|
|
|
8,785 |
|
|
|
29,167 |
|
Income taxes expense |
|
|
|
|
|
|
11,682 |
|
|
|
297 |
|
|
|
63 |
|
|
|
12,042 |
|
Equity in earnings in subsidiaries |
|
|
|
|
|
|
19,266 |
|
|
|
|
|
|
|
(19,266 |
) |
|
|
|
|
|
Net income |
|
|
|
|
|
|
17,125 |
|
|
|
10,544 |
|
|
|
(10,544 |
) |
|
|
17,125 |
|
|
-123-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S .dollars, except share related data)
Condensed consolidated cash flows for the twelve-month period ended September 30, 2010 (Successor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Axcan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intermediate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holdings |
|
|
Subsidiary |
|
|
Subsidiary |
|
|
|
|
|
|
|
|
|
Inc. |
|
|
guarantors |
|
|
non-guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(70,250 |
) |
|
|
91,150 |
|
|
|
42,220 |
|
|
|
|
|
|
|
63,120 |
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property, plant and equipment |
|
|
|
|
|
|
(4,705 |
) |
|
|
(1,353 |
) |
|
|
|
|
|
|
(6,058 |
) |
Intercompany advances |
|
|
7,408 |
|
|
|
(72,268 |
) |
|
|
|
|
|
|
64,860 |
|
|
|
|
|
Investments in subsidiaries |
|
|
|
|
|
|
|
|
|
|
(68,000 |
) |
|
|
68,000 |
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
7,408 |
|
|
|
(76,973 |
) |
|
|
(69,353 |
) |
|
|
132,860 |
|
|
|
(6,058 |
) |
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of long-term debt |
|
|
(8,791 |
) |
|
|
(12,074 |
) |
|
|
|
|
|
|
|
|
|
|
(20,865 |
) |
Stock-based compensation plan redemptions |
|
|
(345 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(345 |
) |
Intercompany advances |
|
|
72,268 |
|
|
|
(7,408 |
) |
|
|
|
|
|
|
(64,860 |
) |
|
|
|
|
Issue of shares |
|
|
|
|
|
|
68,000 |
|
|
|
|
|
|
|
(68,000 |
) |
|
|
|
|
Dividends paid |
|
|
(128 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(128 |
) |
|
Net cash provided by (used in) financing activities |
|
|
63,004 |
|
|
|
48,518 |
|
|
|
|
|
|
|
(132,860 |
) |
|
|
(21,338 |
) |
|
Foreign exchange gain (loss) on cash held in foreign currencies |
|
|
|
|
|
|
54 |
|
|
|
(710 |
) |
|
|
|
|
|
|
(656 |
) |
|
Net increase (decrease) in cash and cash equivalents |
|
|
162 |
|
|
|
62,749 |
|
|
|
(27,843 |
) |
|
|
|
|
|
|
35,068 |
|
Cash and cash equivalents, beginning of period |
|
|
702 |
|
|
|
41,859 |
|
|
|
83,874 |
|
|
|
|
|
|
|
126,435 |
|
|
Cash and cash equivalents, end of period |
|
|
864 |
|
|
|
104,608 |
|
|
|
56,031 |
|
|
|
|
|
|
|
161,503 |
|
|
-124-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S .dollars, except share related data)
Consolidated consolidated cash flows for the twelve-month period ended September 30, 2009
(Successor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Axcan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intermediate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holdings |
|
|
Subsidiary |
|
|
Subsidiary |
|
|
|
|
|
|
|
|
|
Inc. |
|
|
guarantors |
|
|
non-guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(13,820 |
) |
|
|
124,804 |
|
|
|
(18,602 |
) |
|
|
|
|
|
|
92,382 |
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property, plant and equipment |
|
|
|
|
|
|
(8,861 |
) |
|
|
(1,729 |
) |
|
|
|
|
|
|
(10,590 |
) |
Acquisition of intangible assets |
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
(10 |
) |
Intercompany advances |
|
|
540 |
|
|
|
(95,914 |
) |
|
|
2,505 |
|
|
|
92,869 |
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
540 |
|
|
|
(104,775 |
) |
|
|
766 |
|
|
|
92,869 |
|
|
|
(10,600 |
) |
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of long-term debt |
|
|
(4,608 |
) |
|
|
(6,329 |
) |
|
|
|
|
|
|
|
|
|
|
(10,937 |
) |
Stock-based compensation plan redemptions |
|
|
(157 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(157 |
) |
Intercompany advances |
|
|
19,226 |
|
|
|
2,129 |
|
|
|
71,514 |
|
|
|
(92,869 |
) |
|
|
|
|
Dividends paid |
|
|
(500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(500 |
) |
|
Net cash provided by (used in) financing activities |
|
|
13,961 |
|
|
|
(4,200 |
) |
|
|
71,514 |
|
|
|
(92,869 |
) |
|
|
(11,594 |
) |
|
Foreign exchange gain (loss) on cash held in foreign currencies |
|
|
|
|
|
|
(151 |
) |
|
|
293 |
|
|
|
|
|
|
|
142 |
|
|
Net increase in cash and cash equivalents |
|
|
681 |
|
|
|
15,678 |
|
|
|
53,971 |
|
|
|
|
|
|
|
70,330 |
|
Cash and cash equivalents, beginning of period |
|
|
21 |
|
|
|
26,181 |
|
|
|
29,903 |
|
|
|
|
|
|
|
56,105 |
|
|
Cash and cash equivalents, end of period |
|
|
702 |
|
|
|
41,859 |
|
|
|
83,874 |
|
|
|
|
|
|
|
126,435 |
|
|
-125-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S .dollars, except share related data)
Condensed consolidated cash flows for the seven-month period ended September 30, 2008 (Successor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Axcan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intermediate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holdings |
|
|
Subsidiary |
|
|
Subsidiary |
|
|
|
|
|
|
|
|
|
Inc. |
|
|
guarantors |
|
|
non-guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(53,068 |
) |
|
|
(21,846 |
) |
|
|
27,402 |
|
|
|
|
|
|
|
(47,512 |
) |
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property, plant and equipment |
|
|
|
|
|
|
(2,029 |
) |
|
|
(1,032 |
) |
|
|
|
|
|
|
(3,061 |
) |
Acquisition of intangible assets |
|
|
|
|
|
|
|
|
|
|
(32 |
) |
|
|
|
|
|
|
(32 |
) |
Net cash used for the acquisition |
|
|
|
|
|
|
(958,463 |
) |
|
|
|
|
|
|
|
|
|
|
(958,463 |
) |
Intercompany advances |
|
|
(898,816 |
) |
|
|
(32,878 |
) |
|
|
(671,702 |
) |
|
|
1,603,396 |
|
|
|
|
|
Investments in subsidiaries |
|
|
(21,020 |
) |
|
|
(663,674 |
) |
|
|
|
|
|
|
684,694 |
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(919,836 |
) |
|
|
(1,657,044 |
) |
|
|
(672,766 |
) |
|
|
2,288,090 |
|
|
|
(961,556 |
) |
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of long-term debt |
|
|
538,120 |
|
|
|
96,000 |
|
|
|
|
|
|
|
|
|
|
|
634,120 |
|
Repayment of long-term debt |
|
|
(10,457 |
) |
|
|
(164 |
) |
|
|
(269 |
) |
|
|
|
|
|
|
(10,890 |
) |
Intercompany advances |
|
|
|
|
|
|
1,590,988 |
|
|
|
12,408 |
|
|
|
(1,603,396 |
) |
|
|
|
|
Advances from the parent company |
|
|
4,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,182 |
|
Deferred debt issue expenses |
|
|
(33,921 |
) |
|
|
(2,439 |
) |
|
|
|
|
|
|
|
|
|
|
(36,360 |
) |
Issue of shares |
|
|
475,001 |
|
|
|
21,020 |
|
|
|
663,674 |
|
|
|
(684,694 |
) |
|
|
475,001 |
|
|
Net cash provided by financing activities |
|
|
972,925 |
|
|
|
1,705,405 |
|
|
|
675,813 |
|
|
|
(2,288,090 |
) |
|
|
1,066,053 |
|
|
Foreign exchange loss on cash held in foreign currencies |
|
|
|
|
|
|
(334 |
) |
|
|
(546 |
) |
|
|
|
|
|
|
(880 |
) |
|
Net increase in cash and cash equivalents |
|
|
21 |
|
|
|
26,181 |
|
|
|
29,903 |
|
|
|
|
|
|
|
56,105 |
|
|
Cash and cash equivalents, beginning and end of period |
|
|
21 |
|
|
|
26,181 |
|
|
|
29,903 |
|
|
|
|
|
|
|
56,105 |
|
|
-126-
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S .dollars, except share related data)
Consolidated cash flows for the five-month period ended February 25, 2008 (Predecessor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Axcan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intermediate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holdings |
|
|
Subsidiary |
|
|
Subsidiary |
|
|
|
|
|
|
|
|
|
Inc. |
|
|
guarantors |
|
|
non-guarantors |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
|
|
|
|
77,714 |
|
|
|
(4,469 |
) |
|
|
|
|
|
|
73,245 |
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposal of short-term investments |
|
|
|
|
|
|
129,958 |
|
|
|
|
|
|
|
|
|
|
|
129,958 |
|
Intercompany advances |
|
|
|
|
|
|
4,500 |
|
|
|
|
|
|
|
(4,500 |
) |
|
|
|
|
Acquisition of property, plant and equipment |
|
|
|
|
|
|
(3,063 |
) |
|
|
(251 |
) |
|
|
|
|
|
|
(3,314 |
) |
Acquisition of intangible assets |
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
|
|
|
|
|
(14 |
) |
|
Net cash provided by (used in) investing activities |
|
|
|
|
|
|
131,395 |
|
|
|
(265 |
) |
|
|
(4,500 |
) |
|
|
126,630 |
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of long-term debt |
|
|
|
|
|
|
(101 |
) |
|
|
(120 |
) |
|
|
|
|
|
|
(221 |
) |
Intercompany advances |
|
|
|
|
|
|
|
|
|
|
(4,500 |
) |
|
|
4,500 |
|
|
|
|
|
Deferred debt issue expenses |
|
|
|
|
|
|
(889 |
) |
|
|
|
|
|
|
|
|
|
|
(889 |
) |
Stock-based compensation plan redemptions |
|
|
|
|
|
|
(29,219 |
) |
|
|
(1,138 |
) |
|
|
|
|
|
|
(30,357 |
) |
Issue of shares |
|
|
|
|
|
|
224 |
|
|
|
|
|
|
|
|
|
|
|
224 |
|
|
Net cash used in financing activities |
|
|
|
|
|
|
(29,985 |
) |
|
|
(5,758 |
) |
|
|
4,500 |
|
|
|
(31,243 |
) |
|
Foreign exchange gain on cash held in foreign currencies |
|
|
|
|
|
|
64 |
|
|
|
423 |
|
|
|
|
|
|
|
487 |
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
|
|
|
|
179,188 |
|
|
|
(10,069 |
) |
|
|
|
|
|
|
169,119 |
|
Cash and cash equivalents, beginning of period |
|
|
|
|
|
|
150,856 |
|
|
|
28,816 |
|
|
|
|
|
|
|
179,672 |
|
|
Cash and cash equivalents, end of period |
|
|
|
|
|
|
330,044 |
|
|
|
18,747 |
|
|
|
|
|
|
|
348,791 |
|
|
21. Subsequent events
On December 1, 2010, Axcan Holdings Inc. (Axcan Holdings), the Companys indirect parent, and
Axcan Pharma Holding B.V. (Axcan Pharma), a Companys subsidiary, announced that they had
entered into a definitive agreement with Eurand N.V. (Eurand), a global specialty pharmaceutical
company with headquarters in the Netherlands, under which Axcan Holdings will acquire all of the
outstanding shares of Eurand for $12.00 per share in cash, resulting in a purchase price of
approximately $583 million. The transaction is subject to a condition that a minimum of 80% of
Eurand shares be tendered, as well as receipt of antitrust approval. The Company has secured
committed debt financing from BofA Merrill Lynch, Barclays Capital, RBC Capital Markets and HSBC
Securities (USA) for the transaction.
-127-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
We conducted an evaluation under the supervision and with the participation of our
management, including our principal executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the
Exchange Act), as of September 30, 2010, the end of the period covered by this Annual Report on
Form 10-K. Based upon this evaluation, our principal executive officer and principal financial
officer concluded that our disclosure controls and procedures are effective to ensure that
material information required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms and is accumulated and communicated to our
management, including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
(b) Changes in internal control over financial reporting.
As required by Rule 13a-15(d) under the Exchange Act, the companys management, including
the companys Chief Executive Officer and Chief Financial Officer, has evaluated the companys
internal control over financial reporting to determine whether any changes occurred during the
fourth fiscal quarter covered by this annual report that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting. Based on
that evaluation, there has been no such change during the fourth fiscal quarter covered by this
annual report.
(c) Managements report on internal control over financial reporting.
Management is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our
internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with GAAP. Internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the interim or annual consolidated financial statements. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Our management conducted an assessment of the effectiveness of our internal control over
financial reporting as of September 30, 2010. In making this assessment, management used the
criteria established in the report entitled Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO Report). Management
concluded that we did maintain effective internal control over financial reporting as of September
30, 2010, based on the criteria established in the COSO Report.
This annual report does not include an attestation report of the companys independent
registered public accounting firm regarding internal control over financial reporting.
Managements report was not subject to attestation by the companys independent registered public
accounting firm pursuant to rules of the Securities and Exchange Commission that permit the
company to provide only managements report in this annual report.
ITEM 9B. OTHER INFORMATION
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
Below is a list of the names, ages and positions, and a brief account of the business
experience, of (1) the individuals who serve as our executive officers and as members of our Board
of Directors, or the Board, and (2) the individuals who serve as the executive officers and
members of the Board of Directors of our indirect parent Holdings. We include director and
management information for both us and Holdings, an entity controlled by the Sponsor and the
Co-Investors, since our executive officers also serve as officers in the same capacity for
Holdings and certain decisions relating to our business are made by the Board of Directors of
Holdings, or the Holdings Board, in their capacity as our indirect parent. See Item 11. Executive
Compensation for further discussion on the relationship between our management and the management
of Holdings.
In addition, certain our officers and directors listed below also serve as the officers and
directors of Axcan MidCo Inc., or MidCo, our direct parent and certain of our officers also serve
in the same capacity as officers for our indirect subsidiaries Axcan Pharma Inc. and Axcan Pharma
US, Inc.
|
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|
|
|
|
|
Name |
|
Age |
|
Position |
Frank Verwiel, M.D.
|
|
|
48 |
|
|
President and Chief Executive Officer; Director, Axcan Intermediate Holdings Inc. and
Axcan Holdings Inc. |
|
|
|
|
|
|
|
David Mims
|
|
|
47 |
|
|
Executive Vice President and Chief Operating Officer; Director, Axcan Intermediate Holdings Inc. |
|
|
|
|
|
|
|
Steve Gannon
|
|
|
49 |
|
|
Senior Vice President, Chief Financial Officer and Treasurer; Director, Axcan Intermediate Holdings Inc. |
|
|
|
|
|
|
|
Alexandre LeBeaut, M.D.
|
|
|
53 |
|
|
Senior Vice President and Chief Scientific Officer |
|
|
|
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|
|
|
Nicholas Franco
|
|
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48 |
|
|
Senior Vice President, International Commercial Operations |
|
|
|
|
|
|
|
Theresa Stevens, Esq.
|
|
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49 |
|
|
Senior Vice President, Business Development |
|
|
|
|
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|
Richard DeVleeschouwer
|
|
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53 |
|
|
Senior Vice President, Human Resources and Assistant Secretary; Director, Axcan Intermediate Holdings Inc. |
|
|
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|
|
|
|
Richard Tarte, Esq.
|
|
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47 |
|
|
Vice President, Corporate Development, General Counsel and Secretary |
|
|
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|
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Fred Cohen, M.D., D. Phil
|
|
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54 |
|
|
Director, Axcan Holdings Inc. |
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Heather Preston, M.D.
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44 |
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Director, Axcan Holdings Inc. |
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Todd Sisitsky
|
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39 |
|
|
Director, Axcan Holdings Inc. |
Frank Verwiel, M.D., has been a director on our Board and a director of our parent
corporations Axcan MidCo Inc. and Axcan Holdings Inc. since February 2008. Dr. Verwiel joined
Axcan Pharma Inc. as President and Chief Executive Officer in July 2005 and joined the Board of
Directors of Axcan Pharma Inc. in August 2005. Dr. Verwiel most recently held the position of
Vice President, Hypertension, Worldwide Human Health Marketing, with Merck & Co., Inc., while
concurrently serving as a member of Mercks worldwide hypertension business strategy team. He
joined Merck in 1996 and was appointed managing director of MSD in the Netherlands in 1997.
Prior to joining Merck, from 1988 to 1996, Dr. Verwiel held a number of executive positions with
Laboratoires Servier in the EU. Dr. Verwiel holds Doctorate of Medicine and Master of Medicine
degrees from Erasmus University in Rotterdam, the Netherlands. He also attended INSEAD in
Fontainebleau, France, where he earned his Masters of Business Administration.
David Mims has been a director on the Board and a director of our parent corporation
Axcan MidCo Inc. since February 2008. Mr. Mims has also served as President of our parent
corporations Axcan MidCo Inc. and Axcan Holdings Inc. since February 2008. Mr. Mims joined
Axcan Pharma Inc. as Executive Vice President and Chief Operating Officer in February 2000,
shortly after Axcan Pharma Inc.s acquisition of Scandipharm, Inc. He served as senior
accountant at a major accounting firm before joining Russ Pharmaceuticals, Inc. in 1987 as
Accounting Services Manager. In 1991, Mr. Mims helped found Scandipharm, Inc., and served as
Vice President, Chief Operating Officer, and Chief Financial Officer. He resigned from
Scandipharm, Inc., in March 1998 to join Cebert Pharmaceuticals, Inc., as Executive Vice
President and Chief Operating Officer. Previously a director of the University of Alabama at
Birmingham Research Foundation, Mr. Mims is also a member of the American Institute of
Certified Public Accountants and Alabama Society of Certified Public Accountants. He is a
licensed Certified Public Accountant (CPA) (inactive) in the state of Alabama and holds a
Bachelor of Science degree in accounting from Auburn University, Alabama.
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Steve Gannon has been our Senior Vice President, Chief Financial Officer and Treasurer and a
director on the Board since February 2008. Mr. Gannon has also served as director of our parent
corporation Axcan MidCo Inc. and Senior Vice President, Chief Financial Officer and Treasurer of
our parent corporations Axcan MidCo Inc. and Axcan Holdings Inc. since February 2008. Mr. Gannon
joined Axcan Pharma Inc. as Senior Vice President and Chief Financial Officer in February 2006. He
has extensive financial experience in corporate growth initiatives, such as acquisitions,
corporate alliances, and partnerships within the biotechnology and pharmaceutical sector. Prior to
joining Axcan, Mr. Gannon was Chief Financial Officer at CryoCath Technologies Inc., in addition
to serving in a number of senior financial roles at AstraZeneca and Mallinckrodt Medical Inc.
Mr. Gannon earned a chartered accountants designation (CA) in 1985 and holds a Bachelor of
Commerce degree from the Concordia University, Montreal, Canada.
Alexandre LeBeaut, M.D., has been our Senior Vice President and Chief Scientific Officer
since September 2008. Dr. LeBeaut previously held the title of Senior Vice President and Chief
Scientific Officer of Axcan Pharma from May 2006 to February 2007. Prior to joining the Company,
Dr. LeBeaut held senior scientific positions with Schering-Plough, Sanofi-Aventis and Novartis
Pharmaceuticals. A pediatrician by training, Dr. LeBeaut received his medical degree with honors
from the University of Paris VII, France, in 1984. Dr. LeBeaut is a member of the American
Gastroenterological Association, the American College of Gastroenterology, the American Society of
Microbiology and the American Society of Critical Care Medicine.
Nicholas Franco was appointed Senior Vice President, International Commercial Operations, of
Axcan Pharma Inc. in July 2007. Prior to joining Axcan, he held various positions at Novartis Pharma AG in Basel,
Switzerland, since 1991, including President of the Global Ophthalmic Business Unit and Global Head
of the Neuroscience Business Franchise. Mr. Franco graduated from McGill University, Montreal,
Canada, where he earned a Bachelor of Science in Biochemistry and an MBA in Strategic Planning and
Marketing.
Theresa Stevens, Esq., joined the Company in May 2009 as Senior Vice President, Business
Development. Before joining Axcan, Ms. Stevens was with Novartis for 10 years holding a number
of executive positions, the last being on the Executive Committee member, as Vice President,
U.S. Business Development and Licensing, Life Cycle Management and Generics-Brands Strategies
in East Hanover, NJ. Ms. Stevens holds a Bachelor of Science in Animal Science cum laude, and
Master of Science in Molecular and Cell Biology, summa cum laude, from the University of
Maryland in College Park and a Juris Doctorate, magna cum laude, from Widener University of Law
in Wilmington, Delaware. Ms. Stevens was admitted to the USPTO in 1992, the State Bars of
Pennsylvania and the District of Columbia in 1993 and the U.S. Court of Appeals for the Federal
Circuit in 1994.
Richard Tarte, Esq., has been our General Counsel and Secretary since February 2008. Mr.
Tarte has also served as General Counsel and Secretary of our parent corporations Axcan MidCo
Inc. and Axcan Holdings Inc. since February 2008. Mr. Tarte joined Axcan Pharma Inc. as Vice
President, Corporate Development and General Counsel, in 2001. Prior to that, he served as
in-house counsel at the Société Générale de Financement du Québec, a diversified investment fund.
Prior to that he was partner at Coudert Brothers, an international law firm. Mr. Tarte was
admitted to the Quebec Bar in 1988. He holds a Masters of Business Administration degree from
INSEAD in France and a Bachelor of Law degree from the University of Montreal, Canada.
Richard DeVleeschouwer has been our Senior Vice President, Human Resources since March 2010.
Mr. DeVleeschouwer has also served as Director and Assistant Secretary of our parent corporation
Axcan MidCo Inc. since August 2010. Mr. DeVleeschouwer has more than 23 years of experience as a
Human Resources professional and more than 14 years of experience in the health-care industry.
Prior to joining Axcan, Mr. DeVleeschouwer served a number of senior human resources roles at
Schering-Plough Corporation. Earlier in his career, Mr. DeVleeschouwer worked at Pharmacia
Corporation and Monsanto Company where he held various leadership positions. Mr. DeVleeschouwer
holds a Bachelor of Arts degree in Social Organization and Human Relations from the University of
Western Ontario, London, Ontario, Canada, and is a graduate from George Brown College of Applied
Arts and Technology, Toronto, Ontario, Canada.
Fred Cohen, M.D., D. Phil., has been a director on the Holdings Board since February 2008.
Prior to joining TPG in 2001, Dr. Cohen was a Professor of Medicine, Cellular and Molecular Pharmacology, Biochemistry and
Biophysics and Pharmaceutical Chemistry at the University of California, San Francisco. In this
context, he was Chief of the Division of Endocrinology and Metabolism and directed an active
research program in the areas of prion biology, structure-based drug design, bioinformatics and
heteropolymer chemistry. He is a Fellow of the American College of Physicians and the American
College of Medical Informatics, a member of the American Society for Clinical Investigation and
the Association of American Physicians, and the recipient of several awards and honors including
the Burroughs-Wellcome New Initiatives in Malaria Award, the LVMH Science Pour LArt Prize
(shared with Stanley Prusiner), a Searle Scholars Award and Young Investigator Awards from the
Endocrine Society and the Western Society for Clinical Investigation. He holds a Bachelor of Arts
degree, magna cum laude, from Yale University, a D. Phil. from Oxford University as a Rhodes
Scholar, and a Doctor of Medicine degree from Stanford Medical School. He was an American Cancer
Society postdoctoral fellow in internal medicine and endocrinology at the University of
California, San Francisco. Over the past 20 years, Dr. Cohen has played advisory and board roles
for the venture capital, biotechnology and pharmaceutical industries with Kleiner Perkins Caufield
and Byers, Chiron Corporation, Incyte Corporation, Synteni, Syrrx Inc., Genomic Health, Inc.,
Arris Pharmaceuticals Corporation, Immunex Corporation, DoubleTwist, Procept and Eli Lilly and
Company. He currently serves on the boards of GenomicHealth, FivePrime, Expression Diagnostics
(XDx), CardioDx, Nodality, ProteoGenix, Quintiles Transnational Corp, Roka and Vercyte. Dr. Cohen
was elected to the Institute of Medicine of the National Academies in 2004 and to the American
Academy of Arts and Sciences in 2008.
Heather Preston, M.D., is Managing Director of TPG Biotech. Prior to joining TPG Biotech in
May 2005, Dr. Preston spent two years at JP Morgan Partners where she focused on medical device
and biotechnology venture capital investing. Prior to that, she was an
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Entrepreneur-in-Residence with New Enterprise Associates. She has an undergraduate degree in biochemistry from the
University of London and a medical degree from the University of Oxford. After leaving Oxford,
she completed a post-doctoral fellowship in molecular biology at the Dana Farber Cancer Institute, Harvard University. She completed her training
in internal medicine at the Massachusetts General Hospital and then she sub-specialized in
gastroenterology and hepatology at University of California, San Francisco. During her academic
career, she was the recipient of a Fulbright Scholarship, a Fulbright Cancer Research
Scholarship, a Harlech Scholarship, and a Science and Engineering Research Council post-doctoral
Fellowship Award. After leaving academic medicine, she spent five years at McKinsey & Co. in New
York, where she was a leader of their pharmaceutical and medical products consulting practice.
She advised large pharmaceutical companies and biotechnology companies on critical strategic
issues such as R&D portfolio prioritization, M&A opportunities, new technology acquisitions, new
product launches and product growth strategies. Dr. Preston co-founded, and is the CEO of Virobay
Inc., a biotechnology company which is seeking to develop new therapies for the treatment of
hepatitis C virus (HCV). Dr. Preston serves on the boards of Albireo, Alder Biotherapeutics and
Virobay Inc.
Todd Sisitsky is a partner of TPG Capital, L.P., where he leads the firms investment
activities in the health-care services and pharmaceutical/medical device sectors. He played
leadership roles in connection with TPGs investments in Axcan Pharma, Biomet, Fenwal Transfusion
Therapies, IASIS Health-care, and Surgical Care Affiliates (carved out from HealthSouth
Corporation). Prior to joining TPG in 2003, Mr. Sisitsky worked at Forstmann Little & Company and
Oak Hill Capital Partners. He received an MBA from the Stanford Graduate School of Business, where
he was an Arjay Miller Scholar, and earned his undergraduate degree from Dartmouth College, where
he graduated summa cum laude.
Corporate Governance
Our Board consists of four members and the Holdings Board consists of five members. There
are no representatives of the Sponsor on our Board, which consists solely of members of our
executive management team. The Holdings Board consists of representatives of the Sponsor and our
CEO. While decisions regarding the Companys business and affairs are taken by our Board, the
Holdings Board exercises certain strategic and oversight functions. As discussed in more detail
below, matters relating to named executive officers compensation are considered and approved by a
committee of the Holdings Board comprised of Todd Sisitsky, Fred Cohen and Frank Verwiel
(Compensation Committee). A committee of the Holdings Board comprised of Heather Preston and
Frank Verwiel, also exercises oversight on financial statement approval, auditor nomination,
pre-approval of fees and services performed by our auditors and disclosure (Audit Committee).
Because of these requirements, together with the Sponsors ownership of a majority of our
outstanding common shares through Holdings, neither we nor Holdings currently have a policy or
procedure with respect to shareholder nominees to our respective Boards of Directors. Though not
formally considered by our Board, given that our securities are not registered or traded on any
national securities exchange, based upon the listing standards of the NASDAQ Global Market, the
national securities exchange upon which Axcan Pharmas common stock was listed prior to the
February 2008 Transactions, we do not currently believe that any of our directors would be
considered independent, because of their relationships with us as executive officers. In
addition, when using the same independence standards, none of the directors on the Holdings Board
would be considered independent due to Dr. Verwiels position as President and Chief Executive
Officer of Holdings and us and the respective relationships of Drs. Cohen and Preston and Mr.
Sisitsky with the Sponsor, the owner of a majority of the outstanding common equity of Holdings.
See Item 13 Certain Relationships and Related Transactions, and Director Independence.
Section 16(a) Compliance
There is no established public trading market for our common stock. We are a wholly owned
subsidiary of Axcan MidCo Inc., which holds all of our outstanding common stock and is a wholly
owned subsidiary of Axcan Holdings Inc., a privately held company.
Audit Committee
Our Board selects our independent auditors and reviews the independence of such auditors,
approves the scope of the annual audit activities of the independent auditors, approves the audit
fee payable to the independent auditors and reviews such audit results with the independent
auditors. Due to our status as a privately-held company and the absence of a public trading market
for our common stock, we have not designated any member of the Board as an audit committee
financial expert. A committee of the Holdings Board currently consisting of Heather Preston and
Frank Verwiel also exercises oversight on financial statement approval, auditor nomination, review
and pre-approval of fees and services performed by our auditors and disclosure (Audit
Committee).
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Compensation Committee
A committee of the Holdings Board comprising Todd Sisitsky, Fred Cohen and Frank Verwiel
also considers and approves matters related to compensation of our named executive officers
(Compensation Committee). The Holdings Compensation Committee is responsible for reviewing and
approving goals and objectives related to our executive officers compensation, evaluating the
chief executive officers performance against these goals and objectives and approving his
compensation, approving total compensation for the other named executive officers, establishing
total compensation for the directors and overseeing our incentive plans. Though not formally
considered by the Holdings Board, given that neither our securities nor the securities of
Holdings are registered or traded on any national securities exchange, based upon the listing
standards of the NASDAQ Global Market, the national securities exchange upon which Axcan
Pharmas common stock was listed prior to the February 2008 Transactions, we do not currently
believe that any of the members of the Holdings Compensation Committee would be considered
independent, because of their relationships with the Sponsor, who own a majority of our
outstanding common shares through Holdings. See Item 13- Certain Relationships and Related
Transactions, and Director Independence.
Compensation Committee Interlocks and Insider Participation
Dr. Verwiel is our Chief Executive Officer. Mr. Sisitsky and Dr. Cohen are affiliated with
the Sponsor, which holds the majority of the outstanding common stock of Holdings and is a party
to the management services agreement with us. The management services agreement is described in
greater detail in Item 13- Certain Relationships and Related Transactions, and Director
Independence. During fiscal year 2010, we had no compensation committee interlocks meaning
that no executive officer of ours served as a director or member of the compensation committee of
another entity while an executive officer of the other entity served as a director or member of
the Holdings Compensation Committee.
Code of Ethics
We have a Business Ethics and Conduct Code that applies to, among others, our principal
executive officer, principal financial officer, principal accounting officer, and persons
performing similar functions, among others. A copy of our Business Ethics and Conduct Code is
available on our website, http://www.axcan.com, under Corporate Profile Investor
Relations Whistleblower Program. Any future amendments to the Business Ethics and Conduct
Code, and any waivers thereto involving our executive officers, also will be posted to our
website.
ITEM 11. EXECUTIVE COMPENSATION
Introduction
In this section, unless otherwise noted, for purposes of presenting in U.S. dollars the cash
compensation paid to named executive officers and directors in non-U.S. currency, we have used the
following exchange rates: 1.0498 Canadian dollars to 1 U.S. dollar and 0.7376 Euros to 1 U.S.
dollar. These rates are the average of the monthly average exchange rates for each respective
currency conversion during fiscal year 2010 as reported by The Bank of Canada. Unless otherwise
specified, the source of all exchange rates mentioned in this section is The Bank of Canada.
Compensation Discussion and Analysis
Overview
This section includes information regarding, among other things, the overall objectives of
AIHs compensation programs and each element of compensation that AIH provided in fiscal year
2010. The goal of this section is to provide a summary of AIHs executive compensation practices
and the decisions that AIH made during this period concerning the compensation package payable
to AIHs executive officers, including the five executives listed in the summary compensation
table below. Each of the executives listed in the summary compensation table is referred to
herein as a named executive officer. This section should be read in conjunction with the
detailed tables and narrative descriptions under Executive Compensation Tables below.
It was generally the responsibility of the Compensation Committee of Holdings, or the
Holdings Compensation Committee, to review and recommend to the Board of Directors of Holdings, or
Holdings Board, for its approval at the beginning of the fiscal year (1) the corporate goals and
objectives that were relevant to the compensation of AIHs executive officers for the upcoming
fiscal year and (2) the level and form of compensation to be offered to AIHs President and Chief
Executive Officer and other named executive officers. After the conclusion of each fiscal year,
the Holdings Compensation Committee evaluates the performance of its executive officers against
these preset goals and objectives along with the effectiveness of the respective officers
leadership and makes recommendations to the Holdings Board with respect to the incentive
compensation that should be paid to the most senior executive officers, including the named
executive officers.
The most significant development in our executive compensation philosophy following the
consummation of the February 2008 Transaction has been a greater emphasis on correlating
compensation to long-term equity growth. The Holdings Board has provided significant equity
investment opportunities in Holdings tied to financial objectives through (1) offering certain
employees one-time opportunities to purchase shares of Holdings common stock and (2) granting of
options to purchase shares of Holdings common stock.
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Executive Compensation Philosophy and Objectives
AIHs executive compensation philosophy was to provide and maintain a total compensation
program that was internally equitable in relation to the value of each job and externally
competitive in relation to the total compensation levels and practices at other companies with
similar revenue levels in the pharmaceutical industry and geographic areas, and that also
recognized the Companys performance. A cornerstone of the executive compensation philosophy is
that equity incentives in the form of stock options are an excellent motivation for employees,
including executive officers, and serve to align the interests of employees, management and
investors.
AIHs Executive Compensation Program, or the Program, was designed to attract and retain
talented individuals and motivate them to focus on activities that contributed to AIHs long-term
success. The Program was developed and administered in a manner to reward superior operating
performance while maximizing shareholder value; and rewards were linked to the accomplishment of
specific business goals and outstanding individual performance.
|
|
The Holdings Board and Holdings Compensation Committee, when making compensation decisions in
fiscal year 2010, followed these four principles: |
|
|
|
Performance-based: Executive compensation levels were intended to reflect both
company and individual results based on specific quantitative and qualitative
objectives established at the start of each fiscal year in keeping with AIHs
short-term, mid-term and long-term strategic objectives. |
|
|
|
|
Aligned with shareholder interests: AIH sought to align the interests of the named executive
officers with
the interests of its investors by evaluating executive performance on the basis of key
financial measurements which were believed to be closely correlated to long-term
shareholder value. Key elements of compensation that were meant to align the interests of
the named executive officers with shareholders included: |
|
|
|
AIHs Annual Incentive Compensation Plan, which offered performance-based
cash incentives and used adjusted EBITDA and net sales as measures of corporate
performance; and |
|
|
|
|
Axcan Holdings Inc. Management Equity Incentive Plan, or the Management
Equity Incentive Plan, which provides for the grant of options to executives with
the intention of encouraging them to increase shareholder value. |
|
|
|
Market competitive: AIHs total direct compensation for executives was
designed to be competitive with total direct compensation of executives of
comparable peer companies and to consider company and business unit results
relative to the results of peers. See Compensation Methodology-Benchmarking
Practices below. |
|
|
|
|
Individual considerations: AIHs compensation levels were also designed to
reflect individual factors such as scope of responsibility, experience and
performance against individual objectives. |
Compensation Methodology
The Program consisted of the following three basic components: (1) a Base Salary that was
internally equitable and externally competitive; (2) Annual Performance-Based Cash Incentives
linked to AIHs performance and the performance of its individual executive officers; and (3)
Long-Term Equity Incentives comprised of equity-based compensation. Each compensation component
had a different function. Base salary is the cornerstone of the compensation package and is
defined as fixed compensation paid to employees for performing specific job responsibilities. The
purpose of short-term incentives is to maximize corporate and individual performance by
establishing specific, aggressive operational and financial goals and providing financial
incentives to employees based on their level of achievement of these goals. Long-term
incentives are designed to retain talent and align employee interests with those of shareholders.
All compensation elements were intended to work in concert to maximize corporate and individual
performance by establishing specific, aggressive operational and financial goals and by providing
financial incentives to employees based on their level of achievement of these goals.
Benchmarking Practices
In fiscal year 2010, AIH engaged the Hay Group to conduct a compensation analysis for top
executive positions. The comparator peer group included 35 specialty pharmaceutical and
biotechnology companies similar in size with revenues within .5x and 2.5x of Axcan and included
both public and private companies. Results of the assessment show that executive compensation was
generally in line with market. In fiscal year 2010, the executive salary ranges, the Incentive
Compensation Plan and the Long-term Incentive Plan remained the same. The Chief Financial
Officers base salary was adjusted to better position within the salary range. We believe that
each component of our executive compensation in fiscal year 2010 was aligned with competitive
market practices and levels for executives from competitor organizations of comparable revenue
and market capitalization size, and other pharmaceutical companies that we compete with for
talent.
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Compensation Elements
During fiscal year 2010, the principal elements of compensation for the named executive
officers of AIH were (1) Base Salary; (2) Annual Performance-Based Cash Incentives; (3)
Long-Term Equity Incentives; and (4) Other Benefits and Perquisites.
Base Salary
Base salaries for the named executive officers in fiscal year 2010 were established with
consideration to the criteria discussed above in Executive Compensation Philosophy and
Objectives and Compensation Methodology, including the executives role, responsibilities,
and capabilities, as well as the market pay levels for the position, and were benchmarked
against competitor group practices. As set forth in the table below, for fiscal year 2010, base
salary adjustments for the named executive officers ranged from 0% to 10% based on the
executives individual performance and position within the relevant salary range.
|
|
|
|
|
|
|
Percentage of Base Salary Adjustment |
Executive Officer |
|
in Fiscal Year 2010 |
Dr. Frank Verwiel |
|
|
0.00 |
% |
President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
David Mims |
|
|
0.00 |
% |
Executive Vice President and Chief Operating Officer |
|
|
|
|
|
|
|
|
|
Steve Gannon |
|
|
10.00 |
% |
Senior Vice President and Chief Financial Officer |
|
|
|
|
|
|
|
|
|
Dr. Alexandre LeBeaut |
|
|
0.00 |
% |
Senior Vice President and Chief Scientific Officer |
|
|
|
|
|
|
|
|
|
Nicholas Franco |
|
|
0.00 |
% |
Senior Vice President, International Commercial Operations |
|
|
|
|
Steve Gannons base salary was increased 10% to bring his compensation into a more
competitive market position. Payments of base salaries were made in the currency of the named
executive officers country of residence. The base salaries for the named executive officers in
fiscal year 2010 are set forth below in Executive Compensation TablesSummary Compensation
Table.
Performance-Based Cash Incentives
The named executive officers participated in AIHs Annual Incentive Compensation Plan, or
the Incentive Plan, a program designed to maximize corporate and individual performance by
establishing specific, ambitious operational and financial goals at the beginning of the fiscal
year and providing financial incentives to employees based on the level of achievement of these
goals. Cash incentives granted to the named executive officers under the Incentive Plan required
the approval of both the Holdings Compensation Committee and Holdings Board and were based upon
an assessment of corporate and individual performance, respectively described as:
|
|
|
Corporate performance, a measure of adjusted EBITDA and corporate net sales; and |
|
|
|
|
Individual performance, determined by means of an evaluation under AIHs formal
performance management program and general discharge of duties. |
The weighting of corporate performance measures varied for each named executive officer as
described in more detail below. The individuals performance evaluation for the year as evaluated
under the corporate performance plan is also considered in determining the annual incentive
payouts.
The annual incentive targets were reviewed and established as part of AIHs annual
benchmarking of executive compensation. In fiscal year 2009, the Holdings Compensation Committee
and Holdings Board, modified the Incentive Plan for all employees to accomplish the following:
|
|
|
Reduce plan complexity and provide transparency in calculations; |
|
|
|
|
Streamline the incentive administration processes; |
|
|
|
|
Apply more leverage (differentiation) to reinforce pay for performance higher
potential upside gain for top performers and larger downside risk for poor performance;
and |
|
|
|
|
Increase individual accountability at all levels. |
-134-
Performance-based cash incentive targets for Mr. Mims, Mr. Gannon, Dr. LeBeaut and Mr.
Franco increased 5% in fiscal year 2009 to better align our executive compensation program with
the market; no further changes in fiscal year 2010. Under the terms of the Incentive Plan,
incentive compensation awards were not intended to be paid to any named executive officers,
including the President and Chief Executive Officer, if minimum corporate and individual
performance objectives were not met. Incentive targets were established to provide median total
cash compensation when AIHs performance objectives were achieved the potential for above median
total cash compensation when AIHs performance objectives were exceeded and the risk of below
median total cash compensation when AIH did not achieve its annual performance objectives. For
fiscal 2010, corporate objectives were based on aggressive EBITDA and revenue goals.
The following table sets forth the annual cash incentive targets determined by AIH for each
named executive officer for fiscal year 2010 as well as the weighting of corporate performance
measures and individual performance measures for each named executive officer under the Incentive
Plan. The actual percentage of base salary which serves as the basis for non-equity incentive
award calculations may be more or less than the annual incentive target shown in the table below,
depending on the individual performance evaluation. Furthermore, corporate and individual
weightings may vary slightly depending on the specific responsibilities and span of control of the
respective named executive officer.
|
|
|
|
|
|
|
|
|
|
|
Annual Incentive |
|
Corporate |
|
|
Target |
|
Performance |
Name and Principal Position |
|
(as % of Base Salary) |
|
Weighting |
Dr. Frank Verwiel |
|
|
60 |
%(1) |
|
|
100 |
% |
President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Mims
|
|
|
50 |
% |
|
|
90 |
% |
Executive Vice President and Chief Operating Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steve Gannon |
|
|
50 |
% |
|
|
85 |
% |
Senior Vice President and Chief Financial Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Alexandre LeBeaut |
|
|
50 |
% |
|
|
85 |
% |
Senior Vice President and Chief Scientific Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nicholas Franco |
|
|
45 |
% |
|
|
85 |
% |
Senior Vice President, International Commercial Operations |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Does not include Match Payment related to supplemental
retirement plan replacement. |
The following tables generally illustrate the potential payouts under the Incentive Plan for
the corporate and the individual performance measures, which are calculated separately. The
corporate performance target table below does not illustrate the full incremental range of
potential target annual incentive payouts. Upon AIHs achievement of 80% of its corporate
performance targets, 50% of the target annual incentive payout would be earned and for
approximately every 5% of the corporate performance target achieved above the 80% level, the
annual incentive payout earned would increase by 12.5%. For example, if AIH achieved between
105.0% to 109.9999% of its corporate performance targets, 112.5% of the target annual incentive
payout would be earned. If either corporate performance or individual performance did not meet a
certain threshold, then, generally, no incentive award would be granted to the named executive
officer. Regardless of corporate and/or individual performance, no non-equity incentive awards
were guaranteed and all such awards were subject to the discretion of the AIH Board.
|
|
|
|
|
|
|
|
|
|
|
Individual Performance |
|
|
Corporate Goal Attainment |
|
Corporate Performance Factor |
|
Evaluation Received |
|
Individual Performance Factor |
140% of target or more
|
|
200% of target
|
|
Excellent
|
|
126% to 150% of target |
|
|
|
|
|
|
|
100% of target
|
|
100% of target
|
|
Exceeds Expectations
|
|
106% to 125% of target |
|
|
|
|
|
|
|
|
|
|
|
Fully Effective
|
|
95% to 105% of target |
|
|
|
|
|
|
|
Less than 80% of target
|
|
0% of target
|
|
Needs Improvement
|
|
0% to 84% of target |
|
|
|
|
|
|
|
|
|
|
|
Far Below Expectations
|
|
0% of target |
Each fiscal year, with the exception of AIHs President and Chief Executive Officer,
each named executive officers individual performance was measured in part by the evaluation of
his direct supervisor, who gave his recommended evaluation of the named executive officer to the
Holdings Compensation Committee for its review and consideration. The Holdings Compensation
Committee ultimately made a recommendation to the Holdings Board for the individual performance
evaluation of such named executive officer. The individual performance of Holdings President and
Chief Executive Officer, Dr. Frank Verwiel, was to be evaluated by the Holdings Compensation
Committee and the Holdings Board. In addition, if in any year Dr. Verwiel receives an annual cash
incentive as described above, he will also be entitled to receive a Match Payment equal to
one-half (1/2) the annual incentive payable with respect to such year according to his employment
agreement with AIH dated May 16, 2008. The Match Payment is intended to replace the supplemental
retirement plan listed in Dr. Verwiels employment agreement with Axcan Pharma dated May 19,
2005.
-135-
Long-Term Equity Incentives
AIHs compensation philosophy places a strong emphasis on long-term equity incentives. As
discussed in greater detail below, the Holdings Compensation Committee has provided equity
investment opportunities tied to financial objectives and all of our named executive officers
have chosen to subscribe for additional shares of Holdings.
We do not anticipate that annual grants of long-term equity incentive awards will be made to
our named executive officers. Currently, there is one plan under which our named executive
officers receive long-term equity incentive awards, the Axcan Holdings Inc. Management Equity
Incentive Plan, or the Management Equity Incentive Plan, which provides for the grant of options
to
purchase Holdings common stock, or Holdings Options, to our own and our affiliates key employees,
directors, service providers and
consultants. The Management Equity Incentive Plan was approved on April 15, 2008 and is discussed
in more detail below. Under the
Management Equity Incentive Plan, our named executive officers received one-time equity incentive
awards in fiscal year 2008.
The Axcan Holdings Inc. Management Equity Incentive Plan
Generally, for any grant made under the Management Equity Incentive Plan, 50% of the Holdings
Options granted vest based on continued employment (time-based options), 25% vest based on
continued employment and have an exercise price that increases annually (premium options), and 25%
vest based on continued employment and upon the occurrence of a Liquidity Event (as defined in the
Management Equity Incentive Plan) and the achievement of specified performance targets
(performance-based options). Subject to the participants continued employment with us, the
time-based and premium options vest ratably on each of the first through fifth anniversaries of
the date of grant and the performance-based options have the potential to vest, following the
occurrence of a Liquidity Event, upon the realization of certain profits by the Sponsor Funds
and/or their affiliates as a result of such event(s), calculated by comparing the value of the
cash or certain securities obtained in exchange for the equity of Holdings held by the Sponsor
Funds and/or their affiliates to the Sponsor Funds initial investment in the February 2008
Transactions. For our employees who are residents of France, the Management Equity Incentive Plan
has been amended to include a French sub-plan. The French sub-plan amends certain guidelines set
forth in the Management Equity Incentive Plan in order to allow our French employees to benefit
from, as it relates to the Holdings Options, a favorable tax and social regime under French law.
Upon termination of a participants employment, the Management Equity Incentive Plan
provides that, subject to the terms of any participants employment agreement, any unvested
portion of a participants Holdings Options will be forfeited, and that the vested portion of his
or her Holdings Options will expire on the earlier of (1) the date the participants employment
is terminated for cause, (2) 90 days after the date the participants employment is terminated by
us for any reason other than cause, death or disability, (3) one year after the date the
participants employment is terminated by reason of death or disability, except for those
employees subject to the French sub-plan for whom Holdings Options will expire 6 months after the
participants death, or (4) the tenth anniversary of the grant date of the Holdings Option.
However, if a participants employment is terminated by us without Cause (as defined in the
Management Equity Incentive Plan) or by the participant for Good Reason (as defined in the
Management Equity Incentive Plan) during the two-year period following a Change in Control (as
defined in the Management Equity Incentive Plan), all time-based and premium options will
immediately vest and become exercisable as of the date of such termination.
Under the Management Equity Incentive Plan, 3,833,307 shares of Holdings common stock were
reserved for issuance. The Holdings Board or a committee appointed by the Holdings Board is
responsible for administering the Management Equity Incentive Plan and authorizing the grant of
Holdings Options pursuant thereto, and may amend the Management Equity Incentive Plan (and any
Holdings Options) at any time with certain restrictions. As of September 30, 2010, there were
3,642,250 Holdings Options outstanding under the Management Equity Incentive Plan. All of the
outstanding Holdings Options have been granted to our employees and, specifically, 1,845,000 were
granted to our named executive officers in fiscal year 2008 and remain outstanding (640,000
Holdings Options to Dr. Verwiel, 410,000 Holdings Options to Mr. Mims, 335,000 Holdings Options to
Mr. Gannon, 230,000 Holdings Options to Dr. LeBeaut, and 230,000 Holdings Options to Mr. Franco).
Prior to receiving shares of Holdings common stock (whether pursuant to the exercise of
Holdings Options or otherwise), participants must execute a Management Stockholders
Agreement, which provides that the shares are subject to certain transfer restrictions, put
and call rights, and tag-along and drag-along rights.
Additional Equity Grants Following the February 2008 Transactions
Dr. Verwiel and Mr. Mims, in consideration of their continued employment with us, received
a one-time nonrecurring equity grant on April 15, 2008 in the form of restricted stock units, or
RSUs. Dr. Verwiel and Mr. Mims received, respectively, 77,834 and 108,578 RSUs. Such RSUs are,
upon vesting and settlement, convertible into shares of Holdings common stock. For Dr. Verwiel,
all of the granted RSUs vested immediately upon grant and, for Mr. Mims, approximately one-third
of the RSUs vested immediately upon grant, an additional one-third vested August 25, 2009 and
the remainder of the RSUs vested on August 25, 2010. Additionally, pursuant to Dr. Verwiels
employment agreement, Dr. Verwiel received 155,666 RSUs on August 25, 2009, one-half of which
vested immediately upon grant and one-half of which vested on August 25, 2010. Vested RSUs shall
be settled into shares of Holdings common stock, with certain exceptions, on the earlier of: (1)
four years from the date of grant, or April 15, 2012; (2) the termination of the officers
employment; (3) a Liquidity Event (as defined in the Management Equity Incentive Plan); and (4)
a Change in Control
(as defined in the Management Equity Incentive Plan).
-136-
Mr. Gannon, in consideration of his continued employment with us, received a one-time equity
grant on April 15, 2008 in the form of penny options, or options to purchase shares of common stock
of Holdings for $0.01. Mr. Gannon received 96,436 penny options pursuant to the terms of a Penny
Option Grant Agreement which each officer granted penny options entered into with Holdings on April
15, 2008. Approximately one-third of these penny options vested on April 15, 2008, one-third vested
on August 25, 2009 and the remainder of the penny options vested on August 25, 2010.
Other Benefits and Perquisites
Benefits
AIHs benefit programs in fiscal year 2010 were targeted to be competitive with other
pharmaceutical companies. They included competitive health, welfare and retirement plans. The
benefit programs provided to the named executive officers were generally the same benefits
provided to the employee population at large. Although the types of benefits offered to AIHs
named executive officers were similar, the cost paid by AIH to secure such benefits varied
depending on the country of residence of the named executive officer. In fiscal year 2010, AIH
did not have a pension plan or exceptional retirement benefits for any employee group including
the named executive officers.
Perquisites
As disclosed in the All Other Compensation column in the Summary Compensation Table below
in Executive Compensation Tables, AIH provided its named executive officers with additional
compensation in the form of perquisites. This compensation was targeted to be competitive with
other pharmaceutical companies and included a car allowance or a company- provided vehicle.
Retirement Plans
In fiscal year 2010, AIH maintained a registered retirement savings plan, or RRSP/DPSP, for
all of its employees in Canada and a defined contribution registered retirement plans in the form
of a 401(k) Plan for all of its U.S. employees, including the named executive officers residing in
each location. Additionally, an Employee Profit Sharing Plan is maintained for Canadian executives
that is designed to allow employees salaried above a certain salary level to contribute and
benefit from matching employer contributions up to the threshold of 5% of their base salary, as
other employees, where their RRSP/DPSP eligibility is capped under relevant regulations.
Employees meeting the following criteria are eligible to participate: 1) regular employees
working in Canada with an annual base salary of $210,000 in 2010, 2) participant in the registered
retirement savings plan and total contribution must reach the maximum allowed by the Canadian
government; $21,000 in 2010. Once a participant meets the annual fiscal maximum of
$21,000, a participant can make after income tax contributions into the non-registered Employee
Profit Sharing Plan and receive matching employer contributions, subject to the 5% threshold.
Employer contributions are made before income tax and employee pays taxes at the end of the
calendar year on his/her income tax return. Dr. Verwiel participated in this program until June
30, 2009, at which time he moved to the U.S. and began participating in the U.S. 401(k) Plan. Mr.
Gannon participated in this program in fiscal years 2009 and 2010.
AIH did not maintain a supplemental retirement plan, pension plan or any other retirement
benefits for any executive or employee groups other than those described above.
Compensation Committee Report
The following report of the Holdings Compensation Committee is included in accordance with
the rules and regulations of the Securities and Exchange Commission.
The Holdings Compensation Committee has reviewed and discussed the Compensation Discussion
and Analysis, or CD&A, with management. Based upon the review and discussions, the Holdings
Compensation Committee recommended to the Board of Directors of Axcan Intermediate Holdings
Inc., and such board approved, that the CD&A be included in the Form 10-K for the year ended
September 30, 2010.
Respectfully submitted on December 1, 2010 by the members of the Compensation Committee of
the Board of Directors of Axcan Holdings Inc.:
Todd Sisitsky
Fred Cohen
Frank Verwiel
Executive Compensation Tables
In fiscal years 2010, 2009 and 2008, certain of our named executive officers were
compensated in non-U.S. currency, depending on the officers country of residence. Generally, Mr.
Gannon was compensated in Canadian dollars and Mr. Franco was compensated in Euros. Dr. Verwiel
was compensated in Canadian dollars until June 30, 2009 when he relocated to the U.S. Unless
otherwise indicated, in the executive compensation tables presented below, all cash
compensation paid to the named executive officers has been converted into U.S. dollars using
an exchange rate equal to the average of the monthly average exchange rates for each respective
currency conversion during fiscal years 2010, 2009 and 2008 as calculated by the Bank of Canada.
For conversions of Canadian dollars to U.S. dollars in fiscal year 2010, this rate
-137-
was equal to 1.0498 and for conversions of Euros to U.S. dollars, this rate was equal to
0.7376. For conversions of Canadian dollars to U.S. dollars in fiscal year 2009, this rate was
equal to 1.1778 and for conversions of Euros to U.S. dollars, this rate was equal to 0.7419. For
conversions of Canadian dollars to U.S. dollars in fiscal year 2008, this rate was equal to
1.0065 and for conversions of Euros to U.S. dollars, this rate was equal to 0.6649. As designated
by footnotes, figures related to equity compensation in the tables below may have been converted
using a different exchange rate in order to accurately reflect values related to such equity
compensation at a particular time, such as the date of grant.
Summary Compensation Table
The information set forth below in this section reflects the compensation awarded to, earned
by, or paid to our named executive officers in fiscal years 2010, 2009 and 2008 for their
services rendered in all capacities to us and our subsidiaries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted |
|
Option |
|
Incentive Plan |
|
All other |
|
Total |
|
|
Fiscal |
|
Salary |
|
Bonus |
|
Stock Awards |
|
Awards |
|
Compensation |
|
Compensation |
|
Compensation |
Name and Principal Position |
|
Year |
|
($) |
|
($)(2) |
|
($)(3) |
|
($)(4) |
|
($)(5) |
|
($)(7) |
|
($) |
Dr. Frank Verwiel |
|
|
2010 |
|
|
$ |
645,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
290,250 |
|
|
$ |
257,439 |
|
|
$ |
1,192,689 |
|
President
and Chief Executive Officer |
|
|
2009 |
|
|
|
645,000 |
(1) |
|
|
|
|
|
|
1,555,103 |
|
|
|
|
|
|
|
406,350 |
|
|
|
367,971 |
|
|
|
2,974,424 |
|
|
|
|
2008 |
|
|
|
645,000 |
|
|
|
750,000 |
|
|
|
777,562 |
|
|
|
2,192,000 |
|
|
|
580,500 |
|
|
|
6,150,326 |
|
|
|
11,095,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Mims |
|
|
2010 |
|
|
|
399,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159,366 |
|
|
|
36,905 |
|
|
$ |
595.320 |
|
Executive Vice President
and Chief Operating Officer |
|
|
2009 |
|
|
|
399,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
205,392 |
|
|
|
29,847 |
|
|
|
634,288 |
|
|
|
|
2008 |
|
|
|
387,426 |
|
|
|
75,000 |
|
|
|
1,084,694 |
|
|
|
1,404,250 |
|
|
|
262,123 |
|
|
|
4,084,610 |
|
|
|
7,298,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steve Gannon |
|
|
2010 |
|
|
|
365,382 |
(6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163,648 |
|
|
|
29,467 |
|
|
$ |
558,497 |
|
Senior Vice President
and Chief Financial Officer |
|
|
2009 |
|
|
|
296,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182,210 |
|
|
|
26,487 |
|
|
|
504,697 |
|
|
|
|
2008 |
|
|
|
336,364 |
|
|
|
60,000 |
|
|
|
963,396 |
|
|
|
1,147,375 |
|
|
|
182,276 |
|
|
|
766,140 |
|
|
|
3,455,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Alexandre LeBeaut |
|
|
2010 |
|
|
|
382,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
40,795 |
|
|
$ |
422,795 |
|
Senior Vice President
and Chief Scientific Officer |
|
|
2009 |
|
|
|
382,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
205,215 |
|
|
|
32,120 |
|
|
|
619,335 |
|
|
|
|
2008 |
|
|
|
2,938 |
|
|
|
|
|
|
|
|
|
|
|
787,750 |
|
|
|
|
|
|
|
127,000 |
|
|
|
917,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nicholas Franco |
|
|
2010 |
|
|
|
340,468 |
(6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124,348 |
|
|
|
66,995 |
|
|
$ |
531,811 |
|
Senior Vice President, International
|
|
|
2009 |
|
|
|
338,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182,036 |
|
|
|
63,705 |
|
|
$ |
584,236 |
|
Commercial Operations
|
|
|
2008 |
|
|
|
368,476 |
|
|
|
40,000 |
|
|
|
|
|
|
|
787,750 |
|
|
|
177,851 |
|
|
|
265,865 |
|
|
|
1,639,942 |
|
|
|
|
(1) |
|
Dr. Verwiels annual base salary is USD$645,000.
Through June 30, 2009, he was
compensated in Canadian dollars. In fiscal year 2009, Dr. Verwiel was paid $490,807 in
Canadian dollars, $161,250 in U.S. dollars and a currency exchange adjustment of $99,018.29
in Canadian dollars. |
|
(2) |
|
Amounts set forth in the Bonus column represent a special one-time incentive bonus
paid to our named executive officers that related to their performance in fiscal year 2008. |
|
(3) |
|
Amounts set forth in the Restricted Stock Awards column represents the aggregate
grant date fair value of awards granted to the named executive officers during the fiscal
years ended September 30, 2010, 2009 and 2008 and calculated in accordance with the
guidance issued by the FASB on stock compensation. For a discussion of the assumptions used
in calculating award values for fiscal years 2010, 2009 and 2008, see Note 12 to our
audited consolidated financial statements for the fiscal year ended September 30, 2010
contained in this report. The value set forth in this column for Mr. Gannon represents
aggregate grant date fair value of our grant of penny options calculated in accordance with
the guidance issued by the FASB on stock compensation. |
|
(4) |
|
Amounts set forth in the Option Awards column represents the aggregate grant date
fair value of awards granted to the named executive officers during the fiscal years ended
September 30, 2010, 2009 and 2008 and calculated in accordance with the guidance issued by
the FASB on stock compensation. The fair value of the service based options was calculated
using a Black-Scholes option-pricing model. Values for awards subject to performance
conditions are calculated based upon the probable outcome of the performance condition as
of the grant date using a Monte Carlo simulation model. For a discussion of the assumptions
used in calculating award values for fiscal years 2010, 2009 and 2008, see Note 12 to our
audited consolidated financial statements for the fiscal year ended September 30, 2010
contained in this report. The estimated maximum potential value for the performance awards
for the 2008 awards, were $1,600,000 for Dr. Verwiel; $1,025,000 for Mr. Mims; $837,500 for
Mr. Gannon; $575,000 for Dr. LeBeaut; and $575,000 for Mr. Franco. |
|
(5) |
|
The values in this column represent, in U.S. dollars, incentive awards under the
Incentive Plan earned by the named executive officers in fiscal years 2010, 2009 and 2008,
but paid in fiscal years 2011, 2010 and 2009. Since the incentive award granted to Mr.
Gannon was paid in Canadian dollars and the incentive award granted to Mr. Franco was paid
in Euros, the values for such awards have been converted to U.S. dollars. For fiscal year
2010, an exchange rate of 1.0498 Canadian dollars to one U.S. dollar and 0.7376 Euros to |
-138-
|
|
|
|
|
one U.S. dollars was used for the conversion. For fiscal year 2009, an exchange rate of
1.0574 Canadian dollars to one U.S. dollar and 0.6670 Euros to one U.S. dollars was used
for the conversion. For fiscal year 2008, an exchange rate of 1.2372 Canadian dollars
to one U.S. Dollar and 0.7877 Euros to one U.S. dollar was used for the conversion. |
|
(6) |
|
These amounts represent, in U.S. dollars, salaries earned by Mr. Gannon and Mr.
Franco that were paid in local currency. The salary paid to Mr. Gannon was paid in Canadian
dollars and the salary paid to Mr. Franco was paid in Euros, the values for such salaries
have been converted to U.S. dollars. |
|
(7) |
|
All other compensation for FY2010 includes the compensation set forth in the table
below: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
|
|
|
|
|
|
|
|
|
|
Car Allowance |
|
Contributions |
|
|
|
|
|
|
|
|
|
|
|
|
and/or |
|
to Defined |
|
Insurance |
|
|
|
|
|
|
|
|
|
|
Company- |
|
Contribution |
|
Premiums |
|
|
|
|
Name & Principal Position |
|
Fiscal Year |
|
Paid Car ($) |
|
Plans ($)(a) |
|
($)(b) |
|
Other(c) |
|
Total ($) |
Dr. Frank Verwiel
President and Chief
Executive Officer |
|
|
2010 |
|
|
$ |
18,000 |
|
|
$ |
12,373 |
|
|
$ |
21,388 |
|
|
$ |
205,678 |
|
|
$ |
257,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Mims
Executive Vice President
and
Chief Operating Officer |
|
|
2010 |
|
|
|
10,200 |
|
|
|
8,250 |
|
|
|
18,455 |
|
|
|
|
|
|
|
36,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steve Gannon
Senior Vice President
and Chief
Financial Officer |
|
|
2010 |
|
|
|
9,716 |
|
|
|
17,311 |
|
|
|
2,440 |
|
|
|
|
|
|
|
29,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Alexandre LeBeaut
Senior Vice President
and Chief
Scientific Officer |
|
|
2010 |
|
|
|
10,200 |
|
|
|
11,000 |
|
|
|
19,595 |
|
|
|
|
|
|
|
40,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nicholas Franco
Senior Vice President,
International
Commercial Operations |
|
|
2010 |
|
|
|
25,565 |
|
|
|
|
|
|
|
25,161 |
|
|
|
16,269 |
|
|
|
66,995 |
|
|
|
|
(a) |
|
Company contributions to defined contribution plans include contributions to
RRSP/DPSP matching funds and 401(k) during fiscal year 2010. |
|
(b) |
|
This column includes payments for life and disability insurance, as well as
medical and dental benefits. In addition, $3,532 in fiscal year 2010 in additional life
insurance and long-term disability premiums was paid on behalf of Dr. Verwiel. A Payment
of $19,565 in fiscal year 2010 was made to maintain an unemployment insurance policy for
Mr. Franco since, in France, Mr. Francos country of residency, corporate officers who
become unemployed are generally not eligible for unemployment benefits. |
|
(c) |
|
A cash payment of $145,125 in fiscal year 2010 was made to Dr. Verwiel by us
pursuant to the terms of his employment agreement as a Match Payment, or a payment equal to
one-half of the amount of Dr. Verwiels non-equity incentive award for fiscal year 2010. In
fiscal year 2010, $19,402 was paid for the preparation of Dr. Verwiels annual tax returns.
In fiscal year 2010, Dr. Verwiel received relocation expenses of $41,152. |
Mr. Franco
received $16,269 in fiscal year 2010 in housing expenses.
-139-
Grants of Plan-Based Awards
The named executive officers currently do not receive annual grants of long-term equity
incentive awards.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future Payouts Under |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity Incentive Plan Awards (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future |
|
All Other Stock |
|
All Other Option |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payouts Under |
|
Awards: Number of |
|
Awards: Number of
|
|
Exercise or |
|
Grant Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Incentive |
|
Shares of Stock or |
|
Securities Underlying |
|
Base Price of Option |
|
Fair Value of Stock and |
Name and Principal Position |
|
Grant Date |
|
Threshold |
|
Target |
|
Maximum |
|
Plan |
|
Units |
|
Options |
|
Awards |
|
Option Awards |
Dr. Frank Verwiel |
|
|
|
|
|
|
|
|
|
$ |
387,000 |
|
|
$ |
774,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President and Chief
Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Mims |
|
|
|
|
|
|
|
|
|
|
199,524 |
|
|
|
568,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Vice President
and Chief Operating
Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steve Gannon |
|
|
|
|
|
|
|
|
|
|
182,691 |
|
|
|
506,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Vice President
and Chief Financial
Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Alexandre LeBeaut |
|
|
|
|
|
|
|
|
|
|
191,000 |
|
|
|
530,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Vice President
and Chief Scientific
Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nicholas Franco |
|
|
|
|
|
|
|
|
|
|
153,210 |
|
|
|
425,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Vice President,
International Commercial
Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This column shows the potential non-equity incentive awards that are possible under
the 2010 Incentive Plan, at the threshold, target and maximum levels of performance in
fiscal year 2010. As discussed above in Compensation Discussion and Analysis
Performance-Based Cash Incentives, no incentive payments were to be paid under the
Incentive Plan if both corporate fiscal and individual performance goals were not met. The
target payments are based on achieving the 100% target level of performance for both
corporate financial measures and individual performance measures. The maximum payments are
based on the maximum incentive payments available to our named executive officers under
the Incentive Plan as discussed above in Compensation Discussion and Analysis. According
to Dr. Verwiels employment contract, the maximum incentive payment is 120% of base salary
for high achievement. |
-140-
Outstanding Equity Awards at Fiscal Year-End
The following table shows the outstanding equity awards as of the end of fiscal year 2010 for
each of our named executive officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards |
|
Stock Awards |
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
Number of |
|
Number of |
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
Securities |
|
Securities |
|
Securities |
|
|
|
|
|
|
|
|
|
Shares or |
|
|
|
|
Underlying |
|
Underlying |
|
Underlying |
|
|
|
|
|
|
|
|
|
Units |
|
Market Value of |
|
|
Unexercised |
|
Unexercised |
|
Unexercised |
|
Option |
|
Option |
|
of Stock that |
|
Shares or Units of |
|
|
Options (#) |
|
Options (#) |
|
Unearned |
|
Exercise |
|
Expiration |
|
Have Not |
|
Stock that Have |
Name and Principal Position |
|
Exercisable |
|
Unexercisable |
|
Options |
|
Price ($) |
|
Date |
|
Vested (#) |
|
Not Vested |
Dr. Frank Verwiel |
|
|
128,000 |
(1) |
|
|
192,000 |
(1) |
|
|
160,000 |
(4) |
|
$ |
10.00 |
|
|
|
4/15/2018 |
|
|
|
|
|
|
|
|
|
President and Chief |
|
|
64,000 |
(2) |
|
|
96,000 |
(2) |
|
|
|
|
|
$ |
12.10 |
(5) |
|
|
4/15/2018 |
|
|
|
|
|
|
|
|
|
Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Mims |
|
|
82,000 |
(1) |
|
|
123,000 |
(1) |
|
|
102,500 |
(4) |
|
$ |
10.00 |
|
|
|
4/15/2018 |
|
|
|
|
|
|
|
|
|
Executive Vice President and |
|
|
41,000 |
(2) |
|
|
61,500 |
(2) |
|
|
|
|
|
$ |
12.10 |
(5) |
|
|
4/15/2018 |
|
|
|
|
|
|
|
|
|
Chief
Operating Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steve Gannon |
|
|
96,436 |
(3) |
|
|
|
|
|
|
|
|
|
$ |
0.01 |
|
|
|
4/15/2018 |
|
|
|
|
|
|
|
|
|
Senior Vice President and Chief |
|
|
67,000 |
(1) |
|
|
100,500 |
(1) |
|
|
83,750 |
(4) |
|
$ |
10.00 |
|
|
|
4/15/2018 |
|
|
|
|
|
|
|
|
|
Financial
Officer |
|
|
33,500 |
(2) |
|
|
50,250 |
(2) |
|
|
|
|
|
$ |
12.10 |
(5) |
|
|
4/15/2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Alexandre P. LeBeaut |
|
|
46,000 |
(1) |
|
|
69,000 |
(1) |
|
|
57,500 |
(4) |
|
$ |
10.00 |
|
|
|
9/29/2018 |
|
|
|
|
|
|
|
|
|
Senior Vice President and Chief |
|
|
23,000 |
(2) |
|
|
34,500 |
(2) |
|
|
|
|
|
$ |
12.10 |
(5) |
|
|
9/29/2018 |
|
|
|
|
|
|
|
|
|
Scientific
Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nicholas Franco |
|
|
46,000 |
(1) |
|
|
69,000 |
(1) |
|
|
57,500 |
(4) |
|
$ |
10.00 |
|
|
|
4/15/2018 |
|
|
|
|
|
|
|
|
|
Senior Vice President, |
|
|
23,000 |
(2) |
|
|
34,500 |
(2) |
|
|
|
|
|
$ |
10.00 |
(5) |
|
|
4/15/2018 |
|
|
|
|
|
|
|
|
|
International
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These values reflect the number vested and unvested time-based options granted to our
named executive officers under the Management Equity Incentive Plan. Time-based options vest
ratably on each of the first through fifth anniversaries of the date of grant, subject to
the officers continued employment with us through each
anniversary. Dr. Verwiel, Mr. Mims, Mr. Gannon and
Mr. Francos option will fully vest on April 15, 2013;
Dr. LeBeauts option will fully vest on September 29,
2013. |
|
(2) |
|
These values reflect the number of vested and unvested premium options granted to our
named executive officers under the Management Equity Incentive Plan. Premium options vest
ratably on each of the first through fifth anniversaries of the date of grant, subject to
the officers continued employment with us through each anniversary. Dr. Verwiel, Mr. Mims, Mr. Gannon and
Mr. Francos option will fully vest on April 15, 2013;
Dr. LeBeauts option will fully vest on September 29,
2013. |
|
(3) |
|
This value represents the number of penny options, or options to purchase common stock of
Holdings for $0.01, granted to Mr. Gannon, who resides and works in Canada, pursuant to his
penny option grant agreement. Approximately one-third of the penny options immediately
vested upon grant on April 15, 2008, one-third vested on August 25, 2009, and the remainder
of the penny options vested on August 25, 2010. |
|
(4) |
|
These values represent the number of performance-based options granted to our named
executive officers under the Management Equity Incentive Plan. Under the terms of the
Management Equity Incentive Plan, the amount of performance- based options that will vest is
dependent upon the occurrence of a Liquidity Event (as defined in the Management Equity
Incentive Plan) and the realization of certain profits by the Sponsor Funds and/or their
affiliates as a result of such event(s), calculated by comparing the value of the cash or
certain securities obtained in exchange for the equity of Holdings held by the Sponsor Funds
and/or their affiliates to the Sponsor Funds initial investment in the February 2008
Transactions. Depending on these factors, all, none, or |
-141-
|
|
|
|
|
one-half of the performance-based options held by our named executive officers may vest upon
the occurrence of the Liquidity Event (as defined in the Management Equity Incentive Plan),
subject to the officers continued employment with us on the date of the liquidity event. |
|
(5) |
|
For the premium options granted under the Management Equity Incentive Plan to Dr. Verwiel,
Mr. Mims, Mr. Gannon and Dr. LeBeaut, the exercise price of these options increases at a
10.00% compound rate on each anniversary of the date of grant of such options until, with
certain exceptions, the earlier of: (a) the exercise of such option; (b) the fifth
anniversary of the grant date of such option; (c) a Liquidity Event (as defined in the
Management Equity Incentive Plan) or (d) the occurrence of a Change in Control (as defined
in the Management Equity Incentive Plan) of Axcan Holdings Inc. For Mr. Franco, any premium
options granted to him under the Management Equity Incentive Plan will be subject to the
terms of the French sub-plan, under which the premium options will not be subject to an
increasing exercise price over time. Rather, any vested premium options held by Mr. Franco
will be exercisable in a percentage equal to (i) the percentage of the premium options
exercisable under the terms of the Management Equity Incentive Plan multiplied by (ii) the
difference between the fair market value of one share of Holdings common stock on the
exercise date and the exercise price of the premium option to be exercised if it had
accreted in price under the terms of the Management Equity Incentive Plan divided by (iii)
the difference between the fair market value of the share and the exercise price of $10.00. |
Options Exercised and Stock Vested
The table below sets forth information on stock vested and value realized on vesting during
fiscal year 2010. There were no options exercised by our named executive officers in fiscal year
2010.
|
|
|
|
|
|
|
|
|
|
|
Stock Awards |
|
|
Number of |
|
|
|
|
Shares Acquired |
|
Value Realized |
|
|
on Vesting |
|
on Vesting |
Name & Principal Position |
|
(#)(1) |
|
($)(2) |
Dr. Frank Verwiel |
|
|
77,833 |
|
|
$ |
958,124 |
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Mims |
|
|
36,194 |
|
|
$ |
445,548 |
|
Executive Vice President and Chief Operating Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steve Gannon |
|
|
|
|
|
|
|
|
Senior Vice President and Chief Financial Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Alexandre LeBeaut |
|
|
|
|
|
|
|
|
Senior Vice President and Chief Scientific Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nicholas Franco |
|
|
|
|
|
|
|
|
Senior Vice President, International Commercial Operations |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The values in this column reflect the number of RSUs granted to Dr. Verwiel on August 25,
2009 where one-half vested on August 25, 2010 and for Mr. Mims, the third vesting tranche of
his RSU grant awarded on April 15, 2008. These vested RSUs will not be settled in Holdings
common stock until the earlier of: (1) four years from the date of grant, or April 15, 2012;
(2) the termination of the officers employment; (3) a Liquidity Event (as defined in the
Management Equity Incentive Plan); and (4) a Change in Control (as defined in the Management
Equity Incentive Plan). |
|
(2) |
|
Represents the number of RSUs vested multiplied by $12.31, the fair market value of one
share of Holdings common stock as at December 31, 2009, being
the last valuation determination made by the Holdings Board prior to
the vesting date. |
Employment Agreements and Potential Payments upon Certain Terminations
The following are descriptions of our employment agreements with our named executive
officers in effect as of the end of fiscal year 2010. We have employment agreements with Dr.
Verwiel, Mr. Mims, Mr. Gannon, Dr. LeBeaut and Mr. Franco, which contain severance and change of
control provisions. In addition, the Companys Severance Plan, or the Severance Plan provides
severance benefits in the event of certain terminations of the executives employment. The
following narrative describes the terms of these various agreements.
-142-
Employment Agreement with Dr. Frank Verwiel
On May 16, 2008, we entered into an amended and restated employment agreement with Dr.
Verwiel to continue his service as President and Chief Executive Officer of AIH, and to serve as
President and Chief Executive Officer of Holdings and an officer of certain other subsidiaries of
Holdings, including Axcan Intermediate Holdings Inc. The agreement has an initial five-year term
beginning on February 25, 2008 that provides for automatic twelve-month extensions, beginning on
February 25, 2013, unless either we or Dr. Verwiel give 60 days prior notice of termination.
Dr. Verwiel will receive a base salary at a rate no less than USD$645,000 per year, which
shall be adjusted at our discretion. Although no annual bonus is guaranteed to Dr. Verwiel, Dr.
Verwiel will have the opportunity to earn an annual cash bonus of 60%
of his base salary for on-target performance, or Target Annual Bonus, with the possibility of
achieving 120% of base salary for high achievement. In addition, if in any year Dr. Verwiel
receives an annual cash bonus as described above, he will also be entitled to receive a Match
Payment equal to one-half (1/2) the annual bonus payable with respect to such year.
In addition, Dr. Verwiel received a one-time nonrecurring grant of 640,000 options to
purchase shares of Holdings under the Management Equity Incentive Plan. These Holdings Options
will vest in accordance with our Management Equity Incentive Plan (described above) and have an
initial exercise price of $10.00 per share.
We agreed to grant Dr. Verwiel a total of 233,500 restricted stock units. 77,834 of these
RSUs were granted as fully vested on April 15, 2008; and an additional 155,666 RSUs were granted
to Dr. Verwiel on August 25, 2009, half of which vested immediately upon grant and half vested on
August 25, 2010. Vested RSUs will be settled into Holdings common stock, with certain exceptions,
upon the earlier of: (1) four years from the date of grant, April 15, 2012; (2) the termination
of the officers employment; (3) a Liquidity Event (as defined in the Management Equity Incentive
Plan); and (4) a Change in Control (as defined in the Management Equity Incentive Plan).
In addition, Dr. Verwiel agreed to, and did, purchase 75,000 shares of Holdings common stock
for an aggregate investment of
$750,000 pursuant to a subscription agreement and a Management Stockholders Agreement. For more
details on these agreements, see Item 13. Certain Relationships and Related Transactions, and
Director Independence in this Annual Report on Form 10-K.
The agreement further provides that Dr. Verwiel could be entitled to certain severance
benefits following termination of employment. If we terminate him without Cause (as defined in the
agreement), or if Dr. Verwiel terminates his employment for Good Reason (as defined in the
agreement), all outstanding Holdings Options granted to Dr. Verwiel by us pursuant to the
Management Equity Incentive Plan will expire pursuant to the terms of that plan as described above
in The Axcan Holdings Inc. Management Equity Incentive Plan except that, with certain
exceptions, any performance-based Holdings Options that have not vested as of the date of
termination shall remain outstanding for a 12-month period following termination and if a
liquidity event (as defined under the Management Equity Incentive Plan) occurs within such period,
all, none or one-half of the unvested performance-based options will become vested and exercisable
in accordance with the Management Equity Incentive Plan. In addition, Dr. Verwiel would be
entitled to the following:
|
|
|
An amount equal to Dr. Verwiels accrued but unused vacation and base salary
through the date of termination, or collectively, the accrued benefits. |
|
|
|
|
An amount equal to (a) two times his base salary in effect at the date of
termination, plus (b) two times the amount of his Target Annual Bonus, which is 60% of
Dr. Verwiels base salary. This amount will be paid in equal, ratable installments in
accordance with our regular payroll policies over the course of 24 months. |
|
|
|
|
Medical benefits which are substantially similar to the benefits provided to our
executive officers for 24 months after the date of termination. However, if Dr. Verwiel
becomes re-employed with another employer and is eligible to receive comparable
benefits, we shall cease to provide continued medical benefits. |
If Dr. Verwiel is terminated without Cause or terminates his employment for Good Reason
within twelve (12) months following a Change of Control (as defined in the agreement), Dr. Verwiel
shall be entitled to the benefits described above except that he shall receive two times his base
salary and Target Annual Bonus immediately, rather than over a 24-month period.
If Dr. Verwiel is terminated due to Dr. Verwiels death, Disability (as defined in the
agreement), or is terminated with Cause or without Good Reason, we will pay Dr. Verwiel the
accrued benefits when due.
Employment Agreement with David Mims
On June 3, 2008, we entered into an employment agreement with Mr. Mims to continue his
service as Executive Vice President and Chief Operating Officer of AIH, and to serve as Executive
Vice President and Chief Operating Officer of Holdings as well as an officer of certain other
subsidiaries of Holdings, including Axcan Intermediate Holdings Inc. The agreement has an initial
five-year term beginning on February 25, 2008 that provides for automatic twelve-month extensions,
beginning on February 25, 2013, unless either we or Mr. Mims give 60 days prior notice of
termination.
Mr. Mims will receive a base salary at a rate no less than $387,426 per year, which shall be
adjusted at our discretion. Although
-143-
no annual bonus is guaranteed to Mr. Mims, Mr. Mims will have the opportunity to earn
an annual cash bonus of at least 45% (as of fiscal year 2009, this bonus has been updated to 50%
by the Holdings Board) of his base salary for on-target performance, or Target Annual Bonus, with
the possibility of achieving 90% of base salary for high achievement.
In addition, Mr. Mims received a one-time nonrecurring grant of 410,000 options to purchase
shares of Holdings under the Management Equity Incentive Plan. These Holdings Options will vest
in accordance with our Management Equity Incentive Plan (as described above) and have an initial
exercise price of $10.00 per share.
We also agreed to grant Mr. Mims a total of 108,578 restricted stock units. One-third of
these RSUs vested immediately upon grant, one-third vested on August 25, 2009, and the remaining
RSUs vested on August 25, 2010. Vested RSUs will be settled into Holdings common stock, with
certain exceptions, upon the earlier of: (1) four years from the date of grant, April 15, 2012;
(2) the termination of the officers employment; (3) a Liquidity Event (as defined in the
Management Equity Incentive Plan); and (4) a Change in Control (as defined in the Management
Equity Incentive Plan).
In addition, Mr. Mims agreed to, and did, purchase 50,000 shares of Holdings common stock
for an aggregate investment of
$500,000 pursuant to a subscription agreement and a Management Stockholders Agreement. For more
details on these agreements, see Item 13. Certain Relationships and Related Transactions, and
Director Independence in this Annual Report on Form 10-K.
The agreement further provides that Mr. Mims could be entitled to certain severance
benefits following termination of employment. If we terminate him without Cause (as defined in
the agreement), or if Mr. Mims terminates his employment for Good Reason (as defined in the
agreement), all outstanding options granted to Mr. Mims by us pursuant to the Management Equity
Incentive Plan will expire pursuant to the terms of that plan as described above in The Axcan
Holdings Inc. Management Equity Incentive Plan except that, with certain exceptions, any
performance-based Holdings Options that have not vested as of the date of termination shall
remain outstanding for a 12-month period following termination and if a Liquidity Event (as
defined under the Management Equity Incentive Plan) occurs within such period, all, none or
one-half of the unvested performance-based options will become vested and exercisable in
accordance with the Management Equity Incentive Plan. In addition, Mr. Mims would be entitled to
the following:
|
|
|
An amount equal to Mr. Mims accrued but unused vacation and base salary
through the date of termination, or collectively, the accrued benefits. |
|
|
|
|
An amount equal to (a) two times his base salary in effect at the date of
termination, plus (b) two times the amount of his Target Annual Bonus, which is 50% of
Mr. Mims base salary. This amount will be paid in equal, ratable installments in
accordance with our regular payroll policies over the course of 24 months. |
|
|
|
|
Medical benefits which are substantially similar to the benefits provided to our
executive officers for 24 months after the date of termination. However, if Mr. Mims
becomes re-employed with another employer and is eligible to receive comparable benefits,
we shall cease to provide continued medical benefits. |
If Mr. Mims is terminated without Cause or terminates his employment for Good Reason within
twelve (12) months following a Change of Control (as defined in the agreement), Mr. Mims shall be
entitled to the benefits described above except that he shall receive two times his base salary
and Target Annual Bonus immediately, rather than over a 24-month period.
If Mr. Mims is terminated due to Mr. Mims death, Disability (as defined in the
agreement), or is terminated with Cause or without Good Reason we will pay Mr. Mims the
accrued benefits when due.
Employment Agreement with Steve Gannon
On July 3, 2008, we entered into an employment agreement with Mr. Gannon to continue his
service to us as Senior Vice President and Chief Financial Officer of AIH, and to serve as Senior
Vice President and Chief Financial Officer of Holdings as well as an officer of certain other
subsidiaries of Holdings, including as Senior Vice President, Finance and Chief Financial Officer
of Axcan Intermediate Holdings Inc. The agreement has an initial five-year term beginning on
February 25, 2008 that provides for automatic twelve-month extensions, beginning on February 25,
2013, unless either we or Mr. Gannon give 60 days prior notice of termination.
Mr. Gannon will receive a base salary at a rate no less than CDN $338,550 per year, which
shall be adjusted at our discretion. Although no annual bonus is guaranteed to Mr. Gannon, Mr.
Gannon will also have the opportunity to earn an annual cash bonus of at least 45% (for fiscal
year 2009, this bonus has been updated to 50%) of his base salary for on-target performance with
the possibility of achieving 90% of base salary for high achievement.
In addition, Mr. Gannon received a one-time nonrecurring grant of 335,000 options to
purchase shares of Holdings under the Management Equity Incentive Plan. These Holdings Options
will vest in accordance with our Management Equity Incentive Plan (as described above) and have
an initial exercise price of $10.00 per share.
We also agreed to, and did, grant Mr. Gannon a total of 96,436 penny options, which are
options to purchase a share of Holdings common stock for $0.01. Subject to Mr. Gannons
continued employment with us, these penny options were scheduled to vest in three approximately
equal installments on April 15, 2008, August 25, 2009 and August 25, 2010.
-144-
In addition, Mr. Gannon agreed to purchase 20,640 shares of Holdings common stock for an
aggregate investment of $206,400 pursuant to a subscription agreement and a Management
Stockholders Agreement. For more details on these agreements, see Item
13. Certain Relationships and Related Transactions, and Director Independence in this Annual
Report on Form 10-K.
The agreement further provides that Mr. Gannon could be entitled to certain severance
benefits following termination of employment. If we terminate him without Cause (as defined in the
agreement), or if Mr. Gannon terminates his employment for Good Reason (as defined in the
agreement), all outstanding options granted to Mr. Gannon by us pursuant to the Management Equity
Incentive Plan will expire pursuant to the terms of that plan as described above in The Axcan
Holdings Inc. Management Equity Incentive Plan except that, with certain exceptions, any
performance-based Holdings Options that have not vested as of the date of termination shall remain
outstanding for a 12-month period following termination and if a liquidity event (as defined under
the Management Equity Incentive Plan) occurs within such period, all, none or one-half of the
unvested performance-based options will become vested and exercisable in accordance with the
Management Equity Incentive Plan. In addition, Mr. Gannon would be entitled to the following:
|
|
|
An amount equal to Mr. Gannons accrued but unused vacation and base salary
through the date of termination, or collectively, the accrued benefits. |
|
|
|
|
An amount equal to one-and-a-half times his base salary in effect at the date of
termination. This amount will be paid in equal, ratable installments in accordance
with our regular payroll policies over the course of 18 months. |
|
|
|
|
Medical benefits which are substantially similar to the benefits provided to our
executive officers for 18 months after the date of termination. However, if Mr. Gannon
becomes re-employed with another employer and is eligible to receive comparable
benefits, we shall cease to provide continued medical benefits. |
If Mr. Gannon is terminated without Cause or terminates his employment for Good Reason within
twelve (12) months following a Change of Control (as defined in the agreement), Mr. Gannon shall
be entitled to the benefits described above except that he shall receive one-and-a-half times his
base salary immediately, rather than over a 18-month period.
If Mr. Gannon is terminated due to Mr. Gannons death, Disability (as defined in the
agreement), or is terminated with Cause or without Good Reason, we will pay Mr. Gannon the
accrued benefits when due.
Employment Agreement with Dr. Alexandre LeBeaut
On September 15, 2008, we entered into an employment agreement with Dr. LeBeaut, under which
he agreed to serve as Senior Vice President and Chief Scientific Officer of Holdings and AIH. The
agreement has an initial five-year term beginning on September 29, 2008 that provides for
automatic twelve-month extensions, beginning on September 29, 2013, unless either we or Dr.
LeBeaut give 60 days prior notice of termination.
Dr. LeBeaut will receive a base salary at a rate no less than $382,000 per year, which
shall be adjusted at our discretion. Dr. LeBeaut will also have the opportunity to earn an
annual cash bonus of at least 45% (for fiscal year 2009 updated to 50% by the Holdings
Board) of his base salary for on-target performance.
In addition, Dr. LeBeaut received a one-time nonrecurring grant of 230,000 options to
purchase shares of Holdings under the Management Equity Incentive Plan. These Holdings Options
will vest in accordance with our Management Equity Incentive Plan (as described above) and have
an exercise price equal to the Fair Market Value (as defined in the Management Equity Incentive
Plan) of the shares at the time of grant, as determined by the Board.
We granted Dr. LeBeaut a $50,000 signing bonus, a $35,000 tax assistance payment and a
$42,000 special signing bonus. In the event that Dr. LeBeauts employment was terminated prior to
September 29, 2010 for any reason, other than if the Company terminates him without Cause or Dr.
LeBeaut terminates for Good Reason, he would have been required to refund and pay the Company the
full gross amount of the bonus and incentive payments. In addition, Dr. LeBeaut agreed to, and
did, purchase 2,500 shares of Holdings common stock for an aggregate investment of $25,000,
pursuant to a subscription agreement and Management Stockholders Agreement. For more details on
these agreements, see Item 13. Certain Relationships and Related Transactions, and Director
Independence in this Annual Report on Form 10-K.
The agreement further provides that Dr. LeBeaut could be entitled to certain severance
benefits following termination of employment. If we terminate him without Cause (as defined in the
agreement), or if Dr. LeBeaut terminates his employment for Good Reason (as defined in the
agreement), all outstanding options granted to Dr. LeBeaut by us pursuant to the Management Equity
Incentive Plan would expire pursuant to the terms of that plan and Dr. LeBeaut would be entitled
to the following:
|
|
|
An amount equal to Dr. LeBeauts accrued but unused vacation and base salary
through the date of termination, or collectively, the accrued benefits. |
|
|
|
|
An amount equal to one-and-a-half times his base salary in effect at the date of
termination. This amount will be paid in equal, ratable installments in accordance
with our regular payroll policies over the course of 18 months. |
|
|
|
|
Medical benefits which are substantially similar to the benefits provided to our
executive officers for 18 months after the date of termination. However, if Dr. LeBeaut
becomes re-employed with another employer and is eligible to receive |
-145-
|
|
|
comparable
benefits, we shall cease to provide continued medical benefits. |
If Dr. LeBeaut is terminated without Cause or terminates his employment for Good Reason
within twelve (12) months following a Change of Control (as defined in the agreement), Dr. LeBeaut
shall be entitled to the benefits described above except that he shall receive one-and-a-half
times his base salary immediately, rather than over a 18-month period.
If Dr. LeBeaut is terminated due to Dr. LeBeauts death, Disability (as defined in the
agreement), or is terminated with Cause or without Good Reason, we will pay Dr. LeBeaut the
accrued benefits when due.
Employment Agreement with Nicholas Franco
The employment agreement between the Company and Mr. Franco was effective as of December
20, 2007, and has an indefinite term. Mr. Francos employment agreement provides for gross
annual compensation of 245,000 Euros, which shall be adjusted at our discretion at the end of
each fiscal year. Mr. Franco is eligible to participate in any executive incentive program
approved by the AIH Board, and his target annual incentive for fiscal year 2010 is 45% of his
base salary, prorated based on time of service.
The employment agreement provides Mr. Franco could be entitled to certain severance
benefits following termination of employment. If Mr. Franco is terminated at any time, he is
entitled to an incentive bonus based on the target of what he would have earned for the full
year, prorated for the time he served during that particular fiscal year. In the event that
Mr. Franco is terminated due to or following a Change of Control (as defined in the
agreement), he is entitled to receive an amount equal to the gross base compensation he
received during the twelve months prior to the termination.
Potential Payments upon Certain Terminations or a Change in Control
This table shows the potential compensation that we would have had to pay to our named
executive officers upon various termination of service scenarios. The table values are based
solely on our named executive officers employment contracts as the company Severance Plan
expired February 24, 2010. The amounts shown assume that termination of employment was effective
September 30, 2010. The amounts shown are only estimates of the amounts that would be payable to
the named executive officers upon termination of employment and do not reflect tax positions we
may have taken or the accounting treatment of such payments. Actual amounts to be paid can only
be determined at the time of separation. Although the calculations are intended to provide
reasonable estimates of the potential benefits, they are based on numerous assumptions and do not
represent the actual amount, if any, an executive would receive if an eligible termination event
were to occur.
-146-
The following table provides information regarding the potential value of our severance
arrangements for our named executive officers under the following termination of service
scenarios: (1) upon termination by us with cause or by the executive officer without good
reason, including a retirement; (2) upon termination by us without cause or by the executive
officer for good reason; (3) upon termination of the executive due to his death or disability
or (4) our change-in-control.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance Arrangements |
|
|
|
Assuming Termination of Service at the end of Fiscal year 2010 |
|
|
|
|
|
|
|
Termination with Cause |
|
|
Termination without Cause |
|
|
Termination |
|
|
|
|
|
|
|
|
|
|
or without |
|
|
or for Good |
|
|
due to Death |
|
|
Change in |
|
Name & Principal |
|
|
|
|
|
Good Reason |
|
|
Reason(1) |
|
|
or Disability |
|
|
Control(2) |
|
Position |
|
Benefit Type |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
Dr. Frank Verwiel |
|
Severance Payment |
|
|
|
|
|
$ |
2,064,000 |
|
|
|
|
|
|
$ |
2,064,000 |
|
President and Chief Executive Officer
|
|
Bonus |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits |
|
|
|
|
|
|
34,248 |
|
|
|
|
|
|
|
34,248 |
|
|
|
Value of Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Award Acceleration(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
2,098,248 |
|
|
|
|
|
|
$ |
2,098,248 |
|
David Mims |
|
Severance Payment |
|
|
|
|
|
$ |
1,197,146 |
|
|
|
|
|
|
$ |
1,197,146 |
|
Executive Vice President and Chief Operating Officer
|
|
Bonus |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits |
|
|
|
|
|
|
34,248 |
|
|
|
|
|
|
|
34,248 |
|
|
|
Value of Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Award Acceleration(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
1,231,395 |
|
|
|
|
|
|
$ |
1,231,395 |
|
Steve Gannon |
|
Severance Payment |
|
|
|
|
|
$ |
548,073 |
|
|
|
|
|
|
$ |
548,073 |
|
Senior Vice President and Chief Financial Officer
|
|
Bonus |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits |
|
|
|
|
|
|
2,709 |
|
|
|
|
|
|
|
2,709 |
|
|
|
Value of Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Award Acceleration(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
550,782 |
|
|
|
|
|
|
$ |
550,782 |
|
Dr. Alexandre LeBeaut |
|
Severance Payment |
|
|
|
|
|
$ |
573,000 |
|
|
|
|
|
|
$ |
573,000 |
|
Senior Vice President and Chief Scientific Officer
|
|
Bonus |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits |
|
|
|
|
|
|
25,686 |
|
|
|
|
|
|
|
25,686 |
|
|
|
Value of Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Award Acceleration |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
598,686 |
|
|
|
|
|
|
$ |
598,686 |
|
Nicholas Franco |
|
Severance Payment |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
340,468 |
|
Senior Vice President, International Commercial
Operations
|
|
Bonus |
|
|
|
|
|
$ |
153,210 |
|
|
|
|
|
|
|
|
|
|
|
Benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Award Acceleration |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
153,210 |
|
|
|
|
|
|
$ |
340,468 |
|
|
|
|
(1) |
|
The severance payments set forth in this column would have been paid to Dr. Verwiel and
Mr. Mims, respectively, in equal installments over a period of 24 months in accordance with
our standard payroll procedures and any benefits would be provided over a period of 24
months. For Mr. Gannon and Dr. LeBeaut, the severance payments set forth in this column
would have been paid to him in equal installments over a period of 18 months in accordance
with our standard payroll procedures and any benefits would be provided over a period of 18
months. |
|
(2) |
|
The severance payments set forth in this column would have been paid immediately upon
termination to Dr. Verwiel, Mr. Mims, Mr. Gannon and Dr. LeBeaut. For Mr. Franco, the
severance payments set forth in this column would have been paid in one lump sum no later
than the March 15th following the year of termination. The determination of the form in
which benefits would be paid to Mr. Franco would have been at our discretion. |
|
(3) |
|
Upon any event of termination, the named executive officers were entitled to receive the
same treatment of their Holdings Options under the Management Equity Incentive Plan as any
other employee with the exception of the performance-based Holdings Options held by Dr.
Verwiel, Mr. Mims and Mr. Gannon. In the event one of these named executive officers were
terminated without cause or for good reason, any performance-based options that had not
vested as of the date of termination would remain outstanding for a 12-month period
following termination and if a liquidity event (as defined under the Management Equity
Incentive Plan) were to occur within such period, all unvested performance-based shares
would become |
-147-
|
|
|
|
|
vested and exercisable in accordance with the Management Equity Incentive
Plan. Otherwise, upon any event of termination of
a named executive officer, any unvested Holdings Options would be forfeited unless such
termination was without Cause (as defined in the Management Equity Incentive Plan) or by
the participant for Good Reason (as defined in the Management Equity Incentive Plan) and
occurred during the two-year period following a Change of Control (as defined in the
Management Equity Incentive Plan), in which case all unvested time-based and premium
Holdings Options would immediately vest and become exercisable as of the date of such
termination. |
Director Compensation
Certain members of our Board also serve on the Board of Directors of certain of our parents
and subsidiaries. For example, the director composition of our Board is identical to the
composition of the board of our parent company MidCo. The current membership of our Board is not
compensated for their services as directors by us or any of our parents or subsidiaries. Members of
the Board of Directors of Holdings, which, as the board of our indirect parent, makes certain
compensation and business decisions that relate to our employees, are also not compensated for
their services as directors by us, Holdings, or any of our parents or subsidiaries.
-148-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Beneficial Ownership
Axcan MidCo Inc., or MidCo, directly owns all our issued and outstanding stock. All of
MidCos issued and outstanding stock is directly owned by Axcan Holdings Inc., or Holdings. All
equity interests in Holdings are owned, directly or indirectly, by the Sponsor Funds, the
Co-investors and certain of our employees, including certain of our named executive officers and
directors.
The following table sets forth information with respect to the ownership as of September 30,
2010 for (a) each person known by us to own beneficially more than a 5% equity interest in
Holdings, (b) each member of our Board of Directors, (c) each member of Holdings board of
directors, (d) each of our named executive officers (who are also the named executive officers of
Holdings), and (e) all of our and Holdings executive officers and directors as a group. We have
100 shares of common stock outstanding, all of which are owned indirectly by Holdings. Share
amounts indicated below reflect beneficial ownership, through Holdings, by such entities or
individuals of these 100 shares of Axcan Intermediate Holdings Inc.
The amounts and percentages of shares beneficially owned are reported on the basis of SEC
regulations governing the determination of beneficial ownership of securities. Under SEC rules, a
person is deemed to be a beneficial owner of a security if that person has or shares voting
power or investment power, which includes the power to dispose of or to direct the disposition of
such security. A person is also deemed to be a beneficial owner of any securities of which that
person has a right to acquire beneficial ownership within 60 days. Securities that can be so
acquired are deemed to be outstanding for purposes of computing such persons ownership
percentage, but not for purposes of computing any other persons percentage. Under these rules,
more than one person may be deemed to be a beneficial owner of the same securities and a person
may be deemed to be a beneficial owner of securities with respect to which such person has no
economic interest.
Except as otherwise indicated in the footnotes below, each of the beneficial owners has, to
our knowledge, sole voting and investment power with respect to the indicated shares. Unless
otherwise noted, the address of each beneficial owner is c/o Axcan Intermediate Holdings Inc.,
General Counsel, 22 Inverness Center Parkway, Suite 310, Birmingham, AL USA 35242.
|
|
|
|
|
|
|
|
|
|
|
Beneficial Ownership |
|
|
Percentage |
|
Name and Address of Beneficial Owner |
|
of Common Shares |
|
|
Owned |
|
TPG Capital(1) |
|
|
69.91 |
|
|
|
69.91 |
% |
Banc of America Capital Investors V, L.P.(2) |
|
|
8.35 |
|
|
|
8.35 |
% |
Société Générale de Financement du Québec(3) |
|
|
6.26 |
|
|
|
6.26 |
% |
HSBC(4) |
|
|
5.22 |
|
|
|
5.22 |
% |
OMERS Capital Partners Inc.(5) |
|
|
5.22 |
|
|
|
5.22 |
% |
Alberta Investment Management Corp.(6) |
|
|
4.17 |
|
|
|
4.17 |
% |
Dr. Frank Verwiel |
|
|
* |
|
|
|
* |
|
David Mims |
|
|
* |
|
|
|
* |
|
Steve Gannon |
|
|
* |
|
|
|
* |
|
Nicholas Franco |
|
|
* |
|
|
|
* |
|
Richard Tarte |
|
|
* |
|
|
|
* |
|
Dr. Alexandre LeBeaut |
|
|
* |
|
|
|
* |
|
Dr. Fred Cohen(7) |
|
|
69.91 |
|
|
|
69.91 |
% |
Dr. Heather Preston(7) |
|
|
69.91 |
|
|
|
69.91 |
% |
Todd Sisitsky(7) |
|
|
69.91 |
|
|
|
69.91 |
% |
All executive officers and directors as a group (12 people) |
|
|
0.39 |
|
|
|
0.39 |
% |
|
|
|
* |
|
Represents less than one percent or one share, as applicable. |
|
(1) |
|
Axcan Intermediate Holdings Inc. shares shown as beneficially owned by TPG Capital
reflect an aggregate of the following record ownership: (i) 30,854,198.80 shares of
Holdings held by TPG Partners V, L.P., (ii) 80,715.00 shares of Holdings held by TPG FOF
V-A, L.P., (iii) 65,086.20 shares of Holdings held by TPG FOF V-B, L.P. and (iv)
2,500,000.00 shares of Holdings held by TPG Biotechnology Partners II, LP. The address of
TPG Capital is 301 Commerce Street, Suite 3300, Fort Worth, TX 76102. |
|
(2) |
|
Axcan Intermediate Holdings Inc. shares shown as beneficially owned by Banc of
America Capital Investors V, L.P. through its investment in TPG Axcan Co-Invest II, LLC
reflect the following record ownership: 4,000,000 shares of Holdings held by Banc of
America Capital Investors V, L.P. The address of Banc of America Capital Investors V,
L.P. is 100 North Tryon Street, 25th floor, Attention: Scott R. Poole, Charlotte, NC
28255. |
|
(3) |
|
Axcan Intermediate Holdings Inc. shares shown as beneficially owned by Société
Générale de Financement du Quebec through its investment in TPG Axcan Co-Invest, LLC
reflect the following record ownership: 3,000,000 shares of Holdings held by SGF
Bio-Pharma Capital Inc. The address of Société Générale de Financement du Québec is 600
de la Gauichetière West, Suite 1500, Montreal, Quebec, Canada, H3B 4L8. |
|
(4) |
|
Axcan Intermediate Holdings Inc. shares shown as beneficially owned by HSBC through
its investment in TPG Axcan Co- |
-149-
|
|
|
|
|
Invest, LLC reflect an aggregate of the following record ownership:(i) 2,100,000 shares
held by HSBC Equity Partners USA, L.P. and (ii) 400,000 shares held by HSBC Private Equity
Partners II USA, LP. The address of HSBC is 452 Fifth Avenue, 14th floor, Attention:
Andrew Trigg, New York, NY 10018. |
|
(5) |
|
Axcan Intermediate Holdings Inc. shares shown as beneficially owned by OMERS Capital
Partners Inc. through its investment in TPG Axcan Co-Invest, LLC reflect the following
record ownership: 2,500,000 shares of Holdings held by OCP API Holdings, Inc. The
address of OMERS Capital Partners Inc. is Royal Bank Plaza, South Tower, Suite 2010, 200
Bay Street, Toronto, Ontario, Canada, M5J 2J2. |
|
(6) |
|
Axcan Intermediate Holdings Inc. shares shown as beneficially owned by Alberta
Investment Management Corp. through its investment in TPG Axcan Co-Invest, LLC reflect an
aggregate of the following record ownership: (i) 1,140,000 shares of Holdings held by
GP08GV (General) Ltd. and (ii) 860,000 shares of Holdings held by GP08PX (General) Ltd.
The address of Alberta Investment Management Corp. is 9515-107 Street, 340 Terrace
Building, Edmonton, Alberta, Canada, T5K 2C3. |
|
(7) |
|
Includes all shares held by TPG Partners V, L.P., TPG FOF V-A, L.P., TPG FOF V-B,
L.P., and TPG Biotechnology Partners II, LP. Each of Fred Cohen, Heather Preston and Todd
Sisitsky may be deemed to be a beneficial owner of these interests due to his or her
status as an employee of TPG Capital, and each such person disclaims beneficial ownership
of any such interests in which he or she does not have a pecuniary interest. The address
of each of Dr. Cohen, Dr. Preston and Mr. Sisitsky is c/o TPG Capital, 301 Commerce
Street, Suite 3300, Fort Worth, TX 76102. |
Securities Authorized for Issuance Under Equity
Compensation Plans
The following table provides information about the shares of Holdings common stock that
may be issued upon the exercise of options and rights (including restricted stock units) under all
of our existing equity compensation plans as of September 30, 2010, including the Management
Equity Incentive Plan and certain individual arrangements between us and our employees. The table
below does not include shares of Holdings common stock that may be issued to certain of our
employees as incentive awards correlated
to our performance under the Axcan Holdings Inc. Employee Long Term Incentive Plan, since we
cannot predict the value, if any, of
such awards or whether any of our employees will elect to receive shares of Holdings common
stock in lieu of cash awards under such plan. All of our shares are owned by MidCo and we do
not have any equity compensation plans under which shares of our common stock are granted.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
Number of |
|
|
|
|
|
|
remaining available for |
|
|
|
securities to be |
|
|
Weighted-average |
|
|
future issuance |
|
|
|
issued upon exercise |
|
|
exercise price of |
|
|
under equity compensation |
|
|
|
of outstanding |
|
|
outstanding |
|
|
plans (excluding |
|
|
|
options, warrants and |
|
|
options, warrants |
|
|
securities |
|
|
|
rights |
|
|
and rights |
|
|
reflected in first column) |
|
|
|
|
Plan Category |
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans
approved by security
holders |
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans
not approved by security
holders(1) |
|
|
4,814,646 |
(2) |
|
$ |
10.69 |
(3) |
|
|
172,307 |
|
Total |
|
|
4,814,646 |
|
|
$ |
10.69 |
|
|
|
172,307 |
|
|
|
|
(1) |
|
Since our indirect parent Holdings is owned primarily by the Sponsor and the majority
of members of the Holdings Board are affiliated with the Sponsor, the Holdings Board, and
not the Holdings stockholders, have approved all decisions related to equity-based
compensation, including the approval of the Management Equity Incentive Plan and individual
compensation arrangements with our executive officers. |
|
(2) |
|
This amount includes 3,642,250 shares of Holdings common stock issuable under the Management
Equity Incentive Plan, 719,836 shares of Holdings common stock issuable upon the settlement of
Restricted Stock Unit (RSUs) awards granted to certain of our employees and 452,560 shares of
Holdings common stock issuable upon the exercise of penny options, or options to purchase
Holdings Common Stock for $0.01, granted to certain of our employees. |
|
(3) |
|
The weighted-average exercise price reflects the exercise price of all options to purchase
Holdings common stock issued under the Management Equity Incentive Plan and does not
reflect the exercise price of the RSUs awards or penny option awards, which have exercise
prices of $0 and $0.01, respectively. |
-150-
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Review, Approval or Ratification of Transactions with Related Persons
We have not adopted any formal policies or procedures for the review, approval or
ratification of certain related-party transactions that may be required to be reported under the
SEC disclosure rules. Such transactions, if and when they are proposed or have occurred, have
traditionally been (and will continue to be) reviewed by our Board of Directors (other than the
board members involved, if any) on a case-by-case basis.
Stockholders Agreement
We have entered into a stockholders agreement with Holdings and the stockholders of Holdings,
including investment funds associated with our Sponsor and certain members of our management.
Future stockholders may also be required to become parties to the agreement. The stockholders
agreement contains agreements among the parties with respect to the election of our directors and
the directors of Holdings, restrictions on the issuance of shares (including certain participation
rights), restrictions on the transfer of shares (including tag-along rights, drag-along rights and
a right of first offer) and other special corporate governance provisions (including the right of
our Sponsor and its affiliates to approve various corporate actions).
Registration Rights Agreement
We have entered into a registration rights agreement with Holdings and the stockholders of
Holdings, including investment funds associated with our Sponsor and certain members of our
management. The registration rights agreement contains customary demand and piggyback
registration rights. The agreement also requires Holdings and us to indemnify each holder of
registrable securities and certain of their affiliates against liability arising from any
violation of the securities laws by Holdings or us or any material misstatements or omissions
made by Holdings or us in connection with a public offering.
Management Agreement
We have entered into a management agreement with Holdings and our Sponsor, pursuant to
which our Sponsor will provide management and other advisory services to us. In consideration
for ongoing management and other advisory services, the management agreement requires us to pay
our Sponsor an annual management fee of $750,000 and to reimburse our Sponsor for out-of-pocket
expenses incurred in connection with its services. The management agreement also provides that
our Sponsor will receive transaction fees in connection with certain subsequent financings and
acquisition transactions. The management agreement includes customary indemnification provisions
in favor of our Sponsor and its affiliates.
In addition, on December 16, 2009, we entered into an agreement with our Sponsor to clarify
our indemnification obligations with respect to the Sponsor and its affiliates. The agreement
clarifies that we have the primary obligation to indemnify the Sponsor and its affiliates for
expenses and indemnification obligations that we provide to our officers and directors and those
of Holdings.
Director Independence
We are a privately held corporation. As discussed in Item 10 above, no current director of
our Board is deemed to be independent under our previously adopted independence standards. See
Item 10. Directors, Executive Officers and Corporate Governance.
-151-
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
During the periods indicated, Raymond Chabot Grant Thornton LLP, and its affiliates, the
Companys independent registered public accounting firm and principal accountant, billed the
fees set forth below.
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year ended |
|
|
Fiscal Year ended |
|
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
Audit Fees (1) |
|
$ |
778,566 |
|
|
$ |
908,858 |
|
Audit-Related Fees (2) |
|
|
42,811 |
|
|
|
308,777 |
|
Tax Fees (3) |
|
|
24,316 |
|
|
|
244,003 |
|
All Other Fees (4) |
|
|
|
|
|
|
21,451 |
|
|
|
|
|
|
|
|
|
Total Fees |
|
$ |
845,693 |
|
|
$ |
1,483,089 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Audit Fees billed during the periods indicated represented fees for the
following services: audit of the Companys (or the predecessor companys) annual financial
statements, reviews of the Companys (or the predecessor companys) quarterly financial
statements, audit of the financial statements of certain subsidiaries and other services
normally provided in connection with statutory and regulatory filings. |
|
(2) |
|
Audit-Related Fees billed during the periods indicated represented fees for the following
services: issue of consent and comfort letters and other services provided in conjunction
with financing transactions and consultations on accounting matters. |
|
(3) |
|
Tax Fees billed during the periods indicated represented fees for the following services:
compliance, transfer-pricing studies and other tax consultation. |
|
(4) |
|
Performance of agreed-upon procedures with respect to a royalty sales schedule. |
We do not have an audit committee and as such, the audit committee of Axcan Holdings Inc.,
our indirect parent, performs the duties of an audit committee, including the review and
pre-approval of fees paid to and services performed by Raymond Chabot Grant Thornton LLP.
-152-
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) |
|
Financial Statements |
|
|
|
The financial statements are filed as part of this Annual Report on Form 10-K under Item
8-Financial Statements and Supplementary Data. |
(b) |
|
Financial Statement Schedules |
|
|
|
Financial statement schedules have been omitted because they are either not required,
not applicable, or the information is presented in the consolidated financial statements
and the notes thereto in Item 8 above. |
(c) |
|
Exhibits |
|
|
|
Refer to the Index to Exhibits immediately following the signature page of this report. |
-153-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Birmingham, Sate of Alabama, United States of America, on December
16, 2010.
|
|
|
|
|
|
AXCAN INTERMEDIATE HOLDINGS INC.
|
|
|
By: |
/s/
|
|
|
|
Name: |
Steve Gannon |
|
|
|
Title: |
Senior Vice President and
Chief Financial Officer and Treasurer |
|
|
Pursuant to the requirements of Section 13 or Section 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons in the capacities and
on the date indicated below.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
|
|
President, Chief Executive Officer
and Director
(Principal Executive Officer)
|
|
December 16, 2010 |
|
|
|
|
|
|
|
Senior Vice President and
Chief Financial Officer, Treasurer
and Director (Principal Financial
and Accounting Officer)
|
|
December 16, 2010 |
|
|
|
|
|
|
|
Executive Vice President, Chief
Operating Officer and Director
|
|
December 16, 2010 |
|
|
|
|
|
/s/
Richard DeVleeschouwer
|
|
Senior Vice President, Human Resources,
Assistant Secretary and Director
|
|
December 16, 2010 |
-154-
EXHIBIT INDEX
|
|
|
Exhibit No. |
|
Exhibit |
3.1
|
|
Certificate of Incorporation of Axcan Intermediate Holdings Inc. (f/k/a Atom Intermediate Holdings Inc.), as amended
(Exhibit 3.1 to Axcan Intermediate Holdings Inc. Form S-4 filed October 7, 2008). |
|
|
|
3.2
|
|
By-laws of Axcan Intermediate Holdings Inc. (Exhibit 3.2 to Axcan Intermediate Holdings Inc. Form S-4 filed October 7, 2008). |
|
|
|
4.1
|
|
Senior Secured Notes Indenture, dated as of February 25, 2008, between Axcan Intermediate Holdings Inc., the Guarantors
listed therein and The Bank of New York, as Trustee, relating to the 9.25% Senior Secured Notes due 2015 (Exhibit 4.1 to
Axcan Intermediate Holdings Inc. Form S-4 filed October 7, 2008). |
|
|
|
4.2
|
|
Supplemental Indenture, dated as of December 19, 2008, among Axcan EU LLC and The Bank of New York Mellon, as trustee,
supplementing the Senior Secured Notes Indenture dated as of February 25, 2008 (Exhibit 4.1 to Axcan Intermediate Holdings
Inc. Form 10-Q filed February 13, 2009). |
|
|
|
4.3
|
|
Senior Notes Indenture, dated as of May 6, 2008, between Axcan Intermediate Holdings Inc., the Guarantors listed therein and
The Bank of New York, as Trustee, relating to the 12.75% Senior Notes due 2016 (Exhibit 4.2 to Axcan Intermediate Holdings
Inc. Form S-4 filed October 7, 2008). |
|
|
|
4.4
|
|
Supplemental Indenture, dated as of December 19, 2008, among Axcan EU LLC and The Bank of New York Mellon, as trustee,
supplementing the Senior Notes Indenture dated as of May 6, 2008 (Exhibit 4.2 to Axcan Intermediate Holdings Inc. Form 10-Q
filed February 13, 2009). |
|
|
|
4.5
|
|
Form of 9.25% Senior Secured Notes due 2015 (included in the Senior Secured Notes Indenture filed as Exhibit 4.1 to Axcan
Intermediate Holdings Inc. Form S-4 filed October 7, 2008). |
|
|
|
4.6
|
|
Form of 12.75% Senior Notes due 2016 (included in the Senior Notes Indenture filed as Exhibit 4.2 to Axcan Intermediate
Holdings Inc. Form S-4 filed October 7, 2008). |
|
|
|
4.7
|
|
Registration Rights Agreement, dated as of February 25, 2008, by and between Axcan Intermediate Holdings Inc., the
Guarantors named therein and Banc of America Securities LLC, HSBC Securities (USA) Inc., RBC Capital Markets Corporation
(Exhibit 4.5 to Axcan Intermediate Holdings Inc. Form S-4 filed October 7, 2008). |
|
|
|
4.8
|
|
Registration Rights Agreement, dated as of May 6, 2008, by and between Axcan Intermediate Holdings Inc., the Guarantors
named therein and Banc of America Securities LLC, HSBC Securities (USA) Inc., RBC Capital Markets Corporation (Exhibit 4.6
to Axcan Intermediate Holdings Inc. Form S-4 filed October 7, 2008). |
|
|
|
4.9
|
|
Parallel Debt Agreement, dated as of February 25, 2008, between Axcan LuxCo 1 S.àr.l. and Axcan LuxCo 2 S.àr.l and The Bank
of New York, relating to the Senior Secured Notes Indenture (Exhibit 4.12 to Axcan Intermediate Holdings Inc. Form S-4 filed
October 7, 2008). |
|
|
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4.10
|
|
Parallel Debt Agreement, dated as of May 6, 2008, between Axcan LuxCo 2 S.àr.l. and Axcan LuxCo 2 S.àr.l and The Bank of New
York, relating to the Senior Notes Indenture (Exhibit 4.13 to Axcan Intermediate Holdings Inc. Form S-4 filed October 7,
2008). |
|
|
|
4.11
|
|
Pledge Agreement, dated as of February 25, 2008, between Axcan Intermediate Holdings Inc., as Pledgor, Bank of America,
N.A., as Administrative Agent and Collateral Agent, and Axcan LuxCo 1 S.àr.l., as Company (Exhibit 4.14 to Axcan
Intermediate Holdings Inc. Form S-4 filed October 7, 2008). |
|
|
|
4.12
|
|
Pledge Agreement, dated as of February 25, 2008, between Axcan Intermediate Holdings Inc., as Pledgor, Bank of America,
N.A., as Administrative Agent and Collateral Agent, and Axcan LuxCo 2 S.àr.l., as Company (Exhibit 4.15 to Axcan
Intermediate Holdings Inc. Form S-4 filed October 7, 2008). |
|
|
|
4.13
|
|
Deed of Pledge of Membership Rights, dated February 25, 2008, between Axcan Intermediate Holdings Inc. and Axcan US LLC, as
Pledgors, and Bank of America, N.A., as Pledgee, and Axcan Coöperatieve U.A., as Coop (Exhibit 4.16 to Axcan Intermediate
Holdings Inc. Form S-4 filed October 7, 2008). |
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|
|
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Exhibit No. |
|
Exhibit |
4.14
|
|
Pledge and Security Agreement, dated as of February 25, 2008, between certain subsidiaries of Axcan Intermediate Holdings
Inc. identified therein, as Grantors, and Bank of America, N.A., as Administrative Agent (Exhibit 4.17 to Axcan Intermediate
Holdings Inc. Form S-4 filed October 7, 2008). |
|
|
|
4.15
|
|
Supplement No.1, dated as of December 5, 2008, to the Pledge and Security Agreement dated as of February 25, 2008 among
Axcan Intermediate Holdings Inc., as the Parent Borrower, Axcan US Partnership 1 LP, as the Co-Borrower, Axcan MidCo Inc.,
as Holdings, certain other Subsidiaries of Axcan Intermediate Holdings Inc. from time to time party thereto and Bank of
America, N.A., as Administrative Agent for the Secured Parties (as defined therein) (Exhibit 4.3 to Axcan Intermediate
Holdings Inc. Form 10-Q filed February 13, 2009). |
|
|
|
4.16
|
|
Pledge Agreement, dated as of February 25, 2008, between Axcan LuxCo 2 S.àr.l., as Pledgor, Bank of America, N.A., as
Administrative and Collateral Agent, and Axcan Nova Scotia 1 ULC, as Company (Exhibit 4.18 to Axcan Intermediate Holdings
Inc. Form S-4 filed October 7, 2008). |
|
|
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4.17
|
|
Deed of Hypothec in favor of Bank of America, N.A., dated as of February 25, 2008 (Exhibit 4.19 to Axcan Intermediate
Holdings Inc. Form S-4 filed October 7, 2008). |
|
|
|
4.18
|
|
Debenture, dated as of February 25, 2008 (Exhibit 4.20 to Axcan Intermediate Holdings Inc. Form S-4 filed October 7, 2008). |
|
|
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4.19
|
|
Pledge of Debentures, dated as of February 25, 2008, between Axcan Pharma Inc. and the Secured Parties (as defined therein)
(Exhibit 4.21 to Axcan Intermediate Holdings Inc. Form S-4 filed October 7, 2008). |
|
|
|
10.1
|
|
Management Services Agreement, dated as of February 21, 2008, by and among Axcan Holdings Inc., Axcan Intermediate Holdings
Inc. and TPG Capital, L.P. (Exhibit 10.1 to Axcan Intermediate Holdings Inc. Form S-4 filed October 7, 2008). |
|
|
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10.2
|
|
Joinder to Management Services Agreement, dated as of February 25, 2008, by and among TPG Capital, L.P., Axcan Pharma Inc.
and Axcan US Partnership 1 LP (Exhibit 10.2 to Axcan Intermediate Holdings Inc. Form S-4 filed October 7, 2008). |
|
|
|
10.3+
|
|
Exclusive Development/License/Supply Agreement, dated May 16, 2000, between Eurand S.p.A. (f/k/a Eurand International
S.p.A.) and Axcan Pharma US, Inc. (f/k/a Axcan Scandipharm Inc.), as amended by Amendment No. 1, dated March 23, 2007
(Exhibit 10.5 to Axcan Intermediate Holdings Inc. Form S-4 filed October 7, 2008). |
|
|
|
10.4+
|
|
Finished Product Supply Agreement, dated October 8, 2003, by and between Sanofi-Aventis U.S. LLC (successor in interest of
Aventis Pharmaceuticals Inc.) and Axcan Pharma Inc., as amended by Amendment No. 1, dated August 2, 2008 (Exhibit 10.6 to
Axcan Intermediate Holdings Inc. Form S-4 filed October 7, 2008). |
|
|
|
10.5+
|
|
Manufacturing Services Agreement, dated October 1, 2003, between Patheon Inc. and Axcan Pharma Inc. (Exhibit 10.7 to Axcan
Intermediate Holdings Inc. Form S-4 filed October 7, 2008). |
|
|
|
10.6+
|
|
Supply Agreement, dated May 7, 2004, between Paddock Laboratories, Inc. and Axcan Pharma Inc. (Exhibit 10.8 to Axcan
Intermediate Holdings Inc. Form S-4 filed October 7, 2008). |
|
|
|
10.7
|
|
Credit Agreement, dated as of February 25, 2008, between Axcan Intermediate Holdings Inc., as Parent Borrower, Axcan US
Partnership 1 LP, as Co-borrower, Axcan MidCo Inc., as Holdings, Bank of America, N.A., as Administrative Agent, Swing Line
Lender and L/C Issuer, and the other lenders from time to time party thereto (Exhibit 10.9 to Axcan Intermediate Holdings
Inc. Form S-4 filed October 7, 2008). |
|
|
|
10.8
|
|
Guaranty, dated as of February 25, 2008, among Axcan MidCo Inc., Axcan Intermediate Holdings Inc., Axcan US Partnership 1
LP, certain other Subsidiaries of Axcan Intermediate Holdings Inc. from time to time party thereto and Bank of America,
N.A., as Administrative Agent (Exhibit 10.10 to Axcan Intermediate Holdings Inc. Form S-4 filed October 7, 2008). |
|
|
|
10.9
|
|
Supplement No.1, dated as of December 5, 2008, to the Guaranty dated as of February 25, 2008 among Axcan MidCo Inc., Axcan
Intermediate Holdings Inc., Axcan US Partnership 1 LP, certain other Subsidiaries of Axcan Intermediate Holdings Inc. from
time to time party thereto and Bank of America, N.A., as Administrative Agent (Exhibit 10.1 to Axcan Intermediate Holdings
Inc. Form 10-Q filed February 13, 2009). |
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|
|
|
Exhibit No. |
|
Exhibit |
10.10
|
|
Amendment and Restatement of Employment Agreement between Axcan Pharma Inc., Axcan Pharma US, Inc., Axcan Holdings Inc. and
Dr. Frank A.G.M. Verwiel, dated May 16, 2008 (Exhibit 10.11 to Axcan Intermediate Holdings Inc. Form S-4 filed October 7,
2008). |
|
|
|
10.11
|
|
Employment Agreement between Axcan Pharma Inc., Axcan Pharma US, Inc., Axcan Holdings Inc. and David Mims, dated June 3,
2008 (Exhibit 10.12 to Axcan Intermediate Holdings Inc. Form S-4 filed October 7, 2008). |
|
|
|
10.12
|
|
Employment Agreement between Axcan Pharma Inc., Axcan Pharma US, Inc., Axcan Holdings Inc. and Steve Gannon, dated July 3,
2008 (Exhibit 10.13 to Axcan Intermediate Holdings Inc. Form S-4 filed October 7, 2008). |
|
|
|
10.13
|
|
Employment Agreement between Axcan Pharma Inc., Axcan Pharma US, Inc., Axcan Holdings Inc. and Alexandre P. LeBeaut, dated
September 15, 2008 (Exhibit 10.14 to Axcan Intermediate Holdings Inc. Form S-4 filed October 7, 2008). |
|
|
|
10.14
|
|
Employment Agreement between Axcan Pharma Inc. and Nicholas Franco, dated October 5, 2007 (Exhibit 10.15 to Axcan
Intermediate Holdings Inc. Form S-4/A filed November 7, 2008). |
|
|
|
10.15
|
|
Axcan Pharma Inc. Severance Pay Plan (Exhibit 10.16 to Axcan Intermediate Holdings Inc. Form S-4/A filed November 12, 2008). |
|
|
|
10.16
|
|
Axcan Holdings Inc. Management Equity Incentive Plan (Exhibit 10.17 to Axcan Intermediate Holdings Inc. Form S-4/A filed
November 12, 2008). |
|
|
|
10.17
|
|
Axcan Pharma Inc. Incentive Compensation Plan for Executives (Exhibit 10.18 to Axcan Intermediate Holdings Inc. Form S-4/A
filed November 12, 2008). |
|
|
|
10.18
|
|
Form of Axcan Holdings Inc. Management Stockholders Agreement (Exhibit 10.19 to Axcan Intermediate Holdings Inc. Form S-4
filed October 7, 2008). |
|
|
|
10.19
|
|
Form of Restricted Stock Unit Grant Agreement between Axcan Holdings Inc. and U.S. Grantee (Exhibit 10.20 to Axcan
Intermediate Holdings Inc. Form S-4 filed October 7, 2008). |
|
|
|
10.20
|
|
Form of Restricted Stock Unit Grant Agreement between Axcan Holdings Inc. and French Grantee (Exhibit 10.21 to Axcan
Intermediate Holdings Inc. Form S-4 filed October 7, 2008). |
|
|
|
10.21
|
|
Form of Penny Option Grant Agreement between Axcan Holdings Inc. and Optionee (Exhibit 10.22 to Axcan Intermediate Holdings
Inc. Form S-4 filed October 7, 2008). |
|
|
|
10.22
|
|
Axcan Holdings Inc. Employee Long Term Incentive Plan. (Exhibit 102.3 to Axcan Intermediate Holdings Inc. Form 10-K filed
December 22, 2008). |
|
|
|
12.1*
|
|
Computation of Ratio of Earnings to Fixed Charges. |
|
|
|
21.1*
|
|
Subsidiaries of Axcan Intermediate Holdings Inc. |
|
|
|
31.1*
|
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2*
|
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1*
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
32.2*
|
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
* |
|
Exhibits marked with an asterisk (*) are filed herewith. |
|
+ |
|
This Exhibit was filed separately with the Commission pursuant to an application for confidential treatment. The
confidential portions of the Exhibit have been omitted and have been marked by the following symbol: [ ** ]. |
|
|
|
Denotes management contract or compensatory plan or arrangement |
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