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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended September 30, 2012

OR

 

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

For the transition period from              to             

Commission file number 1-35144

 

 

Sagent Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware    98-0536317

(State or other jurisdiction of

incorporation or organization)

  

(I.R.S. Employer

Identification No.)

1901 N. Roselle Road, Suite 700

Schaumburg, Illinois

   60195
(Address of principal executive offices)    (Zip Code)

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

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

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer    ¨    Accelerated filer    x
Non-accelerated filer    ¨  (Do not check if a smaller reporting company)    Smaller reporting company    ¨

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

At October 31, 2012, there were 28,072,934 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

Sagent Pharmaceuticals, Inc.

Table of Contents

 

         Page No.  

PART I –

  FINANCIAL INFORMATION   

Item 1.

  Financial Statements   
  Condensed Consolidated Balance Sheets at September 30, 2012 and December 31, 2011      1   
 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2012 and 2011

     2   
 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2012 and 2011

     3   
 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011

     4   
  Notes to Condensed Consolidated Financial Statements      5   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      12   

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      23   

Item 4.

  Controls and Procedures      23   

PART II –

  OTHER INFORMATION   

Item 1.

  Legal Proceedings      24   

Item 1A.

  Risk Factors      24   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      24   

Item 3.

  Defaults Upon Senior Securities      24   

Item 4.

  Mine Safety Disclosures      24   

Item 5.

  Other Information      24   

Item 6.

  Exhibits      25   
  Signature      26   

In this report, “Sagent,” “we,” “us” and “our” refers to Sagent Pharmaceuticals, Inc. and subsidiaries, and “Common Stock” refers to Sagent’s common stock.


Table of Contents

Sagent Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share amounts)

 

     September 30,
2012
    December 31,
2011
 
     (Unaudited)        

Assets

  

Current assets:

    

Cash and cash equivalents

   $ 26,789      $ 52,203   

Short-term investments

     39,068        73,761   

Accounts receivable, net of chargebacks and other deductions

     30,761        29,028   

Inventories, net

     39,356        41,487   

Due from related party

     1,009        2,379   

Prepaid expenses and other current assets

     3,758        1,988   
  

 

 

   

 

 

 

Total current assets

     140,741        200,846   

Property, plant, and equipment, net

     773        884   

Investment in joint ventures

     21,754        22,762   

Intangible assets, net

     4,676        5,426   

Other assets

     390        590   
  

 

 

   

 

 

 

Total assets

   $ 168,334      $ 230,508   
  

 

 

   

 

 

 

Liabilities and stockholders’ equity

  

Current liabilities:

    

Accounts payable

   $ 20,636      $ 35,403   

Due to related party

     5,811        4,303   

Accrued profit sharing

     3,894        3,753   

Accrued liabilities

     7,374        7,634   

Current portion of long-term debt

     —          8,182   

Notes payable

     —          24,867   
  

 

 

   

 

 

 

Total current liabilities

     37,715        84,142   

Long term liabilities:

    

Long-term debt

     —          4,091   

Other long-term liabilities

     6        606   
  

 

 

   

 

 

 

Total liabilities

     37,721        88,839   

Stockholders’ equity:

    

Common stock—$0.01 par value, 100,000,000 authorized and 28,006,411 and 27,901,174 outstanding at September 30, 2012 and December 31, 2011, respectively

     280        279   

Additional paid-in capital

     270,999        266,062   

Accumulated other comprehensive income

     2,923        2,162   

Accumulated deficit

     (143,589     (126,834
  

 

 

   

 

 

 

Total stockholders’ equity

     130,613        141,669   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 168,334      $ 230,508   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

1


Table of Contents

Sagent Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

(Unaudited)

 

     Three months ended September 30,     Nine months ended September 30,  
     2012     2011     2012     2011  

Net revenue

   $ 49,429      $ 41,281      $ 130,389      $ 103,879   

Cost of sales

     42,208        34,344        110,900        89,604   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     7,221        6,937        19,489        14,275   

Operating expenses:

      

Product development

     4,011        3,460        12,700        8,191   

Selling, general and administrative

     7,169        6,688        22,089        18,139   

Management reorganization

     739        —          739        —     

Equity in net (income) loss of joint ventures

     (940     401        (589     1,598   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     10,979        10,549        34,939        27,928   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (3,758     (3,612     (15,450     (13,653

Interest income and other

     60        104        210        179   

Interest expense and other

     (52     (1,223     (1,515     (2,985

Change in fair value of preferred stock warrants

     —          —          —          (838
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (3,750     (4,731     (16,755     (17,297

Provision for income taxes

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (3,750   $ (4,731   $ (16,755   $ (17,297
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share:

      

Basic

   $ (0.13   $ (0.17   $ (0.60   $ (0.99

Diluted

   $ (0.13   $ (0.17   $ (0.60   $ (0.99

Weighted-average of shares used to compute net loss per common share:

      

Basic

     27,977        27,875        27,943        17,480   

Diluted

     27,977        27,875        27,943        17,480   

See accompanying notes to condensed consolidated financial statements.

 

2


Table of Contents

Sagent Pharmaceuticals, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands, except per share amounts)

(Unaudited)

 

     Three months ended September 30,     Nine months ended September 30,  
     2012     2011     2012     2011  

Net loss

   $ (3,750   $ (4,731   $ (16,755   $ (17,297

Other comprehensive income (loss), net of tax

      

Foreign currency translation adjustments

     362        98        641        655   

Unrealized gains (losses) on available for sale securities

     15        (151     120        (238
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     377        (53     761        417   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (3,373   $ (4,784   $ (15,994   $ (16,880
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

3


Table of Contents

Sagent Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

     Nine months ended September 30,  
     2012     2011  

Cash flows from operating activities

    

Net loss

   $ (16,755   $ (17,297

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization

     5,198        1,865   

Stock-based compensation

     4,297        1,617   

Equity in net (income) loss of joint ventures

     (589     1,598   

Change in fair value of preferred stock warrants

     —          838   

Dividends from unconsolidated joint venture

     2,755        —     

Changes in operating assets and liabilities:

    

Accounts receivable, net

     (1,733     (12,686

Inventories, net

     2,131        (7,222

Prepaid expenses and other current assets

     (1,793     2,467   

Due from related party

     1,370        528   

Accounts payable and other accrued liabilities

     (13,322     (2,858
  

 

 

   

 

 

 

Net cash used in operating activities

     (18,441     (31,150
  

 

 

   

 

 

 

Cash flows from investing activities

    

Capital expenditures

     (54     (214

Return of principal balance (funding) of restricted cash

     23        (465

Investments in unconsolidated joint ventures

     (517     (127

Return of capital from unconsolidated joint venture

     —          924   

Purchases of investments

     (144,897     (93,193

Sale of investments

     178,937        15,627   

Purchase of product rights

     (3,026     (3,008
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     30,466        (80,456
  

 

 

   

 

 

 

Cash flows from financing activities

    

Reduction in short-term notes payable

     (24,867     (1,057

Proceeds from issuance of long-term debt

     —          15,000   

Repayment of long-term debt

     (12,273     (682

Proceeds from issuance of common stock, net of issuance costs

     585        101,582   

Payment of deferred financing costs

     (884     (80
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (37,439     114,763   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (25,414     3,157   

Cash and cash equivalents, at beginning of period

     52,203        34,376   
  

 

 

   

 

 

 

Cash and cash equivalents, at end of period

   $ 26,789      $ 37,533   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements

 

4


Table of Contents

Sagent Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

Note 1. Basis of presentation:

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

The condensed consolidated financial statements include Sagent as well as our wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. We account for our investments in Kanghong Sagent (Chengdu) Pharmaceutical Corporation Limited (“KSCP”) and Sagent Agila LLC (formerly Sagent Strides LLC) using the equity method of accounting, as our interest in each entity provides for joint financial and operational control. Operating results of our KSCP equity method investment are reported on a one-month lag.

You should read these statements in conjunction with our consolidated financial statements and related notes for the year ended December 31, 2011, included in our Annual Report on Form 10-K filed with the SEC on March 29, 2012.

New Accounting Pronouncements:

In May 2011, new guidance was issued on the accounting for fair value measurements. The new guidance limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, the new guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as a description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. We adopted this guidance on January 1, 2012. Adoption of this guidance did not have a significant impact on our financial results.

Note 2. Investments:

Our investments at September 30, 2012 were comprised of the following:

 

     Cost basis      Unrealized
gains
     Unrealized
losses
    Recorded
basis
     Cash and
cash
equivalents
     Short term
investments
 

Assets

                

Cash

   $ 11,377       $ —         $ —        $ 11,377       $ 11,377       $ —     

Money market funds

     15,412         —           —          15,412         15,412         —     

Corporate bonds and notes

     25,838         32         —          25,870         —           25,870   

Commercial paper

     13,199         —           (1     13,198         —           13,198   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
   $ 65,826       $ 32       $ (1   $ 65,857       $ 26,789       $ 39,068   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

5


Table of Contents

Investments with continuous unrealized losses for less than twelve months and their related fair values at September 30, 2012 were as follows:

 

     Fair value      Unrealized
losses
 

Corporate bonds and notes

   $ 4,008       $ (1

Commercial paper

     13,198         (1
  

 

 

    

 

 

 
   $ 17,206       $ (2
  

 

 

    

 

 

 

Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Because we do not currently intend to sell these investments, and it is not more likely than not that we will be required to sell our investments before recovery of their amortized cost basis, which may be maturity, we do not consider these investments to be other-than-temporarily impaired at September 30, 2012.

The original cost and estimated current fair value of our fixed-income securities at September 30, 2012 are set forth below.

 

     Cost basis      Estimated fair
value
 

Due in one year or less

   $ 39,037       $ 39,068   
  

 

 

    

 

 

 
   $ 39,037       $ 39,068   
  

 

 

    

 

 

 

Note 3. Inventories:

Inventories at September 30, 2012 and December 31, 2011 were as follows:

 

     September 30, 2012     December 31, 2011  
     Approved     Pending
regulatory
approval
     Inventory     Approved     Pending
regulatory
approval
     Inventory  

Finished goods

   $ 41,376      $ 509       $ 41,885      $ 47,666      $ —         $ 47,666   

Raw materials

     346        —           346        —          264         264   

Inventory reserve

     (2,875     —           (2,875     (6,443     —           (6,443
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
   $ 38,847      $ 509       $ 39,356      $ 41,223      $ 264       $ 41,487   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Note 4. Intangible assets, net:

Intangible assets at September 30, 2012 and December 31, 2011 were as follows:

 

     September 30, 2012      December 31, 2011  
     Gross carrying
amount
     Accumulated
amortization
    Intangible
assets, net
     Gross carrying
amount
     Accumulated
amortization
    Intangible
assets, net
 

Product licensing rights

   $ 3,156       $ (1,427   $ 1,729       $ 2,528       $ (1,070   $ 1,458   

Product development rights

     2,947         —          2,947         3,968         —          3,968   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 6,103       $ (1,427   $ 4,676       $ 6,496       $ (1,070   $ 5,426   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

6


Table of Contents

Movements in intangible assets were due to the following:

 

     Product
licensing
rights
    Product
development
rights
 

December 31, 2011

   $ 1,458      $ 3,968   

Acquisition of product rights

     628        2,398   

Amortization of product rights

     (357     (3,419
  

 

 

   

 

 

 

September 30, 2012

   $ 1,729      $ 2,947   
  

 

 

   

 

 

 

The weighted-average period prior to the next extension or renewal for the 19 products comprising our product licensing rights intangible asset was 36 months at September 30, 2012.

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

 

     Amortization
expense
 

For the year ending:

  

September 30, 2013

   $ 2,874   

September 30, 2014

     777   

September 30, 2015

     287   

September 30, 2016

     197   

September 30, 2017

     98   

Note 5. Investment in KSCP:

Changes in our investment in KSCP during the nine months ended September 30, 2012 were as follows:

 

Investment in KSCP at January 1, 2012

   $ 20,888   

Equity in net loss of KSCP

     (3,137

Currency translation adjustment

     641   

Investments in KSCP

     130   
  

 

 

 

Investment in KSCP at September 30, 2012

   $ 18,522   
  

 

 

 

Condensed statement of operations information of KSCP is presented below.

 

     Three months ended September 30,     Nine months ended September 30,  
     2012     2011     2012     2011  

Condensed statement of operations information

        

Net revenues

   $ —        $ —        $ —        $ —     

Gross profit

     —          —          —          —     

Net loss

     (2,459     (1,782     (5,766     (4,839

Note 6. Accrued liabilities:

Accrued liabilities at September 30, 2012 and December 31, 2011 were as follows:

 

     September 30,      December 31,  
     2012      2011  

Payroll and employee benefits

   $ 3,213       $ 2,222   

Sales and marketing

     3,691         4,604   

Other accrued liabilities

     470         808   
  

 

 

    

 

 

 
   $ 7,374       $ 7,634   
  

 

 

    

 

 

 

 

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Note 7. Debt:

In February 2012, we entered into a Loan and Security Agreement with Silicon Valley Bank (the “SVB Agreement”). The SVB Agreement provides for a $40,000 asset based revolving loan facility, with availability subject to a borrowing base consisting of eligible accounts receivable and inventory and the satisfaction of conditions precedent specified in the SVB Agreement. The SVB Agreement matures on February 13, 2016, at which time all outstanding amounts will become due and payable. Borrowings under the SVB Agreement may be used for general corporate purposes, including funding working capital. Amounts drawn bear an interest rate equal to, at our option, either a Eurodollar rate plus 2.50% per annum or an alternative base rate plus 1.50% per annum. We also pay a commitment fee on undrawn amounts equal to 0.30% per annum. The SVB Agreement contains various covenants and restrictions, including covenants requiring us to maintain a minimum adjusted quick ratio and a minimum level of free cash flow, and restrictions on our ability to incur additional indebtedness, make certain investments, create liens, pay dividends, sell assets or enter into a merger or acquisition. During the continuance of an event of default, at Silicon Valley Bank’s option, all obligations will bear interest at a rate per annum equal to 5.00% per annum above the otherwise applicable rate. At March 31, 2012, we were in default of the free cash flow covenant in the SVB Agreement. On May 10, 2012, Silicon Valley Bank agreed to waive the covenant at March 31, 2012 and modified the covenant for the remainder of 2012. In connection with the waiver and modification, we paid a fee of $100. As of September 30, 2012, no borrowings were outstanding and we were in compliance with all of our covenants under the SVB Agreement.

Concurrent with entering into the SVB Agreement, we repaid in full with cash on hand all outstanding amounts under our former term loan credit facility and senior secured revolving credit facility, plus certain associated fees, and terminated the agent’s and lender’s commitments to extend further credit under those facilities. Concurrent with the repayment and termination of these agreements, all liens and security interests against our property that secured the obligations under these agreements were released and discharged. Loans under the SVB Agreement are secured by a lien on substantially all of our and our principal operating subsidiary’s assets, other than our equity interests in our joint ventures and certain other limited exceptions.

As part of the termination of these prior agreements, we were required to pay to the lenders under those facilities $1,500 of early termination fees and a $600 exit fee associated with the term loan credit facility; however, $1,050 of such fees owing to Silicon Valley Bank under these agreements were deferred in connection with the execution of the SVB Agreement and will only be payable upon the occurrence of certain early termination events as set forth in the SVB Agreement. We have accounted for the termination of these prior agreements as the extinguishment of the term loan credit facility, and the partial extinguishment of the senior secured revolving credit facility. We recorded $1,124 in the nine months ended September 30, 2012 to account for early termination fees and the acceleration of deferred financing costs related to the partial extinguishment of these facilities within interest expense in the condensed consolidated statement of operations.

Note 8. Fair value measurements:

Assets measured at fair value on a recurring basis as of September 30, 2012 consisted of the following:

 

     Total fair value      Quoted prices in
active markets
for identical
assets (Level 1)
     Significant other
observable
inputs (Level 2)
     Significant
unobservable
inputs
(Level 3)
 

Assets

           

Money market funds

   $ 15,412       $ 15,412       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Corporate bonds and notes

   $ 25,870       $ —         $ 25,870       $ —     

Commercial paper

     13,198         —           13,198         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Short-term investments

   $ 39,068       $ —         $ 39,068       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 54,480       $ 15,412       $ 39,068       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of our Level 2 investments is based on a combination of quoted market prices of similar securities and matrix pricing provided by third-party pricing services utilizing securities of similar quality and maturity.

 

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Assets measured at fair value on a recurring basis as of December 31, 2011 consisted of the following:

 

     Total fair value      Quoted prices in
active markets
for identical
assets (Level 1)
     Significant other
observable
inputs (Level 2)
     Significant
unobservable inputs
(Level 3)
 

Assets

           

Money market funds

   $ 25,373       $ 25,373       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Commercial paper

   $ 28,948       $ —         $ 28,948       $ —     

Corporate bonds and notes

     40,313         —           40,313         —     

US government securities

     4,500         —           4,500         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Short-term investments

   $ 73,761       $ —         $ 73,761       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 99,134       $ 25,373       $ 73,761       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no transfers of assets between Level 1 and Level 2 during the periods presented.

During the nine months ended September 30, 2011 changes in the fair value of our preferred stock warrants measured using significant unobservable inputs (Level 3), were comprised of the following:

 

     Nine months
ended
September 30,
2011
 

Balance at beginning of period

   $ 1,432   

Change in fair value of warrants

     838   

Exercise of warrants

     (2,270
  

 

 

 

Balance at end of period

   $ —     
  

 

 

 

In April 2011, the holder of our preferred stock warrants exercised all of the warrants concurrent with our initial public offering. Accordingly, no preferred stock warrants are outstanding at September 30, 2012 or December 31, 2011.

Note 9. Accumulated other comprehensive income:

Accumulated other comprehensive income at September 30, 2012 and December 31, 2011 is comprised of the following:

 

     September 30,
2012
     December 31,
2011
 

Currency translation adjustment, net of tax

   $ 2,892       $ 2,251   

Unrealized gains (losses) on available for sale securities, net of tax

     31         (89
  

 

 

    

 

 

 

Total accumulated other comprehensive income

   $ 2,923       $ 2,162   
  

 

 

    

 

 

 

Note 10. Earnings per share:

Basic earnings per share is calculated by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Because of their anti-dilutive effect, 2,403,630 and 1,767,977 common share equivalents, comprised of restricted stock and unexercised stock options, have been excluded from the calculation of diluted earnings per share for the three and nine month periods ended September 30, 2012 and 2011, respectively.

 

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The table below presents the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2012 and 2011:

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2012     2011     2012     2011  

Basic and dilutive numerator:

        

Net loss, as reported

   $ (3,750   $ (4,731   $ (16,755   $ (17,297

Denominator:

        

Weighted-average common shares outstanding - basic (in thousands)

     27,977        27,875        27,943        17,480   

Net effect of dilutive securities:

        

Stock options and restricted stock

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding - diluted (in thousands)

     27,977        27,875        27,943        17,480   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share (basic)

   $ (0.13   $ (0.17   $ (0.60   $ (0.99
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share (diluted)

   $ (0.13   $ (0.17   $ (0.60   $ (0.99
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 11. Stock-based compensation:

We granted 124,900 and 322,770 stock options during the three and nine months ended September 30, 2012, and granted 13,608 restricted stock units and 34,050 restricted stock awards during the nine months ended September 30, 2012. We granted 63,250 and 137,420 stock options during the three and nine months ended September 30, 2011, respectively. There were 47,341 and 92,228 stock options exercised during the three and nine months ended September 30, 2012, with an aggregate intrinsic value of $391 and $969, respectively.

Note 12. Net revenue by product:

Net revenue by product line is as follows:

 

     Three months ended September 30,      Nine months ended September 30,  
     2012      2011      2012      2011  

Therapeutic class:

           

Anti-infective

   $ 18,173       $ 20,122       $ 57,314       $ 42,562   

Critical care

     20,897         9,434         53,885         38,230   

Oncology

     10,359         11,725         19,190         23,087   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 49,429       $ 41,281       $ 130,389       $ 103,879   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 13. Management reorganization:

In August 2012, we completed a reorganization of our executive management team in which we eliminated certain positions within the Company. Costs associated with the reorganization, primarily severance related charges, were recognized during the third quarter and are reflected under the Management Reorganization caption in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2012.

Note 14. Related party transactions:

As of September 30, 2012 and December 31, 2011, respectively, we had a receivable of $485 and $298 from Sagent Agila LLC, which is expected to offset future profit-sharing payments. As of September 30, 2012 and December 31, 2011, respectively, we also had a deposit of $517 and $2,081 with our Sagent Agila LLC joint venture partner, Strides Arcolab International Limited (“Strides”), for future inventory purchases. These amounts are included within due from related party on the condensed consolidated balance sheets. As of September 30, 2012 and December 31, 2011, respectively, we had a payable of $3,838 and $4,303 to Sagent Agila LLC, principally for the acquisition of inventory and amounts due under profit-sharing arrangements. During the three and nine months ended September 30, 2012, Sagent Agila LLC distributed $4,385 and $5,510, respectively, of profit sharing receipts to its joint venture partners. As the Sagent Agila joint venture had sufficient cumulative earnings at September 30, 2012, our share of the distribution for the nine months ended September 30, 2012 has been treated as a dividend received in the condensed consolidated statements of cash flows.

 

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Note 15. Commitments and contingencies:

From time to time, we are subject to claims and litigation arising in the normal course of business. At this time, there are no proceedings of which we are aware that we expect will have a material adverse effect on our consolidated financial position or results of operations.

 

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

The following discussion should be read in conjunction with our condensed consolidated financial statements included elsewhere in this report and with our audited financial statements and the notes found in our most recent Annual Report on Form 10-K filed with the SEC on March 29, 2012. Unless otherwise noted, all dollar amounts are in thousands.

Disclosure Regarding Forward-Looking Statements

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

The forward-looking statements contained in this Quarterly Report on Form 10-Q are subject to a number of risks and uncertainties, and the cautionary statements set forth below, as well as elsewhere in this Quarterly Report on Form 10-Q, and those contained in Item 1A under the heading “Risk Factors” in our most recent Annual Report on Form 10-K filed with the SEC on March 29, 2012, identify important factors that could cause actual results to differ materially from those indicated by our forward-looking statements. Such factors, include, but are not limited to:

 

   

we rely on our business partners for the manufacture of our products, and if our business partners fail to supply us with high-quality active pharmaceutical ingredient (“API”) or finished products in the quantities we require on a timely basis, sales of our products could be delayed or prevented, our revenues could decline and we may not achieve profitability;

 

   

if we or any of our business partners are unable to comply with the quality and regulatory standards applicable to pharmaceutical drug manufacturers, or if approvals of pending applications are delayed as a result of quality or regulatory compliance concerns or merely backlogs at the US Food and Drug Administration (“FDA”), we may be unable to meet the demand for our products, may lose potential revenues and may not achieve profitability;

 

   

changes in the regulations, enforcement procedures or regulatory policies established by the FDA and other regulatory agencies are expected to increase the costs and time of development of our products and could delay or prevent sales of our products and our revenues could decline and we may not achieve profitability;

 

   

three of our products, heparin, levofloxacin in pre-mix bags, and cefepime, each of which is supplied to us by a single vendor, represent a significant portion of our net revenues and, if the volume or pricing of any of these products declines, or we are unable to satisfy market demand for these products, it could have a material adverse effect on our business, financial position and results of operations;

 

   

we participate in highly competitive markets, dominated by a few large competitors, and if we are unable to compete successfully, our revenues could decline and our future profitability could be jeopardized;

 

   

if we are unable to continue to develop and commercialize new products in a timely and cost-effective manner, we may not achieve our expected revenue growth or profitability or such revenue growth and profitability, if any, could be delayed;

 

   

if we are unable to maintain our GPO and distributor relationships, our revenues could decline and future profitability would be jeopardized;

 

   

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

 

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

 

   

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

 

   

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

 

   

current and future decline of national and international economic conditions could adversely affect our operations;

 

   

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

 

   

we may never realize the expected benefits from our investment in our KSCP joint venture in China and the joint venture may require additional capital investment to continue its operations; and

 

   

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

We derive many of our forward-looking statements from our work in preparing, reviewing and evaluating our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, it is impossible for us to anticipate or accurately calculate the impact of all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, include, but are not limited to, those disclosed in this Quarterly Report on Form 10-Q, including under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and those disclosed in Item 1A under the heading “Risk Factors” in our most recent Annual Report on Form 10-K filed with the SEC on March 29, 2012. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties.

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

Introduction

We are a specialty pharmaceutical company that develops and sources products that we sell primarily in the United States of America through our highly experienced sales and marketing team.

With a primary focus on generic injectable pharmaceuticals, we offer our customers a broad range of products across anti-infective, oncolytic and critical care indications in a variety of presentations, including single- and multi-dose vials, pre-filled ready-to-use syringes and premix bags. We generally seek to develop injectable products including those where the form or packaging of the product can be enhanced to improve delivery, product safety or end-user convenience. Our management team includes industry veterans who have previously served critical functions at other injectable pharmaceutical companies and key customer groups and have long-standing relationships with customers, regulatory agencies, and suppliers. We have rapidly established a growing and diverse product portfolio and product pipeline as a result of our innovative business model, which combines an extensive network of international development, sourcing and manufacturing collaborations with our proven and experienced U.S.-based regulatory, quality assurance, business development, project management, and sales and marketing teams.

 

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Non-GAAP Financial Measures

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

Adjusted Gross Profit

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

 

     Three months ended
September 30,
                  % of net revenues,
three months ended
September 30,
       
     2012      2011      $ Change     

%

Change

    2012     2011     % Change  

Adjusted Gross Profit

   $ 9,489       $ 7,375       $ 2,114         29     19.2     17.9     1.3

Sagent share of gross profit earned by Sagent Agila joint venture

     2,268         438         1,830         418     4.6     1.1     3.5
  

 

 

    

 

 

    

 

 

          

Gross Profit

   $ 7,221       $ 6,937       $ 284         4     14.6     16.8     (2.2 )% 
  

 

 

    

 

 

    

 

 

          

 

     Nine months ended
September 30,
                  % of net revenues,
nine months ended
September 30,
       
     2012      2011      $ Change      %
Change
    2012     2011     % Change  

Adjusted Gross Profit

   $ 23,629       $ 15,629       $ 8,000         51     18.1     15.0     3.1

Sagent share of gross profit earned by Sagent Agila joint venture

     4,140         1,354         2,786         206     3.2     1.3     1.9
  

 

 

    

 

 

    

 

 

          

Gross Profit

   $ 19,489       $ 14,275       $ 5,214         37     14.9     13.7     1.2
  

 

 

    

 

 

    

 

 

          

EBITDA and Adjusted EBITDA

We use the non-GAAP financial measures “EBITDA” and “Adjusted EBITDA” and corresponding growth ratios. We define EBITDA as net loss less interest expense, net of interest income, provision for income taxes, depreciation and amortization. We define Adjusted EBITDA as net loss less interest expense, net of interest income, provision for income taxes, depreciation and amortization, stock-based compensation expense and the equity in net loss of our KSCP joint venture. We believe that EBITDA and Adjusted EBITDA are relevant and useful supplemental information for our investors. Our management believes that the presentation of these non-GAAP financial

 

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measures, when considered together with our GAAP financial measures and the reconciliation to the most directly comparable GAAP financial measures, provides a more complete understanding of the factors and trends affecting Sagent than could be obtained absent these disclosures. Management uses EBITDA, Adjusted EBITDA and corresponding ratios to make operating and strategic decisions and evaluate our performance. We have disclosed these non-GAAP financial measures so that our investors have the same financial data that management uses with the intention of assisting you in making comparisons to our historical operating results and analyzing our underlying performance. Our management believes that EBITDA and Adjusted EBITDA are useful supplemental tools to evaluate the underlying operating performance of the company on an ongoing basis. The limitation of these measures is that they exclude items that have an impact on net loss. The best way that these limitations can be addressed is by using EBITDA and Adjusted EBITDA in combination with our GAAP reported net loss. Because EBITDA and Adjusted EBITDA calculations may vary among other companies, the EBITDA and Adjusted EBITDA figures presented below may not be comparable to similarly titled measures used by other companies. Our use of EBITDA and Adjusted EBITDA is not meant to and should not be considered in isolation or as a substitute for, or superior to, any GAAP financial measure. You should carefully evaluate the following tables reconciling EBITDA and Adjusted EBITDA to our GAAP reported net loss for the periods presented.

 

     Three months ended September 30,              
     2012     2011     $ Change     % Change  

Adjusted EBITDA

   $ 1,004      $ (1,062   $ 2,066        195

Stock-based compensation expense

     1,641        566        1,075        190

Equity in net loss of KSCP joint venture

     1,115        809        306        38
  

 

 

   

 

 

   

 

 

   

EBITDA

   $ (1,752   $ (2,437   $ 685        28
  

 

 

   

 

 

   

 

 

   

Depreciation and amortization expense1

     2,006        1,175        831        71

Interest expense, net

     (8     1,119        (1,127     -101

Provision for income taxes

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

Net loss

   $ (3,750   $ (4,731   $ 981        21
  

 

 

   

 

 

   

 

 

   
     Nine months ended September 30,              
     2012     2011     $ Change     % Change  

Adjusted EBITDA

   $ (3,304   $ (8,580   $ 5,276        61

Stock-based compensation expense

     4,297        1,617        2,680        166

Equity in net loss of KSCP joint venture

     3,137        2,761        376        14
  

 

 

   

 

 

   

 

 

   

EBITDA

   $ (10,738   $ (12,958   $ 2,220        17
  

 

 

   

 

 

   

 

 

   

Depreciation and amortization expense1

     4,712        1,533        3,179        207

Interest expense, net

     1,305        2,806        (1,501     -53

Provision for income taxes

     —          —          —       
  

 

 

   

 

 

   

 

 

   

Net loss

   $ (16,755   $ (17,297   $ 542        3
  

 

 

   

 

 

   

 

 

   

 

1

Depreciation and amortization expense excludes $22 and $144 of amortization in the three months ended September 30, 2012 and 2011, respectively, and $486 and $332 in the nine months ended September 30, 2012 and 2011, respectively, related to deferred financing fees, which is included within interest expense and other in our Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011.

 

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Discussion and Analysis

Consolidated results of operations

The following compares our condensed consolidated results of operations for the three months ended September 30, 2012 with those of the three months ended September 30, 2011:

 

     Three months ended September 30,              
     2012     2011     $ change     % change  

Net revenue

   $ 49,429      $ 41,281      $ 8,148        20

Cost of sales

     42,208        34,344        7,864        23
  

 

 

   

 

 

   

 

 

   

Gross profit

     7,221        6,937        284        4

Gross profit as % of net revenues

     14.6     16.8     (2.2 )%   

Operating expenses:

        

Product development

     4,011        3,460        551        16

Selling, general and administrative

     7,169        6,688        481        7

Management reorganization

     739        —          739        100

Equity in net (income) loss of joint ventures

     (940     401        (1,341     334
  

 

 

   

 

 

   

 

 

   

Total operating expenses

     10,979        10,549        430        4
  

 

 

   

 

 

   

 

 

   

Loss from operations

     (3,758     (3,612     (146     -4

Interest income and other

     60        104        (44     -42

Interest expense

     (52     (1,223     1,171        96

Change in fair value of preferred stock warrants

     —          —          —          0
  

 

 

   

 

 

   

 

 

   

Loss before income taxes

     (3,750     (4,731     981        21

Provision for income taxes

     —          —          —          0
  

 

 

   

 

 

   

 

 

   

Net loss

   $ (3,750   $ (4,731   $ 981        21
  

 

 

   

 

 

   

 

 

   

Net loss per common share:

        

Basic

   $ (0.13   $ (0.17   $ 0.04        24

Diluted

   $ (0.13   $ (0.17   $ 0.04        24

Net revenue: Net revenue for the three months ended September 30, 2012 totaled $49.4 million, an increase of $8.1 million, or 20%, as compared to $41.3 million for the three months ended September 30, 2011. The launch of 33 new codes or presentations of 11 products since September 30, 2011 contributed $18.3 million in revenue during the third quarter of 2012. Net revenue for products launched prior to September 30, 2011 decreased $10.1 million, or 25%, to $31.1 million in the third quarter of 2012 due primarily to lower pricing of products initially launched in the third quarter of 2011.

Cost of sales: Cost of sales for the three months ended September 30, 2012 totaled $42.2 million, an increase of $7.9 million, or 23%, as compared to $34.3 million for the three months ended September 30, 2011. Gross profit as a percentage of net revenue was 14.6% for the three months ended September 30, 2012, and 16.8% for the three months ended September 30, 2011. The decrease in gross profit as a percentage of net revenue was driven primarily by reduced pricing on products initially launched in the third quarter of 2011. Adjusted Gross Profit as a percentage of net revenue was 19.2% for the three months ended September 30, 2012, and 17.9% for the three months ended September 30, 2011. The increase in Adjusted Gross Profit as a percentage of net revenue was driven primarily by the sale of rocuronium, of which there was a shortage during the third quarter of 2012 and oxaliplatin, which was launched at patent expiry, partially offset by reduced pricing on products initially launched in the third quarter of 2011.

Product development: Product development expense for the three months ended September 30, 2012 totaled $4.0 million, an increase of $0.6 million, or 16%, as compared to $3.5 million for the three months ended September 30, 2011. The increase in product development expense was primarily due to the timing of milestone payments and the purchase of API for our development programs, as the number of products under development has not changed significantly as compared with the third quarter of 2011.

 

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As of September 30, 2012, our new product pipeline included 32 products represented by 58 Abbreviated New Drug Applications (“ANDAs”) which we had filed, or licensed rights to, that were under review by the US Food and Drug Administration (“FDA”) and eight products represented by 15 ANDAs that have been recently approved and were pending commercial launch, including three ANDAs which were launched during October 2012. We expect to launch approximately half of these remaining new products by the end of 2013. We also had an additional 24 products represented by 28 ANDAs under initial development at September 30, 2012.

Selling, general and administrative: Selling, general and administrative expenses for the three months ended September 30, 2012, totaled $7.2 million, an increase of $0.5 million, or 7%, as compared to $6.7 million for the three months ended September 30, 2011. The increase in selling, general and administrative expense was primarily due to additional stock compensation expense. Selling, general and administrative expense as a percentage of net revenue was 15% and 16% for the three months ended September 30, 2012 and 2011, respectively.

Management reorganization: Restructuring expenses, primarily severance related charges in connection with eliminated positions, for the three months ended September 30, 2012 totaled $0.7 million. There were no such restructuring expenses in the three months ended September 30, 2011.

Equity in net (income) loss of joint ventures: Equity in net income of joint ventures for the three months ended September 30, 2012 totaled $0.9 million, an increase of $1.3 million, or 334%, as compared to equity in net loss of joint ventures of $0.4 million for the three months ended September 30, 2011. The increase was primarily due to increased income generated by the Sagent Agila joint venture, partially offset by losses of our KSCP joint venture primarily due to its additional development activities. Included in this amount are the following (amounts in thousands of dollars):

 

     Three Months Ended September 30,  
     2012     2011  

Sagent Agila LLC – Earnings directly related to the sale of product

   $ (2,268   $ (438

Sagent Agila LLC – Product development costs

     213        30   

Kanghong Sagent (Chengdu) Pharmaceutical Co – net loss

     1,115        809   
  

 

 

   

 

 

 

Equity in net (income) loss of joint ventures

   $ (940   $ 401   
  

 

 

   

 

 

 

Interest expense: Interest expense for the three months ended September 30, 2012 was $0.1 million, a decrease of $1.2 million, or 96%, as compared to $1.2 million, for the three months ended September 30, 2011. The decrease was due to lower borrowings outstanding during the three months ended September 30, 2012, as we did not borrow against our new SVB revolving loan facility during the third quarter of 2012.

Provision for income taxes: We have generated tax losses since inception and do not believe that it is more likely than not that our net operating loss carryforwards and other deferred tax assets will be utilized. As a result, we have decided that a full valuation allowance is required against our deferred tax assets. Because none of our current net operating loss carryforwards expire before 2027, we expect that we will have a reasonable opportunity to utilize all of these loss carryforwards before they expire, but such loss carryforwards will be usable only to the extent that we generate sufficient taxable income.

Net loss and net loss per common share: The net loss for the three months ended September 30, 2012 of $3.8 million decreased by $1.0 million, or 21%, from the $4.7 million net loss for the three months ended September 30, 2011. Net loss per common share decreased by $0.04, or 24%. The decrease in net loss per common share is due to the following factors:

 

Basic and diluted EPS for the three months ended September 30, 2011

   $ (0.17

Increases in operations

     0.04   

Increase in common shares outstanding

     0.00   
  

 

 

 

Basic and diluted EPS for the three months ended September 30, 2012

   $ (0.13
  

 

 

 

 

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Adjusted EBITDA: Adjusted EBITDA for the three months ended September 30, 2012 was $1.0 million, an increase of $2.1 million, or 195%, from negative $1.1 million for the three months ended September 30, 2011. The improvement in Adjusted EBITDA is driven by the increase in Adjusted Gross Profit and reduced selling, general and administrative expense cash expenditures.

The following compares our condensed consolidated results of operations for the nine months ended September 30, 2012 with those of the nine months ended September 30, 2011:

 

    

Nine months ended

September 30,

             
     2012     2011     $ change     % change  

Net revenue

   $ 130,389      $ 103,879      $ 26,510        26

Cost of sales

     110,900        89,604        21,296        24
  

 

 

   

 

 

   

 

 

   

Gross profit

     19,489        14,275        5,214        37

Gross profit as % of net revenues

     14.9     13.7     1.2  

Operating expenses:

        

Product development

     12,700        8,191        4,509        55

Selling, general and administrative

     22,089        18,139        3,950        22

Management reorganization

     739        —          739        100

Equity in net (income) loss of joint ventures

     (589     1,598        (2,187     137
  

 

 

   

 

 

   

 

 

   

Total operating expenses

     34,939        27,928        7,011        25
  

 

 

   

 

 

   

 

 

   

Loss from operations

     (15,450     (13,653     (1,797     -13

Interest income and other

     210        179        31        17

Interest expense

     (1,515     (2,985     1,470        49

Change in fair value of preferred stock warrants

     —          (838     838        100
  

 

 

   

 

 

   

 

 

   

Loss before income taxes

     (16,755     (17,297     542        3

Provision for income taxes

     —          —          —          0
  

 

 

   

 

 

   

 

 

   

Net loss

   $ (16,755   $ (17,297   $ 542        3
  

 

 

   

 

 

   

 

 

   

Net loss per common share:

        

Basic

   $ (0.60   $ (0.99   $ 0.39        39

Diluted

   $ (0.60   $ (0.99   $ 0.39        39

Net revenue: Net revenue for the nine months ended September 30, 2012 totaled $130.4 million, an increase of $26.5 million, or 26%, as compared to $103.9 million for the nine months ended September 30, 2011. The launch of 33 codes or presentations of 11 products since September 30, 2011 contributed $27.3 million of the net revenue increase in the current period. Net revenue for products launched prior to September 30, 2011 decreased $0.8 million, or 1%, to $103.1 million in the first nine months of 2012, due primarily to lower pricing, especially on our heparin and gemcitabine products, partially offset by increased volumes, mainly from products launched during the third quarter of 2011.

Cost of sales: Cost of sales for the nine months ended September 30, 2012 totaled $110.9 million, an increase of $21.3 million, or 24%, as compared to $89.6 million for the nine months ended September 30, 2011. Gross profit as a percentage of net revenue was 14.9% for the nine months ended September 30, 2012, and 13.7% for the nine months ended September 30, 2011. The increase in gross profit as a percentage of net revenue was driven primarily by the sale of $1.2 million of heparin previously reserved as excess inventories. Adjusted Gross Profit as a percentage of net revenue was 18.1% for the nine months ended September 30, 2012, and 15.0% for the nine months ended September 30, 2011. The increase in Adjusted Gross Profit as a percentage of net revenue was driven primarily by the sale of higher value products, including rocuronium, which was on shortage during the third quarter of 2012 and oxaliplatin, which was launched at patent expiry, partially offset by reduced pricing on products initially launched in the third quarter of 2011.

 

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Product development: Product development expense for the nine months ended September 30, 2012 totaled $12.7 million, an increase of $4.5 million, or 55%, as compared to $8.2 million for the nine months ended September 30, 2011. The increase in product development expense was primarily due to the timing of milestone payments and the purchase of API for our development programs, as the number of products under development has not changed significantly as compared with the first nine months of 2011.

Selling, general and administrative: Selling, general and administrative expenses for the nine months ended September 30, 2012, totaled $22.1 million, an increase of $4.0 million, or 22%, as compared to $18.1 million for the nine months ended September 30, 2011. The increase in selling, general and administrative expense was primarily due to increases in stock compensation expense and increases in headcount to support our continued growth and manage the requirements of operating as a public company. Selling, general and administrative expense as a percentage of net revenue was 17% for both the nine months ended September 30, 2012 and 2011.

Equity in net (income) loss of joint ventures: Equity in net income of joint ventures for the nine months ended September 30, 2012 totaled $0.6 million, an increase of $2.2 million, or 137%, as compared to equity in net loss of joint ventures of $1.6 million for the nine months ended September 30, 2011. The increase was primarily due to increased income generated by the Sagent Agila joint venture, partially offset by additional losses of our KSCP joint venture primarily due to its development activities. Included in this amount are the following (in thousands of dollars).

 

     Nine Months Ended September 30,  
     2012     2011  

Sagent Agila LLC – Earnings directly related to the sale of product

   $ (4,141   $ (1,354

Sagent Agila LLC – Product development costs

     415        191   

Kanghong Sagent (Chengdu) Pharmaceutical Co – net loss

     3,137        2,761   
  

 

 

   

 

 

 

Equity in net (income) loss of joint ventures

   $ (589   $ 1,598   
  

 

 

   

 

 

 

Interest expense: Interest expense for the nine months ended September 30, 2012 totaled $1.5 million, a decrease of $1.5 million, or 49%, as compared to $3.0 million for the nine months ended September 30, 2011. The decrease was principally due to lower borrowings during 2012, partially offset by $0.8 million of fees and the write-off of $0.4 million of deferred financing costs associated with the early termination and partial extinguishment of our senior secured revolving and term loan credit facilities in February 2012. We did not draw against the SVB revolving loan facility following our entry into this agreement in February 2012. Excluding fees associated with the early termination of our credit facilities, interest expense for the nine months ended September 30, 2012 was $0.4 million.

Provision for income taxes: We have generated tax losses since inception and do not believe that it is more likely than not that our net operating loss carryforwards and other deferred tax assets will be utilized. As a result, we have decided that a full valuation allowance is required against our deferred tax assets. Because none of our current net operating loss carryforwards expire before 2027, we expect that we will have a reasonable opportunity to utilize all of these loss carryforwards before they expire, but such loss carryforwards will be usable only to the extent that we generate sufficient taxable income.

Net loss and net loss per common share: The net loss for the nine months ended September 30, 2012 of $16.8 million decreased by $0.5 million, or 3%, from the $17.3 million net loss for the nine months ended September 30, 2011. Net loss per common share decreased by $0.39, or 39%. The decrease in net loss per common share is due to the following factors:

 

Basic and diluted EPS for the nine months ended September 30, 2011

   $ (0.99

Increase in operations

     0.02   

Increase in common shares outstanding

     0.37   
  

 

 

 

Basic and diluted EPS for the nine months ended September 30, 2012

   $ (0.60
  

 

 

 

 

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Adjusted EBITDA: Adjusted EBITDA for the nine months ended September 30, 2012 of negative $3.3 million increased by $5.3 million, or 61%, from negative $8.6 million for the nine months ended September 30, 2011. The improvement in Adjusted EBITDA is driven predominately by the increased cash earnings of the business during the nine months ended September 30, 2012, as our Adjusted Gross Profit increased by $8.0 million during the period, partially offset by increased selling, general and administrative cash expenditures.

Liquidity and Capital Resources

Funding Requirements

As of September 30, 2012, we have not generated any operating profit and may not in the near term. We expect our continuing operating losses to result in the continued use of cash for operations. Our future capital requirements will depend on a number of factors, including the continued commercial success of our existing products, launching the 40 products that are represented by our 73 ANDAs that have been recently approved and are pending commercial launch or are pending approval by the FDA as of September 30, 2012, successfully identifying and sourcing other new product opportunities, and business acquisition activity.

Based on our existing business plan, we expect our cash, cash equivalents and short-term investments of approximately $65.9 million as of September 30, 2012, together with borrowings available under our SVB revolving loan facility, will be sufficient to fund our planned operations, including the continued development of our product pipeline, for at least the next 12 months. However, we may require additional funds in the event we change our business plan, pursue strategic transactions, including the acquisition of businesses or products, or encounter unexpected developments, including unforeseen competitive conditions within our product markets, changes in the regulatory environment or the loss of key relationships with suppliers, group purchasing organizations or end-user customers.

If required, additional funding may not be available to us on acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our stockholders. For example, if we raise additional funds by issuing equity securities or by selling convertible debt securities, further dilution to our existing stockholders may result. To the extent our capital resources are insufficient to meet our future capital requirements, we will need to finance our future cash needs through public or private equity offerings or debt financings, which may not be available to us on terms we consider acceptable or at all.

If adequate funds are not available, we may be required to terminate, significantly modify or delay the development or commercialization of new products. We may elect to raise additional funds even before we need them if we believe that the conditions for raising capital are favorable.

Cash Flows

Overview

On September 30, 2012, cash and cash equivalents on hand totaled $26.8 million. Short-term investments, generally U.S. government or investment grade corporate debt securities with a remaining term of two years or less, totaled $39.1 million. Working capital totaled $103.1 million and our current ratio (current assets to current liabilities) was approximately 3.7 to 1.0.

Sources and Uses of Cash

Operating activities: Net cash used in operating activities was $18.4 million for the nine months ended September 30, 2012, compared with $31.2 million during the nine months ended September 30, 2011. The decrease in the use of cash was primarily due to improvements in our adjusted EBITDA and reductions in working capital relative to 2011.

Investing activities: Net cash provided by investing activities was $30.5 million for the nine months ended September 30, 2012, compared to $80.5 million net cash used in investing activities during the nine months ended September 30, 2011. The change in cash flows from investing activities relates primarily to the net sale of short-term investments of $34.0 million to repay in full all amounts due under our term loan and senior secured revolving credit facilities in February 2012. Net cash used in investing activities during the nine months ended September 30, 2011 included $77.6 million from the net purchase of short-term investments.

 

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Financing activities: Net cash used in financing activities was $37.4 million for the nine months ended September 30, 2012, primarily related to the repayment in full of all outstanding amounts due under our term loan and senior secured revolving credit facilities in February 2012. Net cash provided by financing activities of $114.8 million for the nine months ended September 30, 2011 included $101.6 million in proceeds from our initial public offering and $15.0 million in proceeds from borrowings related to the term loan credit facility.

Asset based revolving loan facility

In February 2012, we entered into a Loan and Security Agreement with Silicon Valley Bank (the “SVB Agreement”). The SVB Agreement provides for a $40.0 million asset based revolving loan facility, with availability subject to a borrowing base consisting of eligible accounts receivable and inventory and the satisfaction of conditions precedent specified in the SVB Agreement. The SVB Agreement matures on February 13, 2016, at which time all outstanding amounts will become due and payable. Borrowings under the SVB Agreement may be used for general corporate purposes, including funding working capital. Amounts drawn bear an interest rate equal to, at our option, either a Eurodollar rate plus 2.50% per annum or an alternative base rate plus 1.50% per annum. We also pay a commitment fee on undrawn amounts equal to 0.30% per annum. The SVB Agreement contains various covenants and restrictions, including covenants requiring us to maintain a minimum adjusted quick ratio and a minimum level of free cash flow, and restrictions on our ability to incur additional indebtedness, make certain investments, create liens, pay dividends, sell assets or enter into a merger or acquisition. During the continuance of an event of default, at Silicon Valley Bank’s option, all obligations will bear interest at a rate per annum equal to 5.00% per annum above the otherwise applicable rate.

As of September 30, 2012, there were no borrowings outstanding under our Silicon Valley Bank revolving loan facility. At March 31, 2012, we were not in compliance with the free cash flow covenant included in the SVB Agreement, which required that we achieve free cash flow, defined as net loss less interest expense, provision for income taxes, depreciation and amortization, stock-based compensation expense, equity in net loss of our KSCP joint venture, capital expenditures and capitalized product development costs of negative $2.0 million for the three months ended March 31, 2012. On May 10, 2012, Silicon Valley Bank waived our non-compliance with this covenant, and modified the free cash flow covenant for the remainder of 2012. In connection with the waiver and modification, we paid a fee of $0.1 million. We are in compliance with all of our covenants under the SVB Agreement at September 30, 2012.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

We have no off-balance sheet arrangements other than the contractual obligations that are discussed below and under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K filed with the SEC on March 29, 2012.

Aggregate Contractual Obligations:

The following table summarizes our long-term contractual obligations and commitments as of September 30, 2012. The actual amount that may be required in the future to repay borrowings under the SVB Agreement may be different, as a result of borrowings under the facility.

 

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     Payments due by period  

Contractual obligations (1)

   Total      Less than
one year
     1-3 years      3-5 years      More than
five years
 

Long-term debt obligations (2)

   $ —         $ —         $ —         $ —         $ —     

Operating lease obligations (3)

     1,279         286         599         394         —     

Contingent milestone payments (4)

     20,269         13,072         6,668         464         65   

Joint venture funding requirements (5)

     232         72         150         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 21,780       $ 13,430       $ 7,417       $ 858       $ 65   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

We had no material purchase commitments, individually or in the aggregate, under our manufacturing and supply agreements.

(2) 

No amounts were drawn under the SVB revolving loan facility as of September 30, 2012.

(3) 

Includes annual minimum lease payments related to non-cancelable operating leases.

(4) 

Includes management’s estimate for contingent potential milestone payments and fees pursuant to strategic business agreements for the development and marketing of finished dosage form pharmaceutical products assuming all contingent milestone payments occur. Does not include contingent royalty payments, which are dependent on the introduction of new products.

(5) 

Includes minimum funding requirements in connection with our existing joint ventures.

Critical Accounting Policies

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

We have identified the following critical accounting policies:

 

   

Revenue recognition;

 

   

Inventories;

 

   

Income taxes;

 

   

Stock-based compensation;

 

   

Valuation and impairment of marketable securities;

 

   

Product development; and

 

   

Intangible assets.

For a discussion of critical accounting policies affecting us, see the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” and under Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on March 29, 2012.

There have been no other material changes to the Company’s critical accounting policies and estimates since December 31, 2011.

New Accounting Guidance

See Note 1. Basis of Presentation – New Accounting Pronouncements, for a discussion of new accounting guidance.

 

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Contingencies

See Note 14. Commitments and Contingencies, and Part II, Item 1. Legal Proceedings for a discussion of contingencies.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Our market risks relate primarily to changes in interest rates. Our SVB revolving loan facility bears floating interest rates that are tied to LIBOR and an alternate base rate and, therefore our statements of operations and our cash flows will be exposed to changes in interest rates. As we had no borrowings outstanding at September 30, 2012, there is no impact related to potential changes in the LIBOR rate on our interest expense at September 30, 2012. We historically have not engaged in interest rate hedging activities related to our interest rate risk.

At September 30, 2012, we had cash and cash equivalents and short-term investments of $26.8 million and $39.1 million, respectively. Our cash and cash equivalents are held primarily in cash and money market funds, and our short-term investments are held primarily in corporate debt securities, including commercial paper. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates.

While we operate primarily in the U.S., we do have foreign currency considerations. We generally incur sales and pay our expenses in U.S. dollars. Our KSCP joint venture and substantially all of our business partners that supply us with API, product development services, finished products and manufacturing services are located in a number of foreign jurisdictions, and we believe they generally incur their respective operating expenses in local currencies. As a result, these business partners may be exposed to currency rate fluctuations and experience an effective increase in their operating expenses in the event their local currency appreciates against the U.S. dollar. In this event, such business partners may elect to stop providing us with these services or attempt to pass these increased costs back to us through increased prices. Historically we have not used derivatives to protect against adverse movements in currency rates.

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

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that the information is accumulated and communicated to our management, including our certifying officers, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Internal Control over Financial Reporting.

Management, together with our CEO and CFO, evaluated the changes in our internal control over financial reporting during the quarter ended September 30, 2012. We determined that there were no changes in our internal control over financial reporting during the quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time we are subject to claims and litigation arising in the ordinary course of business. At this time, there are no proceedings of which management is aware that are expected to have a material adverse effect on our consolidated financial position or results of operations.

Item 1A. Risk Factors.

There are no material changes from the risk factors previously disclosed in our most recent Annual Report on Form 10-K filed with the SEC on March 29, 2012.

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

Issuer Purchases of Equity Securities during the Quarter ended September 30, 2012

There are currently no share repurchase programs authorized by our Board of Directors. We made no repurchases of our common stock during the third quarter of 2012.

Recent Sales of Unregistered Securities

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

 

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Item 6. Exhibits.

 

Exhibit
Number

 

Description

    3.1   Certificate of Incorporation of Sagent Pharmaceuticals, Inc. (Incorporated by reference to Exhibit 3.3 in the Company’s Registration Statement on Form S-1, as amended (File Nos. 333-170979 and 333-173597)).
    3.2   Bylaws of Sagent Pharmaceuticals, Inc. (Incorporated by reference to Exhibit 3.4 in the Company’s Registration Statement on Form S-1, as amended (File Nos. 333-170979 and 333-173597)).
  10.1   Loan and Security Agreement, dated February 13, 2012, by and among Sagent Pharmaceuticals, Inc., Sagent Pharmaceuticals, and Silicon Valley Bank. (Incorporated by reference to Exhibit 10.1 to the Form 8-K filed February 16, 2012).
  10.2   First Loan Modification Agreement, dated May 10, 2012, by and among Sagent Pharmaceuticals, Inc., Sagent Pharmaceuticals, and Silicon Valley Bank. (Incorporated by Reference to Exhibit 10.2 to the Form 10-Q for the quarter ended March 31, 2012).
  31.1*   Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended
  31.2*   Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended
  32.1*   Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.1**   The following materials from Sagent’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 are formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011, (ii) the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011, (iii) the Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2012 and 2011, (iv) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011, (v) Notes to the Condensed Consolidated Financial Statements and (vi) document and entity information.

 

* Filed herewith
** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101.1 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  SAGENT PHARMACEUTICALS INC.
 

/s/ Jonathon M. Singer

 

Jonathon M. Singer

Executive Vice President and Chief Financial Officer

  November 8, 2012

 

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