e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30,
2009
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File
No. 001-15875
King Pharmaceuticals,
Inc.
(Exact name of registrant as
specified in its charter)
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Tennessee
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54-1684963
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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501 Fifth Street, Bristol, TN
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37620
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(Address of principal executive
offices)
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(Zip Code)
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(423) 989-8000
(Registrants telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Number of shares outstanding of registrants common stock
as of November 3, 2009: 248,242,387
PART I
FINANCIAL INFORMATION
|
|
Item 1.
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Financial
Statements
|
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September 30,
|
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December 31,
|
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2009
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|
2008
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|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
479,968
|
|
|
$
|
940,212
|
|
Investments in debt securities
|
|
|
39,624
|
|
|
|
6,441
|
|
Marketable securities
|
|
|
1,930
|
|
|
|
511
|
|
Accounts receivable, net of allowance of $3,966 and $4,713
|
|
|
227,030
|
|
|
|
245,070
|
|
Inventories
|
|
|
207,650
|
|
|
|
258,303
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|
Deferred income tax assets
|
|
|
100,577
|
|
|
|
89,513
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Income taxes receivable
|
|
|
12,051
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|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
99,374
|
|
|
|
129,214
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,168,204
|
|
|
|
1,669,264
|
|
|
|
|
|
|
|
|
|
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Property, plant and equipment, net
|
|
|
401,162
|
|
|
|
417,259
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|
Intangible assets, net
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|
|
822,589
|
|
|
|
934,219
|
|
Goodwill
|
|
|
453,008
|
|
|
|
450,548
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|
Deferred income tax assets
|
|
|
250,017
|
|
|
|
267,749
|
|
Investments in debt securities
|
|
|
292,034
|
|
|
|
353,848
|
|
Other assets (includes restricted cash of $16,649 and $16,580)
|
|
|
75,379
|
|
|
|
122,826
|
|
Assets held for sale
|
|
|
7,900
|
|
|
|
11,500
|
|
|
|
|
|
|
|
|
|
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Total assets
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|
$
|
3,470,293
|
|
|
$
|
4,227,213
|
|
|
|
|
|
|
|
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|
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current liabilities:
|
|
|
|
|
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Accounts payable
|
|
$
|
87,111
|
|
|
$
|
140,908
|
|
Accrued expenses
|
|
|
309,962
|
|
|
|
411,488
|
|
Income taxes payable
|
|
|
|
|
|
|
10,448
|
|
Short-term debt
|
|
|
4,101
|
|
|
|
5,230
|
|
Current portion of long-term debt
|
|
|
122,449
|
|
|
|
439,047
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
523,623
|
|
|
|
1,007,121
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
505,904
|
|
|
|
877,638
|
|
Other liabilities
|
|
|
105,358
|
|
|
|
110,022
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,134,885
|
|
|
|
1,994,781
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 10)
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|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
2,335,408
|
|
|
|
2,232,432
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
3,470,293
|
|
|
$
|
4,227,213
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
3
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Three Months Ended
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|
Nine Months Ended
|
|
|
|
September 30,
|
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|
September 30,
|
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|
|
2009
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|
2008
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|
2009
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|
2008
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|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net sales
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|
$
|
451,417
|
|
|
$
|
369,989
|
|
|
$
|
1,295,995
|
|
|
$
|
1,156,072
|
|
Royalty revenue
|
|
|
11,932
|
|
|
|
18,456
|
|
|
|
41,399
|
|
|
|
61,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
463,349
|
|
|
|
388,445
|
|
|
|
1,337,394
|
|
|
|
1,217,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues, exclusive of depreciation, amortization and
impairments shown below
|
|
|
162,797
|
|
|
|
101,465
|
|
|
|
469,829
|
|
|
|
295,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative, exclusive of
co-promotion
fees
|
|
|
134,315
|
|
|
|
93,291
|
|
|
|
390,885
|
|
|
|
307,102
|
|
Acquisition related costs
|
|
|
|
|
|
|
|
|
|
|
6,733
|
|
|
|
|
|
Co-promotion fees
|
|
|
1,427
|
|
|
|
5,987
|
|
|
|
4,022
|
|
|
|
34,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative expense
|
|
|
135,742
|
|
|
|
99,278
|
|
|
|
401,640
|
|
|
|
341,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
22,640
|
|
|
|
33,855
|
|
|
|
71,098
|
|
|
|
111,025
|
|
Research and
development-in-process
upon acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development
|
|
|
22,640
|
|
|
|
33,855
|
|
|
|
71,098
|
|
|
|
116,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
53,349
|
|
|
|
29,894
|
|
|
|
159,560
|
|
|
|
121,749
|
|
Asset impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,429
|
|
Restructuring charges (Note 14)
|
|
|
1,653
|
|
|
|
1,153
|
|
|
|
51,178
|
|
|
|
1,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
376,181
|
|
|
|
265,645
|
|
|
|
1,153,305
|
|
|
|
915,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
87,168
|
|
|
|
122,800
|
|
|
|
184,089
|
|
|
|
301,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,027
|
|
|
|
8,110
|
|
|
|
5,321
|
|
|
|
31,000
|
|
Interest expense
|
|
|
(22,218
|
)
|
|
|
(5,300
|
)
|
|
|
(72,913
|
)
|
|
|
(15,571
|
)
|
Gain (loss) on investments
|
|
|
521
|
|
|
|
|
|
|
|
(826
|
)
|
|
|
|
|
Other, net
|
|
|
1,526
|
|
|
|
(1,024
|
)
|
|
|
2,859
|
|
|
|
(1,851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(19,144
|
)
|
|
|
1,786
|
|
|
|
(65,559
|
)
|
|
|
13,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
68,024
|
|
|
|
124,586
|
|
|
|
118,530
|
|
|
|
315,314
|
|
Income tax expense
|
|
|
25,536
|
|
|
|
42,114
|
|
|
|
48,829
|
|
|
|
106,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
42,488
|
|
|
$
|
82,472
|
|
|
$
|
69,701
|
|
|
$
|
208,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
|
$
|
0.17
|
|
|
$
|
0.34
|
|
|
$
|
0.29
|
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share
|
|
$
|
0.17
|
|
|
$
|
0.34
|
|
|
$
|
0.28
|
|
|
$
|
0.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Balance at December 31, 2007
|
|
|
245,937,709
|
|
|
$
|
1,359,817
|
|
|
$
|
1,213,057
|
|
|
$
|
1,957
|
|
|
$
|
2,574,831
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
208,789
|
|
|
|
|
|
|
|
208,789
|
|
Net unrealized loss on investments in debt securities, net of
taxes of $8,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,897
|
)
|
|
|
(13,897
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,018
|
)
|
|
|
(1,018
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193,874
|
|
Stock-based award activity
|
|
|
531,630
|
|
|
|
21,617
|
|
|
|
|
|
|
|
|
|
|
|
21,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008
|
|
|
246,469,339
|
|
|
$
|
1,381,434
|
|
|
$
|
1,421,846
|
|
|
$
|
(12,958
|
)
|
|
$
|
2,790,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
246,487,232
|
|
|
$
|
1,389,698
|
|
|
$
|
871,021
|
|
|
$
|
(28,287
|
)
|
|
$
|
2,232,432
|
|
Adoption of FASB statement on other-than-temporary investments,
net of taxes of $396
|
|
|
|
|
|
|
|
|
|
|
646
|
|
|
|
(646
|
)
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
69,701
|
|
|
|
|
|
|
|
69,701
|
|
Reclassification of unrealized losses on investments in debt
securities, net of taxes of $542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
885
|
|
|
|
885
|
|
Net unrealized gain on marketable securities, net of tax of $539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
880
|
|
|
|
880
|
|
Net unrealized gain on investments in debt securities, net of
taxes of $3,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,472
|
|
|
|
5,472
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,227
|
|
|
|
3,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,165
|
|
Stock-based award activity
|
|
|
1,739,351
|
|
|
|
22,811
|
|
|
|
|
|
|
|
|
|
|
|
22,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009
|
|
|
248,226,583
|
|
|
$
|
1,412,509
|
|
|
$
|
941,368
|
|
|
$
|
(18,469
|
)
|
|
$
|
2,335,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows provided by operating activities
|
|
$
|
262,164
|
|
|
$
|
349,884
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Transfers to restricted cash
|
|
|
(69
|
)
|
|
|
(6
|
)
|
Purchases of investments in debt securities
|
|
|
|
|
|
|
(279,175
|
)
|
Proceeds from maturities and sales of investments in debt
securities
|
|
|
38,473
|
|
|
|
1,185,830
|
|
Purchases of property, plant and equipment
|
|
|
(29,608
|
)
|
|
|
(45,523
|
)
|
Proceeds from sale of property and equipment
|
|
|
337
|
|
|
|
10,390
|
|
Proceeds from the sale of
Kadian®
|
|
|
59,800
|
|
|
|
|
|
Acquisition of Alpharma
|
|
|
(70,230
|
)
|
|
|
|
|
Acquisition of
Avinza®
|
|
|
(8
|
)
|
|
|
(43
|
)
|
Forward foreign exchange contracts
|
|
|
(8,906
|
)
|
|
|
|
|
Purchases of intellectual property and product rights
|
|
|
(2,178
|
)
|
|
|
(7,890
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(12,389
|
)
|
|
|
863,583
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
1,742
|
|
|
|
347
|
|
Net payments related to stock-based award activity
|
|
|
(3,554
|
)
|
|
|
(2,372
|
)
|
Payments on long-term debt
|
|
|
(710,429
|
)
|
|
|
|
|
Debt issuance costs
|
|
|
(1,313
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(713,554
|
)
|
|
|
(2,025
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
3,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(460,244
|
)
|
|
|
1,211,442
|
|
Cash and cash equivalents, beginning of period
|
|
|
940,212
|
|
|
|
20,009
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
479,968
|
|
|
$
|
1,231,451
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
6
KING
PHARMACEUTICALS, INC.
September 30, 2009 and 2008
(In thousands, except share and per share data)
(Unaudited)
The accompanying unaudited interim condensed consolidated
financial statements of King Pharmaceuticals, Inc.
(King or the Company) were prepared by
the Company in accordance with the instructions to
Form 10-Q
and
Rule 10-01
of
Regulation S-X
and, accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of items of a normal recurring
nature) considered necessary for a fair presentation are
included. Operating results for the three and nine months ended
September 30, 2009 are not necessarily indicative of the
results that may be expected for the year ending
December 31, 2009. These unaudited interim condensed
consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes
thereto included in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2008. The year-end
condensed balance sheet was derived from the audited
consolidated financial statements and has been adjusted to
reflect adoption of a Financial Accounting Standards Board
(FASB) statement that requires the Company to
separately account for the liability and equity components of
its $400,000
11/4% Convertible
Senior Notes due April 1, 2026 (the Convertible
Senior Notes), but does not include all disclosures
required by generally accepted accounting principles. This FASB
statement was effective January 1, 2009 and required
retrospective application. Please see Note 9 for additional
information on its adoption.
These unaudited interim condensed consolidated financial
statements include the accounts of King and all of its
wholly-owned subsidiaries. All intercompany transactions and
balances have been eliminated in consolidation.
The Company has performed an evaluation of subsequent events
through November 5, 2009, which is the date the financial
statements were issued.
The basic and diluted net income per common share were
determined using the following share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Basic net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
244,963,911
|
|
|
|
243,695,777
|
|
|
|
244,515,264
|
|
|
|
243,475,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
244,963,911
|
|
|
|
243,695,777
|
|
|
|
244,515,264
|
|
|
|
243,475,338
|
|
Effect of stock options
|
|
|
115,844
|
|
|
|
84,090
|
|
|
|
47,087
|
|
|
|
52,631
|
|
Effect of dilutive share awards
|
|
|
3,185,797
|
|
|
|
2,054,129
|
|
|
|
2,807,487
|
|
|
|
1,655,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
248,265,552
|
|
|
|
245,833,996
|
|
|
|
247,369,838
|
|
|
|
245,183,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2009, the weighted
average shares that were anti-dilutive, and therefore excluded
from the calculation of diluted net income per share, included
options to purchase 5,010,109 shares of common stock, and
138,640 long-term performance units (LPUs). For the
nine months ended September 30, 2009, the weighted average
shares that were anti-dilutive, and therefore excluded from the
calculation of diluted net income per share included options to
purchase 6,356,694 shares of common stock, 202,632
restricted stock awards (RSAs) and 221,362 LPUs. For
the three months ended September 30, 2008, the weighted
average shares that were anti-dilutive, and therefore excluded
from the calculation of diluted net income per share, included
options to purchase 6,011,915 shares of common stock,
304,000 RSAs and 268,935 LPUs. For the nine months ended
September 30, 2008, the weighted average shares that were
anti-dilutive, and therefore
7
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
excluded from the calculation of diluted net income per share
included options to purchase 5,818,026 shares of common
stock, 373,653 RSAs and 455,515 LPUs. The Convertible Senior
Notes could be converted into the Companys common stock in
the future, subject to certain contingencies. Shares of the
Companys common stock associated with this right of
conversion were excluded from the calculation of diluted net
income per share because these notes are anti-dilutive since the
conversion price of the notes was greater than the average
market price of the Companys common stock for all periods
presented.
As previously disclosed, the Company has been involved in
multiple legal proceedings over patents relating to its product
Skelaxin®
(metaxalone). In January 2009, the U.S. District Court for
the Eastern District of New York issued an order ruling invalid
two of these patents. In June 2009, the Court entered judgment
against the Company. The Company has appealed the judgment and
intends to vigorously defend its interests. The entry of the
order may lead to generic versions of
Skelaxin®
entering the market sooner than previously anticipated, which
would likely cause the Companys sales of
Skelaxin®
to decline significantly. Net sales of
Skelaxin®
were $446,243 in 2008, and $102,080 and $304,857, respectively,
in the three and nine months ended September 30, 2009. For
additional information regarding
Skelaxin®
litigation, please see Note 10. For additional information
regarding
Skelaxin®
intangible assets, please see Note 8. For additional
information regarding
Skelaxin®
restructuring action, please see Note 14.
|
|
4.
|
Fair
Value Measurements
|
Cash and Cash Equivalents. The Company
considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. As of
September 30, 2009 and December 31, 2008, the
Companys cash and cash equivalents consisted of
institutional money market funds and bank time deposits. There
were no cumulative unrealized holding gains or losses associated
with these money market funds and time deposits as of
September 30, 2009 and December 31, 2008.
Derivatives. The Company had forward foreign
exchange contracts outstanding during the three and nine months
of 2009 on certain
non-U.S. cash
balances. The forward exchange contracts were not designated as
hedges. The Company recorded these contracts at fair value and
changes in fair value were recognized in current earnings. All
foreign exchange contracts expired in the third quarter of 2009.
In connection with the Companys acquisition of Alpharma on
December 29, 2008, the Company borrowed $425,000 in
principal under its Senior Secured Revolving Credit Facility
(Revolving Credit Facility) as amended on
December 5, 2008. The Company also borrowed $200,000
pursuant to the Senior Secured Term Facility (Term
Facility). The terms of the Revolving Credit Facility and
the Term Facility require the Company to maintain hedging
agreements that will fix the interest rates on 50% of the
Companys total outstanding long-term debt beginning
90 days after the amendment to the facility for a period of
two years. The Revolving Credit Facility and the Term Facility
have variable interest rates. The Convertible Senior Notes of
the Company are at a fixed interest rate. Accordingly, in March
2009, the Company entered into an interest rate swap agreement
on interest under the Revolving Credit Facility with an
aggregate notional amount of $112,500, which expires in March
2011. The interest rate swap was designated as a cash flow hedge
and was being used to offset the overall variability of cash
flows. For a cash flow hedge, the effective portion of the gain
or loss on the derivative is reported as a component of other
comprehensive income and reclassified into earnings in the
period during which the hedged transaction affects earnings. As
a result of the reduction of its variable rate long-term debt,
the Company maintains greater than 50% of its outstanding
long-term debt at fixed rates and therefore an interest rate
swap is no longer required. In September 2009, the Company
terminated the interest rate swap for $838 and recognized the
cost as interest expense in the third quarter 2009. For
additional information on the Revolving Credit Facility and the
Term Facility, please see Note 9.
8
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables summarize the effect of derivative
instruments on the condensed consolidated statements of
operations for the three and nine months ended
September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2009
|
|
Nine Months Ended September 30, 2009
|
|
|
|
|
Gain or
|
|
|
|
|
|
Gain or
|
|
|
|
|
|
|
(Loss)
|
|
|
|
|
|
(Loss)
|
|
|
|
|
|
|
Reclassified
|
|
|
|
|
|
Reclassified
|
|
|
|
|
Gain or
|
|
from
|
|
|
|
Gain or
|
|
from
|
|
|
|
|
(Loss) in
|
|
Accumulated
|
|
|
|
(Loss) in
|
|
Accumulated
|
|
|
|
|
Other
|
|
Other
|
|
|
|
Other
|
|
Other
|
|
|
|
|
Comprehensive
|
|
Comprehensive
|
|
Gain or
|
|
Comprehensive
|
|
Comprehensive
|
|
Gain or
|
|
|
Income on
|
|
Income into
|
|
(Loss)
|
|
Income on
|
|
Income into
|
|
(Loss)
|
|
|
Derivative
|
|
Income
|
|
Recorded
|
|
Derivative
|
|
Income
|
|
Recorded
|
|
|
(Effective
|
|
(Effective
|
|
(Ineffective
|
|
(Effective
|
|
(Effective
|
|
(Ineffective
|
Derivatives in Cash Flow Hedging Relationships
|
|
Portion)
|
|
Portion)
|
|
Portion)
|
|
Portion)
|
|
Portion)
|
|
Portion)
|
|
Interest rate swap
|
|
$
|
|
|
|
$
|
(232
|
)
|
|
$
|
(606
|
)
|
|
$
|
|
|
|
$
|
(232
|
)
|
|
$
|
(606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Nine Months
|
|
|
|
|
Ended September 30,
|
|
Ended September 30,
|
|
|
2009
|
|
2009
|
|
|
Gain or (Loss)
|
|
Gain or (Loss)
|
|
|
Recognized in
|
|
Recognized in
|
|
|
|
|
Income on
|
|
Income on
|
Derivatives not Designated as Hedging Instruments
|
|
Derivative Amount
|
|
Derivative Amount
|
|
Foreign currency contracts
|
|
|
Other income
|
|
|
$
|
(5,789
|
)
|
|
$
|
(5,360
|
)
|
Marketable Securities. As of
September 30, 2009 and December 31, 2008, the
Companys investment in marketable securities consisted
solely of Palatin Technologies, Inc. common stock with a cost
basis of $511. The cumulative unrealized holding gain in this
investment as of September 30, 2009 was $1,419. There were
no cumulative unrealized holding gains or losses in this
investment as of December 31, 2008.
Investments in Debt Securities. Tax-exempt
auction rate securities are long-term variable rate bonds tied
to short-term interest rates that are intended to reset through
an auction process generally every seven, 28 or 35 days.
The Company classifies auction rate securities as
available-for-sale
at the time of purchase. Temporary gains or losses are included
in accumulated other comprehensive income (loss) on the
Condensed Consolidated Balance Sheets.
Other-than-temporary
credit losses are included in Gain (loss) on investments in the
Condensed Consolidated Statements of Operations. Non-credit
related
other-than-temporary
losses are recorded in accumulated other comprehensive income
(loss) on the Consolidated Balance Sheets, as the Company has no
intent to sell the securities and believes that it is more
likely than not that it will not be required to sell the
securities prior to recovery.
As of September 30, 2009 and December 31, 2008, the
par value of the Companys investments in debt securities
was $377,175 and $417,075, respectively, and consisted solely of
tax-exempt auction rate securities associated with municipal
bonds and student loans. The Company has not invested in any
mortgage-backed securities or any securities backed by corporate
debt obligations. The Companys investment policy requires
it to maintain an investment portfolio with a high credit
quality. Accordingly, the Companys investments in debt
securities were limited to issues which were rated AA or higher
at the time of purchase.
On February 11, 2008, the Company began to experience
auction failures with respect to its investments in auction rate
securities. In the event of an auction failure, the interest
rate on the security is reset according to the contractual terms
in the underlying indenture. The funds associated with failed
auctions will not be accessible until a successful auction
occurs, the issuer calls or restructures the underlying
security, the underlying security matures or it is purchased by
a buyer outside the auction process.
Excluding the municipal bond discussed below, as of
September 30, 2009, there were cumulative unrealized
holding losses of $36,961 recorded in accumulated other
comprehensive income (loss) on the Condensed Consolidated
Balance Sheets associated with investments in debt securities
with a par value of $323,875, which were classified as available
for sale. All of these investments in debt securities have been
in continuous unrealized
9
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
loss positions for greater than twelve months. As of
September 30, 2009 the Company believed the decline
associated with the underlying securities was temporary and it
was probable that the par amount of these auction rate
securities would be collectible under their contractual terms.
The Company adopted as of April 1, 2009 a new FASB
statement that provides guidance in determining whether
impairments in debt securities are
other-than-temporary,
and modifies the presentation and disclosures surrounding such
instruments. During the fourth quarter of 2008, the Company
recognized unrealized losses of $6,832 in other income (expense)
for a municipal bond with a par value of $15,000 for which the
holding losses were determined to be
other-than-temporary.
The Company determined that $1,042 (or $646
net-of-tax)
of this previously recognized loss was non-credit related. Upon
the adoption of this statement, the Company was required to
reclassify this non-credit related loss from retained earnings
to accumulated other comprehensive income (loss). As of
September 30, 2009, there were cumulative unrealized
holding gains of $863 associated with this security recorded in
accumulated other comprehensive income (loss) on the Condensed
Consolidated Balance Sheets. For the three and nine months ended
September 30, 2009, no
other-than-temporary
impairment losses associated with available for sale investments
in debt securities were recognized.
During the second quarter of 2009, the Company sold certain
auction rate securities associated with student loans with a par
value of $20,350 for $18,923 to the issuer and realized a loss
of $1,427 in the Condensed Consolidated Statement of Operations.
During the fourth quarter of 2009, the Company received and
accepted offers from two separate issuers of certain auction
rate securities associated with student loans that were
outstanding at September 30, 2009 with par values totaling
$60,900 for $56,712. The estimated fair market value of these
auction rate securities at September 30, 2009 was $52,320.
The unrealized loss of $8,580 was recorded in accumulated other
comprehensive income (loss) on the accompanying Condensed
Consolidated Balance Sheet at September 30, 2009 as the
Company had no intent to sell and believed it was more likely
than not that it would not be required to sell the security
prior to recovery. During the fourth quarter of 2009 a realized
loss of $4,188 will be recorded in the Condensed Consolidated
Statement of Operations. The Company has not sold any other
investments in debt securities below par value during the
periods presented in the accompanying Condensed Consolidated
Statement of Operations.
During the fourth quarter of 2008, the Company accepted an offer
from UBS Financial Services, Inc. (UBS) providing
the Company the right to sell at par value certain auction rate
securities outstanding at September 30, 2009 with a par
value of $38,300 to UBS during the period from June 30,
2010 to July 2, 2012 (the right). The Company
has elected the fair value option to account for this right. As
a result, gains and losses associated with this right are
recorded in other income (expense) in the Condensed Consolidated
Statement of Operations. The value of the right to sell certain
auction rate securities to UBS was estimated considering the
present value of future cash flows, the fair value of the
auction rate security and counterparty risk. As of
September 30, 2009 and December 31, 2008, the fair
value of the right to sell the auction rate securities to UBS at
par was $3,611 and $4,024, respectively. With respect to this
right, during the third quarter and first nine months of 2009,
the Company recognized an unrealized gain of $44 and an
unrealized loss of $413, respectively, in other income (expense)
in the accompanying Condensed Consolidated Statement of
Operations.
In addition, during the fourth quarter of 2008, the Company
reclassified the auction rate securities that are included in
this right from
available-for-sale
securities to trading securities. As of September 30, 2009
and December 31, 2008, the fair value of the investments in
debt securities classified as trading was $34,671 and $36,007,
respectively. During the third quarter and first nine months of
2009, the Company recognized unrealized gains related to these
securities of $477 and $1,014, respectively, in other income
(expense) in the accompanying Condensed Consolidated Statement
of Operations.
As of September 30, 2009, the Company has classified
$39,624 of auction rate securities as current assets and
$292,034 as long-term assets.
10
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables summarize the Companys assets and
liabilities that are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at 9/30/2009 Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
9/30/2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
463,942
|
|
|
$
|
463,942
|
|
|
$
|
|
|
|
$
|
|
|
U.S. government securities
|
|
|
4,893
|
|
|
|
4,893
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
1,930
|
|
|
|
1,930
|
|
|
|
|
|
|
|
|
|
Investments in debt securities
|
|
|
331,658
|
|
|
|
|
|
|
|
|
|
|
|
331,658
|
|
Right to sell debt securities
|
|
|
3,611
|
|
|
|
|
|
|
|
|
|
|
|
3,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
806,034
|
|
|
$
|
470,765
|
|
|
$
|
|
|
|
$
|
335,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at 12/31/2008 Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
12/31/2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
833,653
|
|
|
$
|
833,653
|
|
|
$
|
|
|
|
$
|
|
|
Marketable securities
|
|
|
511
|
|
|
|
511
|
|
|
|
|
|
|
|
|
|
Investments in debt securities
|
|
|
360,289
|
|
|
|
|
|
|
|
2,400
|
|
|
|
357,889
|
|
Right to sell debt securities
|
|
|
4,024
|
|
|
|
|
|
|
|
|
|
|
|
4,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,198,477
|
|
|
$
|
834,164
|
|
|
$
|
2,400
|
|
|
$
|
361,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward foreign exchange contracts
|
|
$
|
2,582
|
|
|
$
|
|
|
|
$
|
2,582
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of marketable securities within the Level 1
classification is based on the quoted price for identical
securities in an active market as of the valuation date.
The fair value of investments in debt securities within the
Level 2 classification is at par based on public call
notices from the issuer of the security.
The fair value of investments in debt securities within the
Level 3 classification is based on a trinomial discount
model. This model considers the probability at the valuation
date of three potential occurrences for each auction event
through the maturity date of the security. The three potential
outcomes for each auction are (i) successful auction/early
redemption, (ii) failed auction and (iii) issuer
default. Inputs in determining the probabilities of the
potential outcomes include, but are not limited to, the
securitys collateral, credit rating, insurance,
issuers financial standing, contractual restrictions on
disposition and the liquidity in the market. The fair value of
each security is determined by summing the present value of the
probability-weighted future principal and interest payments
determined by the model. As of September 30, 2009, the
Company assumed a weighted average discount rate of
approximately 4.5% and an expected term of approximately three
to five years. The discount rate was determined as the
loss-adjusted required rate of return using public information
such as spreads on near-risk free to risk free assets. The
expected term is based on the Companys estimate of future
liquidity as of September 30, 2009. Transfers out of
Level 3 classification occur only when public call notices
have been announced by the issuer prior to the date of the
valuation.
11
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table provides a reconciliation of assets measured
at fair value on a recurring basis using significant
unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Beginning balance, January 1
|
|
$
|
361,913
|
|
|
$
|
|
|
Total gains or losses (realized/unrealized)
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
(823
|
)
|
|
|
|
|
Included in other comprehensive income (loss)
|
|
|
(4,300
|
)
|
|
|
(28,418
|
)
|
Settlements
|
|
|
(8,000
|
)
|
|
|
(154,950
|
)
|
Transfers in and/or out of Level 3
|
|
|
1,700
|
|
|
|
724,725
|
|
|
|
|
|
|
|
|
|
|
Ending balance, March 31
|
|
$
|
350,490
|
|
|
$
|
541,357
|
|
|
|
|
|
|
|
|
|
|
Total gains or losses (realized/unrealized)
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
(524
|
)
|
|
|
|
|
Included in other comprehensive income (loss)
|
|
|
13,781
|
|
|
|
(5,648
|
)
|
Settlements
|
|
|
(25,650
|
)
|
|
|
(151,425
|
)
|
Transfers in and/or out of Level 3
|
|
|
700
|
|
|
|
31,675
|
|
|
|
|
|
|
|
|
|
|
Ending balance, June 30
|
|
$
|
338,797
|
|
|
$
|
415,959
|
|
|
|
|
|
|
|
|
|
|
Total gains or losses (realized/unrealized)
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
521
|
|
|
|
|
|
Included in other comprehensive income (loss)
|
|
|
2,201
|
|
|
|
11,476
|
|
Settlements
|
|
|
(6,250
|
)
|
|
|
(11,700
|
)
|
Transfers in and/or out of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30
|
|
$
|
335,269
|
|
|
$
|
415,735
|
|
|
|
|
|
|
|
|
|
|
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Raw materials
|
|
$
|
83,550
|
|
|
$
|
82,273
|
|
Work-in-process
|
|
|
29,005
|
|
|
|
62,836
|
|
Finished goods (including $6,187 and $7,385 of sample inventory,
respectively)
|
|
|
150,982
|
|
|
|
176,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
263,537
|
|
|
|
321,691
|
|
Inventory valuation allowance
|
|
|
(55,887
|
)
|
|
|
(63,388
|
)
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
207,650
|
|
|
$
|
258,303
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Property,
Plant and Equipment
|
During the first quarter of 2009, the Company classified as held
for sale a pharmaceutical manufacturing facility which was
acquired as a result of the acquisition of Alpharma Inc. The
manufacturing facility is recorded at estimated fair value less
cost to sell. The Company finalized its determination of fair
value of this asset in the first quarter of 2009, reduced the
value by $3,600 and adjusted goodwill accordingly.
12
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The net book value of some of the Companys manufacturing
facilities currently exceeds fair market value. Management
currently believes that the long-term assets associated with
these facilities are not impaired based on estimated
undiscounted future cash flows. However, if the Company were to
approve a plan to sell or close any of the facilities for which
the carrying value exceeds fair market value, the Company would
have to write off a portion of the assets or reduce the
estimated useful life of the assets which would accelerate
depreciation.
|
|
7.
|
Acquisitions,
Dispositions, Co-Promotions and Alliances
|
On December 29, 2008, the Company completed its acquisition
of Alpharma Inc. (Alpharma). Alpharma had a growing
specialty pharmaceutical franchise in the U.S. pain market
with its
Flector®
Patch (diclofenac epolamine topical patch) 1.3% and a pipeline
of new pain medicines led by
Embedatm.
Alpharma is also a provider of medicated feed additives and
water-soluble therapeutics used primarily for poultry, cattle
and swine. The Company paid a cash price of $37.00 per share for
the outstanding shares of Class A Common Stock, together
with the associated preferred stock purchase rights of Alpharma,
totaling approximately $1,527,354, $61,120 associated with
Alpharma employee stock-based awards (which were paid in the
first quarter of 2009), and incurred $30,430 of expenses related
to the transaction, resulting in a total purchase price of
$1,618,904. Contemporaneously with the acquisition of Alpharma
and in accordance with a consent order with the
U.S. Federal Trade Commission (the FTC), the
Company divested Alpharmas
Kadian®
assets to Actavis Elizabeth, L.L.C.
(Actavis LLC).
Management believes the Companys acquisition of Alpharma
is particularly significant because it strengthens Kings
portfolio and development pipeline of pain management products
and increases its capabilities and expertise in this market. The
development pipeline provides the Company with both near-term
and long-term revenue opportunities and Alpharmas animal
health business further diversifies Kings revenue base. As
a result, management believes the acquisition of Alpharma
improves the Companys foundation for sustainable,
long-term growth.
The accompanying Condensed Consolidated Statement of Operations
for the three- and
nine-months
ended September 30, 2008 do not include any activity for
Alpharma because the Company acquired Alpharma in the fourth
quarter of 2008.
The allocation of the initial purchase price and acquisition
costs is as follows:
|
|
|
|
|
|
|
Valuation
|
|
|
Current assets
|
|
$
|
915,296
|
|
Current deferred income taxes
|
|
|
31,589
|
|
Property, plant and equipment
|
|
|
157,649
|
|
Intangible assets, net
|
|
|
300,000
|
|
Goodwill
|
|
|
323,858
|
|
In-process research and development
|
|
|
590,000
|
|
Other long-term assets
|
|
|
26,679
|
|
Current liabilities
|
|
|
(268,636
|
)
|
Convertible debentures
|
|
|
(385,227
|
)
|
Long-term deferred income taxes
|
|
|
(22,005
|
)
|
Other long-term liabilities
|
|
|
(50,299
|
)
|
|
|
|
|
|
Total purchase price
|
|
$
|
1,618,904
|
|
|
|
|
|
|
13
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The valuation of the intangible assets acquired is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Valuation
|
|
|
Amortization Period
|
|
|
Flector®
Patch
|
|
$
|
130,000
|
|
|
|
11 years
|
|
Animal Health intangibles
|
|
|
170,000
|
|
|
|
19 years
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None of the goodwill is expected to be deductible for tax
purposes. The goodwill has been allocated to the Companys
segments as follows:
|
|
|
|
|
Branded prescription pharmaceuticals
|
|
$
|
235,561
|
|
Animal Health
|
|
|
88,297
|
|
|
|
|
|
|
Total
|
|
$
|
323,858
|
|
|
|
|
|
|
The above allocation of the purchase price is not yet finalized
as the acquisition was completed close to the end of 2008 and
management is continuing its initial estimate of the valuation
of certain assets and liabilities. The most significant
valuation estimates that remain open as of September 30,
2009 are related to certain tax assets and liabilities, fixed
assets, and a lease liability.
The acquisition was financed with available cash on hand,
borrowings under the Revolving Credit Facility of $425,000 and
borrowings under the Term Facility of $200,000. For additional
information on the borrowings, please see Note 9.
As indicated above, $590,000 of the purchase price for Alpharma
was allocated to acquired in-process research and development
for the
Embedatm,
Oxycodone NT and Hydrocodone NT projects in the amounts of
$410,000, $90,000 and $90,000, respectively. The value of the
acquired in-process research and development projects was
expensed on the date of acquisition, as they had not received
regulatory approval at the time of the acquisition and had no
alternative future use. The projects were valued through the
application of probability-weighted, discounted cash flow
approach. The estimated cash flows were projected over periods
of 10 to 14 years utilizing a discount rate of 25% to 30%.
In August 2009, the U.S. Food and Drug Administration
(FDA) approved
Embedatm
(morphine sulfate and naltrexone hydrochloride) Extended Release
Capsules, a long-acting Schedule II opioid analgesic for
the management of
moderate-to-severe
pain when a continuous,
around-the-clock
opioid analgesic is needed for an extended period of time.
Oxycodone NT and Hydrocodone NT are long-acting opioids for the
treatment of moderate to severe chronic pain that are in the
early stages of clinical development. These products are
designed to resist certain common methods of misuse and abuse
associated with currently available oxycodone and hydrocodone
opioids. If the clinical development program is successful, the
Company would not expect to commercialize Oxycodone NT any
sooner than 2012 and Hydrocodone NT any sooner than 2015. The
estimated cost to complete the development of Oxycodone NT and
Hydrocodone NT is approximately $35,000 each. The Company
believes there is a reasonable probability of completing these
projects successfully, but the success of the projects depends
on the outcome of the clinical development programs and approval
by the FDA.
14
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following unaudited pro forma summary presents the financial
information as if the acquisition of Alpharma had occurred
January 1, 2008 for the three and nine months ended
September 30, 2008. These pro forma results have been
prepared for comparative purposes and do not purport to be
indicative of the Companys financial results had the
acquisition been made on January 1, 2008, nor are they
indicative of future results. The pro forma results for the nine
months ended September 30, 2008 do not include the $590,000
in-process research and development expense noted above.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30, 2008
|
|
September 30, 2008
|
|
Total revenues
|
|
$
|
513,001
|
|
|
$
|
1,581,042
|
|
Income from continuing operations
|
|
$
|
58,521
|
|
|
$
|
62,442
|
|
Net income
|
|
$
|
58,521
|
|
|
$
|
266,131
|
|
Basic net income per common share
|
|
$
|
0.24
|
|
|
$
|
1.09
|
|
Diluted net income per common share
|
|
$
|
0.24
|
|
|
$
|
1.09
|
|
In connection with the acquisition of Alpharma, the Company and
Alpharma executed a consent order (the Consent
Order) with the FTC. The Consent Order required the
Company to divest the assets related to Alpharmas branded
oral long-acting opioid analgesic drug
Kadian®
to Actavis LLC. In accordance with the Consent Order,
effective upon the acquisition of Alpharma, on December 29,
2008, the Company divested the
Kadian®
product to Actavis LLC. Actavis LLC is entitled to
sell
Kadian®
as a branded or generic product. Prior to the divestiture,
Actavis LLC supplied
Kadian®
to Alpharma.
Actavis LLC will pay a purchase price of up to an aggregate
of $127,500 in cash based on the achievement of certain
Kadian®
quarterly gross profit-related milestones for the period
beginning January 1, 2009 and ending June 30, 2010.
The maximum purchase price payment associated with each calendar
quarter is as follows:
|
|
|
|
|
|
|
Maximum
|
|
|
Purchase
|
|
|
Price Payment
|
|
First Quarter 2009
|
|
$
|
30,000
|
|
Second Quarter 2009
|
|
$
|
25,000
|
|
Third Quarter 2009
|
|
$
|
25,000
|
|
Fourth Quarter 2009
|
|
$
|
20,000
|
|
First Quarter 2010
|
|
$
|
20,000
|
|
Second Quarter 2010
|
|
$
|
7,500
|
|
None of the quarterly payments above, when combined with all
prior payments made by Actavis LLC, shall exceed the
aggregate amount of gross profits from the sale of
Kadian®
in the United States by Actavis LLC and its affiliates for
the period beginning on January 1, 2009 and ending on the
last day of such calendar quarter. Any quarterly purchase price
payment that is not paid by Actavis LLC due to the
application of such provision will be carried forward to the
next calendar quarter, increasing the maximum quarterly payment
in the subsequent quarter. However, the cumulative purchase
price payable by Actavis LLC will not exceed the lesser of
(a) $127,500 and (b) the gross profits from the sale
of
Kadian®
in the United States by Actavis LLC and its affiliates for
the period from January 1, 2009 through June 30, 2010.
The Company recorded a receivable of $115,000 at the time of the
divestiture, reflecting the present value of the estimated
future purchase price payments from Actavis LLC. There was
no gain or loss recorded as a result of the divestiture. In
accordance with the agreement, quarterly payments will be
received one quarter in arrears. During the third quarter of
2009 the Company received $25,000 from Actavis LLC related
to the second quarter of 2009 gross profit from sales.
During the first nine months of 2009 the Company received
$59,800 from Actavis LLC, $55,000 related to gross profit
from sales during the first and second quarters of 2009 and
$4,800 related to inventory sold to Actavis LLC at the time
of the divestiture.
15
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
Intangible
Assets and Goodwill
|
Intangible assets consist primarily of patents, licenses,
trademarks and product rights. A summary of the gross carrying
amount and accumulated amortization is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Branded prescription pharmaceuticals
|
|
$
|
1,252,300
|
|
|
$
|
727,881
|
|
|
$
|
1,252,300
|
|
|
$
|
627,233
|
|
Animal Health
|
|
|
170,000
|
|
|
|
7,167
|
|
|
|
170,000
|
|
|
|
|
|
Meridian Auto-Injector
|
|
|
182,587
|
|
|
|
47,480
|
|
|
|
179,879
|
|
|
|
41,281
|
|
Royalties
|
|
|
3,731
|
|
|
|
3,501
|
|
|
|
3,731
|
|
|
|
3,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
1,608,618
|
|
|
$
|
786,029
|
|
|
$
|
1,605,910
|
|
|
$
|
671,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the three months ended
September 30, 2009 and 2008 was $38,011 and $20,240,
respectively. Amortization expense for the nine months ended
September 30, 2009 and 2008 was $114,338 and $92,211,
respectively.
In January 2009, the U.S. District Court for the Eastern
District of New York issued an order ruling invalid two
Skelaxin®
patents. In June 2009, the Court entered judgment against the
Company. The Company has appealed, and intends to vigorously
defend its interests. The entry of the order may lead to generic
versions of
Skelaxin®
entering the market sooner than previously anticipated, which
would likely cause the Companys sales of
Skelaxin®
to decline significantly. The Company believes that the
intangible assets associated with
Skelaxin®
are not currently impaired based on estimated undiscounted cash
flows associated with these assets. However, as a result of the
order described above, the Company reduced the estimated
remaining useful life of the intangible assets of
Skelaxin®
during the first quarter of 2009. If the Companys current
estimates regarding future cash flows adversely change, the
Company may have to further reduce the estimated remaining
useful life
and/or write
off a portion or all of these intangible assets. As of
September 30, 2009, the net intangible assets associated
with
Skelaxin®
totaled approximately $56,856. For additional information
regarding
Skelaxin®
litigation, please see Note 10.
In April 2009, a competitor entered the market with a generic
substitute for
Cytomel®.
As a result, the Company lowered its future sales forecast for
this product. As of September 30, 2009, the net intangible
assets associated with
Cytomel®
totaled approximately $10,607. The Company believes that the
intangible assets associated with
Cytomel®
are not currently impaired based on estimated undiscounted cash
flows associated with these assets. However, if the
Companys current estimates regarding future cash flows
adversely change, the Company may have to reduce the estimated
remaining useful life
and/or write
off a portion or all of these intangible assets.
As a result of a decline in end-user demand for
Synercid®,
the Company lowered its future sales forecast for this product,
which decreased the estimated undiscounted future cash flows
associated with the
Synercid®
intangible assets to a level below their carrying value.
Accordingly, the Company recorded an intangible asset impairment
charge of $38,064 during the second quarter of 2008 to adjust
the carrying value of the
Synercid®
intangible assets on the Companys balance sheet to reflect
the estimated fair value of these assets. The Company determined
the fair value of the intangible assets associated with
Synercid®
based on its estimated discounted future cash flows.
Synercid®
is included in the Companys branded pharmaceutical
segment. If the Companys current estimates regarding
future cash flows adversely change, the Company may have to
reduce the estimated remaining useful life
and/or write
off an additional portion of the intangible assets. As of
September 30, 2009, the net intangible assets associated
with
Synercid®
totaled approximately $24,555.
16
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Goodwill at September 30, 2009 and December 31, 2008
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Animal
|
|
|
|
|
|
|
|
|
|
Branded
|
|
|
Health
|
|
|
Meridian
|
|
|
|
|
|
|
Segment
|
|
|
Segment
|
|
|
Segment
|
|
|
Total
|
|
|
Goodwill at December 31, 2008
|
|
$
|
258,092
|
|
|
$
|
84,046
|
|
|
$
|
108,410
|
|
|
$
|
450,548
|
|
Adjustment to Alpharma acquisition
|
|
|
(1,791
|
)
|
|
|
4,251
|
|
|
|
|
|
|
|
2,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill at September 30, 2009
|
|
$
|
256,301
|
|
|
$
|
88,297
|
|
|
$
|
108,410
|
|
|
$
|
453,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The adjustment to goodwill is due to managements
continuing initial estimation of the valuation of certain assets
and liabilities related to the Alpharma acquisition. During the
third quarter of 2009, the Company recorded a reserve of $42,500
related to an agreement in principle with the
U.S. Department of Justice (DOJ) as an
adjustment to goodwill associated with the purchase of Alpharma.
Evaluation of the DOJ investigation and therefore the allocation
period associated with this preacquisition contingency continued
into the third quarter of 2009. For additional information
regarding the DOJ investigation, please see Note 10.
During the first quarter of 2009, the Company recorded an
additional deferred tax asset of $28,856 as an adjustment to
goodwill associated with the purchase of Alpharma, for which
management obtained additional information about the status of
these assets as of the acquisition date.
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Convertible senior notes
|
|
$
|
327,713
|
|
|
$
|
314,416
|
|
Senior secured revolving credit facility
|
|
|
272,231
|
|
|
|
425,000
|
|
Senior secured term facility
|
|
|
28,409
|
|
|
|
192,042
|
|
Alpharma convertible senior notes
|
|
|
|
|
|
|
385,227
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
628,353
|
|
|
|
1,316,685
|
|
Less current portion
|
|
|
122,449
|
|
|
|
439,047
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
505,904
|
|
|
$
|
877,638
|
|
|
|
|
|
|
|
|
|
|
Convertible
Senior Notes
Effective January 1, 2009, the Company adopted the new FASB
statement that requires the liability and equity components of
convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) be separately
accounted for in a manner that reflects an issuers
nonconvertible debt borrowing rate. This statement requires
retrospective application to all periods presented.
The separate components of debt and equity of the Companys
Convertible Senior Notes were determined using an interest rate
of 7.13%, which reflects the nonconvertible debt borrowing rate
of the Company at the date of issuance. As a result, the initial
components of debt and equity were $271,267 and $128,733,
respectively. The debt component is being amortized
retrospectively beginning April 1, 2006 through
March 31, 2013.
17
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables reflect the changes in the Companys
previously reported results due to the adoption of this FASB
statement:
Condensed
Consolidated Statement of Operations
Three months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
|
|
|
|
|
As Currently
|
|
|
Prior to
|
|
|
Effect of
|
|
|
|
Reported
|
|
|
Adoption
|
|
|
Change
|
|
|
Depreciation and amortization
|
|
$
|
29,894
|
|
|
$
|
29,695
|
|
|
$
|
199
|
|
Total operating costs and expenses
|
|
|
265,645
|
|
|
|
265,446
|
|
|
|
199
|
|
Operating income
|
|
|
122,800
|
|
|
|
122,999
|
|
|
|
(199
|
)
|
Interest expense
|
|
|
(5,300
|
)
|
|
|
(1,828
|
)
|
|
|
(3,472
|
)
|
Total other income
|
|
|
1,786
|
|
|
|
5,258
|
|
|
|
(3,472
|
)
|
Income before income taxes
|
|
|
124,586
|
|
|
|
128,257
|
|
|
|
(3,671
|
)
|
Income tax expense
|
|
|
42,114
|
|
|
|
43,507
|
|
|
|
(1,393
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
82,472
|
|
|
$
|
84,750
|
|
|
$
|
(2,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
|
$
|
0.34
|
|
|
$
|
0.35
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share
|
|
$
|
0.34
|
|
|
$
|
0.34
|
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
88,905
|
|
|
$
|
91,183
|
|
|
$
|
(2,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statement of Operations
Nine months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
|
|
|
|
|
As Currently
|
|
|
Prior to
|
|
|
Effect of
|
|
|
|
Reported
|
|
|
Adoption
|
|
|
Change
|
|
|
Depreciation and amortization
|
|
$
|
121,749
|
|
|
$
|
121,198
|
|
|
$
|
551
|
|
Total operating costs and expenses
|
|
|
915,593
|
|
|
|
915,042
|
|
|
|
551
|
|
Operating income
|
|
|
301,736
|
|
|
|
302,287
|
|
|
|
(551
|
)
|
Interest expense
|
|
|
(15,571
|
)
|
|
|
(5,470
|
)
|
|
|
(10,101
|
)
|
Total other income
|
|
|
13,578
|
|
|
|
23,679
|
|
|
|
(10,101
|
)
|
Income before income taxes
|
|
|
315,314
|
|
|
|
325,966
|
|
|
|
(10,652
|
)
|
Income tax expense
|
|
|
106,525
|
|
|
|
110,562
|
|
|
|
(4,037
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
208,789
|
|
|
$
|
215,404
|
|
|
$
|
(6,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
|
$
|
0.86
|
|
|
$
|
0.88
|
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share
|
|
$
|
0.85
|
|
|
$
|
0.88
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
193,874
|
|
|
$
|
200,489
|
|
|
$
|
(6,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed
Consolidated Balance Sheet
As of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
|
|
|
As Currently
|
|
Prior to
|
|
Effect of
|
|
|
Reported
|
|
Adoption
|
|
Change
|
|
Property, plant and equipment, net
|
|
$
|
417,259
|
|
|
$
|
409,821
|
|
|
$
|
7,438
|
|
Deferred income tax assets
|
|
|
267,749
|
|
|
|
303,722
|
|
|
|
(35,973
|
)
|
Other assets
|
|
|
122,826
|
|
|
|
124,774
|
|
|
|
(1,948
|
)
|
Total assets
|
|
|
4,227,213
|
|
|
|
4,257,696
|
|
|
|
(30,483
|
)
|
Long-term debt
|
|
|
877,638
|
|
|
|
963,222
|
|
|
|
(85,584
|
)
|
Total liabilities
|
|
|
1,994,781
|
|
|
|
2,080,365
|
|
|
|
(85,584
|
)
|
Retained earnings
|
|
|
871,021
|
|
|
|
892,297
|
|
|
|
(21,276
|
)
|
Shareholders equity
|
|
|
2,232,432
|
|
|
|
2,177,331
|
|
|
|
55,101
|
|
Total liabilities and shareholders equity
|
|
|
4,227,213
|
|
|
|
4,257,696
|
|
|
|
(30,483
|
)
|
The Companys previously reported results as of
December 31, 2007 reflect a change of $76,377 in
Shareholders equity and a change of $(12,303) in Retained
earnings.
A summary of the gross carrying amount, unamortized debt cost
and the net carrying value of the liability component of the
Convertible Senior Notes are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
Gross carrying amount
|
|
$
|
400,000
|
|
|
$
|
400,000
|
|
Unamortized debt discount
|
|
|
72,287
|
|
|
|
85,584
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
$
|
327,713
|
|
|
$
|
314,416
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of 2009, Alpharma and its
U.S. subsidiaries became guarantors of the Convertible
Senior Notes.
The fair value of the Companys Convertible Senior Notes at
September 30, 2009 and December 31, 2008 was
approximately $344,000 and $293,000, respectively, using quoted
market prices.
Senior
Secured Revolving Credit Facility
During the three and nine months ended September 30, 2009,
the Company made payments of $18,584 and $152,769, respectively,
on the Revolving Credit Facility, $91,322 in excess of that
required by the terms of the Revolving Credit Facility during
the nine months ended September 30, 2009.
The availability for borrowing under the Revolving Credit
Facility was reduced to $336,511 as of September 30, 2009.
The remaining undrawn commitment amount under the Revolving
Credit Facility totals approximately $61,315 after giving effect
to outstanding letters of credit totaling $2,965.
In connection with the borrowings, the Company incurred
approximately $22,219 of deferred financing costs that are being
amortized ratably through the maturity date.
The fair value of the Revolving Credit Facility approximates its
carrying value. Changes in interest rates are reflected in
earnings and cash flow from operations.
Senior
Secured Term Facility
During the three and nine months ended September 30, 2009,
the Company made payments of $105,489 and $171,305,
respectively, on the Term Facility, $97,611 and $131,515,
respectively, in excess of that required by the repayment
schedule and the provisions related to mandatory prepayments
under the Senior Secured Term Facility.
19
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In connection with the borrowings, the Company incurred
approximately $8,738 of deferred financing costs that were
amortized ratably from the date of the borrowing based on the
Companys repayments.
The fair value of the Term Facility approximates its carrying
value. Changes in interest rates are reflected in earnings and
cash flow from operations.
In October 2009, the Company paid the outstanding balance of the
Term Facility, of $28,695, completing its repayment obligations
under the facility.
Alpharma
Convertible Senior Notes
At the time of the acquisition of Alpharma by the Company,
Alpharma had $300,000 of Convertible Senior Notes outstanding
(Alpharma Notes). The Alpharma Notes were
convertible into shares of Alpharmas Class A common
stock at an initial conversion rate of 30.6725 Alpharma common
shares per $1,000 principal amount. The conversion rate of the
Alpharma Notes was subject to adjustment upon the direct or
indirect sale of all or substantially all of Alpharmas
assets or more than 50% of the outstanding shares of the
Alpharma common stock to a third party (a Fundamental
Change). In the event of a Fundamental Change, the
Alpharma Notes included a make-whole provision that adjusted the
conversion rate by a predetermined number of additional shares
of Alpharmas common stock based on (1) the effective
date of the Fundamental Change and (2) Alpharmas
common stock market price as of the effective date. The
acquisition of Alpharma by the Company was a Fundamental Change.
As a result, any Alpharma Notes converted in connection with the
acquisition of Alpharma were entitled to be converted at an
increased rate equal to the value of 34.7053 Alpharma common
shares, at the acquisition price of $37 per share, per $1,000
principal amount of Alpharma Notes, at a date no later than 35
trading days after the occurrence of the Fundamental Change.
During the first quarter of 2009, the Company paid $385,227 to
redeem the Alpharma Notes.
|
|
10.
|
Commitments
and Contingencies
|
Intellectual
Property Matters
Altace®
Lupin Ltd. (Lupin) filed an Abbreviated New Drug
Application (ANDA) with the FDA seeking permission
to market a generic version of
Altace®.
In addition to its ANDA, Lupin filed a Paragraph IV
certification challenging the validity and infringement of
U.S. Patent No. 5,061,722 (the 722
patent), a composition of matter patent covering
Altace®,
and seeking to market its generic version of
Altace®
before expiration of the 722 patent. The companies
litigated the matter, and the court ultimately invalidated the
Companys 722 patent. On June 9, 2008, Lupin
received approval from the FDA to market its generic ramipril
product.
The Company was previously involved in patent infringement
litigation with Cobalt Pharmaceuticals, Inc.
(Cobalt), a generic drug manufacturer located in
Mississauga, Ontario, Canada, regarding an ANDA it filed with
the FDA seeking permission to market a generic version of
Altace®.
The parties submitted a joint stipulation of dismissal on
April 4, 2006, and the Court granted dismissal. Following
the courts decision in the Companys litigation with
Lupin, Cobalt launched a generic substitute for
Altace®
in December 2007. A number of other competitors launched generic
substitutes for
Altace®
in June 2008.
On August 2, 2006 and August 2, 2007, the Company
received civil investigative demands (CIDs) for
information from the FTC. The CIDs required the Company to
provide information related to the Companys collaboration
with Arrow International Limited (Arrow) to develop
novel formulations of
Altace®,
the dismissal without prejudice of the Companys patent
infringement litigation against Cobalt under the Hatch-Waxman
Act of
20
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
1984 and other information. Arrow and Cobalt are affiliates of
one another. The Company is cooperating with the FTC in this
investigation.
Skelaxin®
Eon Labs, Inc. (Eon Labs), CorePharma, LLC
(Core) and Mutual Pharmaceutical Co., Inc.
(Mutual) each filed an ANDA with the FDA seeking
permission to market a generic version of
Skelaxin®
400 mg tablets. Additionally, Eon Labs ANDA seeks
permission to market a generic version of
Skelaxin®
800 mg tablets. United States Patent Nos. 6,407,128 (the
128 patent) and 6,683,102 (the
102 patent), two
method-of-use
patents relating to
Skelaxin®,
are listed in the FDAs Orange Book and do not expire until
December 3, 2021. Eon Labs and Core each filed
Paragraph IV certifications against the 128 and
102 patents alleging noninfringement, invalidity and
unenforceability of those patents. Mutual has filed a
Paragraph IV certification against the 102 patent
alleging noninfringement and invalidity of that patent. A patent
infringement suit was filed against Eon Labs on January 2,
2003 in the U.S. District Court for the Eastern District of
New York; against Core on March 7, 2003 in the
U.S. District Court for the District of New Jersey
(subsequently transferred to the U.S. District Court for
the Eastern District of New York); and against Mutual on
March 12, 2004 in the U.S. District Court for the
Eastern District of Pennsylvania, concerning their proposed
400 mg products. Additionally, the Company filed a separate
suit against Eon Labs on December 17, 2004 in the
U.S. District Court for the Eastern District of New York,
concerning its proposed generic version of the 800 mg
Skelaxin®
product. On May 17, 2006, the U.S. District Court for
the Eastern District of Pennsylvania placed the Mutual case on
the Civil Suspense Calendar pending the outcome of the FDA
activity described below. On June 16, 2006, the
U.S. District Court for the Eastern District of New York
consolidated the Eon Labs cases with the Core case. In January
2008, the Company entered into an agreement with Core providing
it with, among other things, the right to launch an authorized
generic version of
Skelaxin®
pursuant to a license in December 2012 or earlier under certain
conditions. On January 8, 2008, the Company and Core
submitted a joint stipulation of dismissal without prejudice. On
January 15, 2008, the Court entered an order dismissing the
case without prejudice.
Pursuant to the Hatch-Waxman Act, the filing of the suits
against Eon Labs provided the Company with an automatic stay of
FDA approval of Eon Labs ANDA for its proposed 400 mg
and 800 mg products for 30 months (unless the patents
are held invalid, unenforceable or not infringed) from no
earlier than November 18, 2002 and November 3, 2004,
respectively. The
30-month
stay of FDA approval for Eon Labs ANDA for its proposed
400 mg product expired in May 2005 and Eon Labs
subsequently withdrew its 400 mg ANDA in September 2006.
The 30-month
stay of FDA approval for Eon Labs 800 mg product was
tolled by the Court from January 10, 2005 to April 30,
2007, and the stay expired in early August 2009. On
April 30, 2007, Eon Labs 400 mg case was
dismissed without prejudice, although Eon Labs claim for
fees and expenses was severed and consolidated with Eon
Labs 800 mg case. On August 27, 2007, Eon Labs
served a motion for summary judgment on the issue of
infringement. The Court granted the Company discovery for
purposes of responding to Eons motion until March 14,
2008 and set a briefing schedule. On March 7, 2008, the
Company filed a letter with the Court regarding Eon Labs
inability to adhere to the discovery schedule and the Court took
Eon Labs motion for summary judgment on the issue of
infringement off the calendar. Subsequently, Eon Labs filed an
amended motion for summary judgment on the issue of infringement
on April 4, 2008. Eon Labs also filed a motion for summary
judgment on the issue of validity on April 16, 2008. On
May 8, 2008, Eon Labs filed amended pleadings. On
May 22, 2008, the Company moved to dismiss certain defenses
and counterclaims. On June 6, 2008, the Company responded
to Eon Labs motion for summary judgment on the issue of
validity. On January 20, 2009, the Court issued an order
ruling invalid the 128 and 102 patents. The order
was issued without the benefit of a hearing in response to Eon
Labs motion for summary judgment. The order also allowed
Eon Labs to pursue its claim for exceptional case, and on
March 31, 2009, Eon Labs filed its motion for this purpose,
which was opposed by the Company and Elan Pharmaceuticals, Inc.
(Elan). Eon Labs has replied and the motion remains
pending before the Court. On May 20, 2009, Eon Labs asked
for entry of final judgment, and on June 4, 2009, the Court
granted this request. On July 1, 2009, the Company filed a
notice of appeal of the Courts entry of judgment and on
July 2, 2009, Elan did the same. The appeals were docketed
by the Federal Circuit on July 10, 2009. In late July 2009,
the companies moved to dismiss the appeals for lack of
jurisdiction. On September 30, 2009, the Federal Circuit
denied the
21
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
motions to dismiss. The Company and Elan have until November
2009 to file opening appeal briefs. The Company intends to
vigorously defend its interests.
On December 5, 2008, the Company, along with co-plaintiff
Pharmaceutical IP Holding, Inc. (PIH) initiated suit
in the U.S. District Court of New Jersey against Sandoz,
Inc. (Sandoz) for infringement of U.S. Patent
No. 7,122,566 (the 566 patent). The
566 patent is a
method-of-use
patent relating to
Skelaxin®
listed in the FDAs Orange Book; it expires on
February 6, 2026. The 566 patent is owned by PIH and
licensed to the Company. The Company and PIH sued Sandoz,
alleging that Eon Labs submission of its ANDA seeking
approval to sell a generic version of a 800 mg
Skelaxin®
tablet prior to the expiration of the 566 patent
constitutes infringement of the patent. Sandoz, which acquired
Eon Labs, is the named owner of Eon Labs ANDA and filed a
Paragraph IV certification challenging the validity and
alleging non-infringement of the 566 patent. On
January 13, 2009, Sandoz answered the complaint and filed
counterclaims of invalidity and non-infringement. The Company
filed a reply on February 5, 2009. The parties are
currently conducting fact discovery.
On March 9, 2004, the Company received a copy of a letter
from the FDA to all ANDA applicants for
Skelaxin®
stating that the use listed in the FDAs Orange Book for
the 128 patent may be deleted from the ANDA
applicants product labeling. The Company believes that
this decision is arbitrary, capricious and inconsistent with the
FDAs previous position on this issue. The Company filed a
Citizen Petition on March 18, 2004 (supplemented on
April 15, 2004 and on July 21, 2004), requesting the
FDA to rescind that letter, require generic applicants to submit
Paragraph IV certifications for the 128 patent and
prohibit the removal of information corresponding to the use
listed in the Orange Book. The Company concurrently filed a
petition for stay of action requesting the FDA to stay approval
of any generic
Skelaxin®
products until the FDA has fully evaluated the Companys
Citizen Petition.
On March 12, 2004, the FDA sent a letter to the Company
explaining that the Companys proposed labeling revision
for
Skelaxin®,
which includes references to additional clinical studies
relating to food, age and gender effects, was approvable and
only required certain formatting changes. On April 5, 2004,
the Company submitted amended labeling text that incorporated
those changes. On April 5, 2004, Mutual filed a petition
for stay of action requesting the FDA to stay approval of the
Companys proposed labeling revision until the FDA has
fully evaluated and ruled upon the Companys Citizen
Petition, as well as all comments submitted in response to that
petition. The Company, CorePharma and Mutual have filed
responses and supplements to their pending Citizen Petitions and
responses. On December 8, 2005, Mutual filed another
supplement with the FDA in which it withdrew its prior petition
for stay, supplement and opposition to the Companys
Citizen Petition. On November 24, 2006, the FDA approved
the revision to the
Skelaxin®
labeling. On February 13, 2007, the Company filed another
supplement to the Companys Citizen Petition to reflect FDA
approval of the revision to the
Skelaxin®
labeling. On May 2, 2007, Mutual filed comments in
connection with the Companys supplemental submission.
These issues are pending. On July 27, 2007 and
January 24, 2008, Mutual filed two other Citizen Petitions
in which it seeks a determination that
Skelaxin®
labeling should be revised to reflect the data provided in its
earlier submissions. These petitions were denied on
July 18, 2008.
Net sales of
Skelaxin®
were $446,243 in 2008 and $102,080 and $304,857, respectively,
in the three and nine months ended September 30, 2009. As
of September 30, 2009, the Company had net intangible
assets related to
Skelaxin®
of $56,856. If a generic version of
Skelaxin®
enters the market, the Company may have to write off a portion
or all of these intangible assets, and the Companys
business, financial condition, results of operations and cash
flows could be materially adversely affected. See Note 8
for information regarding the
Skelaxin®
intangible assets.
Avinza®
Actavis, Inc. (Actavis) filed an ANDA with the FDA
seeking permission to market a generic version of
Avinza®.
U.S. Patent No. 6,066,339 (the 399
patent) is a formulation patent relating to
Avinza®
that is listed in the Orange Book and expires on
November 25, 2017. Actavis filed a Paragraph IV
certification challenging the validity and alleging
non-infringement of the 339 patent, and the Company and
Elan Pharma International LTD (EPI), the owner of
the 339 patent, filed suit on October 18, 2007 in the
U.S. District Court for the District of New Jersey to
defend the rights under the patent. Pursuant to the Hatch-Waxman
Act, the filing of the lawsuit against Actavis
22
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
provided the Company with an automatic stay of FDA approval of
Actavis ANDA for up to 30 months (unless the patent
is held invalid, unenforceable or not infringed) from no earlier
than September 4, 2007. On November 18, 2007, Actavis
answered the complaint and filed counterclaims of
non-infringement and invalidity. The Company and EPI filed a
reply on December 7, 2007. The initial scheduling
conference was held on March 11, 2008. Fact discovery is
largely complete and the parties continue to await a hearing
date for claim construction.
Sandoz filed an ANDA with the FDA seeking permission to market
generic versions of Avinzaat the 30 mg and 120 mg dosages and
provided the Company with a Paragraph IV certification
challenging the validity and alleging non-infringement of the
339 patent. The Company and EPI filed suit on
July 21, 2009 in the U.S. District Court for the
District of New Jersey to defend the rights under the patent.
Pursuant to the Hatch-Waxman Act, the filing of the lawsuit
against Sandoz provided the Company with an automatic stay of
FDA approval of Sandozs ANDA for up to 30 months
(unless the patent is held invalid, unenforceable or not
infringed) from no earlier than June 11, 2009. Sandoz
subsequently sent the Company and EPI a second Paragraph IV
certification adding the 45 mg, 60 mg, 75 mg and 90 mg
dosages. The Company and EPI initiated another suit against
Sandoz in New Jersey on September 1, 2009. On
October 2, 2009, Sandoz answered the complaints and filed
counterclaims of non-infringement and invalidity. The Company
and EPI filed a reply on October 22, 2009.
The Company intends to vigorously defend its rights under the
339 patent. Net sales of
Avinza®
were $135,452 in 2008 and $30,774 and $98,646, respectively, in
the three and nine months ended September 30, 2009. As of
September 30, 2009, the Company had net intangible assets
related to
Avinza®
of $216,852. If a generic form of
Avinza®
enters the market, the Company may have to write off a portion
or all of these intangible assets, and the Companys
business, financial condition, results of operations and cash
flows could be otherwise materially adversely affected.
Adenoscan®
On February 15, 2008, the Company, along with co-plaintiffs
Astellas US LLC and Astellas Pharma US, Inc. (collectively
Astellas), and Item Development AB
(Item) initiated suit in the U.S. District
Court for the Central District of California against Anazao
Health Corp. (Anazao), NuView Radiopharmaceuticals,
Inc. (NuView), Paul J. Crowe (Crowe) and
Keith Rustvold (Rustvold) for the unauthorized sale
and attempted sale of generic adenosine to hospitals and
outpatient imaging clinics for use in Myocardial Perfusion
Imaging procedures for an indication that has not been approved
by the FDA. On July 2, 2008, plaintiffs filed a notice of
dismissal as to Anazao. The Company and co-plaintiffs have
alleged infringement of U.S. Patent Nos. 5,731,296 (the
296 patent) and 5,070,877 (the
877 patent), which cover a method of using adenosine
in Myocardial Perfusion Imaging and which Astellas sells under
the tradename
Adenoscan®;
unfair competition in violation of the California Business and
Professions Code, and violations of various other sections of
the California Business and Professions Code, concerning the
labeling, advertising and dispensing of drugs; and intentional
interference with Company and co-plaintiffs prospective
economic advantage. On June 30, 2008, NuView, Crowe and
Rustvold filed an answer raising defenses and counterclaims of
non-infringement, invalidity, unenforceability due to
inequitable conduct and patent misuse, and unfair competition
under California state law. On August 28, 2008, the Company
filed a reply. On November 20, 2008, the Company and other
plaintiffs amended their complaint to add MTS Health Supplies,
Inc., Nabil Saba and Ghassan Salaymeg (collectively,
MTS) as defendants. On November 21, 2008,
defendant NuView amended its answer and counterclaims to allege
patent misuse antitrust violations by plaintiffs. On
April 10, 2009, a Final Judgment and Injunction on Consent
was entered by the Court against NuView, Crowe and Rustvold. On
April 13, 2009, the Court entered a Final Judgment and
Injunction on Consent against all remaining defendants and
terminated the action.
Epi-Pen
On November 11, 2008, the Company was granted
U.S. Patent 7,449,012 (the 012 patent)
covering the next generation autoinjector (NGA) for
use with epinephrine to be sold under the Epi-Pen brand name.
The 012 patent expires September 11, 2025. The
012 patent was listed in FDAs Orange Book on
July 17, 2009 under the Epi-Pen NDA. On July 21, 2009,
the Company received a Paragraph IV certification from Teva
Pharmaceutical Industries
23
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Ltd. (Teva) giving notice that it had filed an ANDA
to commercialize an epinephrine injectable product and
challenging the validity and alleging non-infringement of the
012 patent. On August 28, 2009, the Company filed
suit against Teva in the U.S. Court for the District of
Delaware to defend its rights under the 012 patent. On
October 21, 2009, Teva filed its answer asserting
non-infringement and invalidity of the 012 patent.
Embedatm
On November 17, 2008 Alpharma, Inc. filed a declaratory
judgment action against Purdue Pharma L.P. (Purdue)
in the U.S. District Court for the Western District of
Virginia, seeking an order declaring that several of
Purdues patents are invalid
and/or would
not be infringed by the commercialization of
Embedatm.
The complaint was served on March 12, 2009, and on
April 22, 2009 Purdue filed a motion requesting that the
court dismiss the action for lack of subject matter jurisdiction
or, alternatively, to transfer the action to the District of
Connecticut. On July 9, 2009, the court denied
Purdues motion to dismiss or transfer. On August 6,
2009, Purdue filed its answer and counterclaims, and filed a
motion for an order certifying the courts July 9 order for
immediate appeal. On August 26, 2009, the court denied
Purdues motion to certify for immediate appeal and issued
an order scheduling certain discovery and hearing dates and
setting a trial date of July 7, 2010.
Average
Wholesale Price Litigation
In August 2004, the Company and Monarch Pharmaceuticals, Inc.
(Monarch), a wholly-owned subsidiary of the Company,
were named as defendants along with 44 other pharmaceutical
manufacturers in an action brought by the City of New York
(NYC) in Federal court in the State of New York. NYC
claims that the defendants fraudulently inflated their average
wholesale prices (AWP) and fraudulently failed to
accurately report their best prices and their
average manufacturers prices and failed to pay proper
rebates pursuant to federal law. Additional claims allege
violations of federal and New York statutes, fraud and unjust
enrichment. For the period from 1992 to the present, NYC is
requesting money damages, civil penalties, declaratory and
injunctive relief, restitution, disgorgement of profits and
treble and punitive damages. The U.S. District Court for
the District of Massachusetts has been established as the
multidistrict litigation court for the case, In re:
Pharmaceutical Industry Average Wholesale Pricing Litigation
(the MDL Court).
Since the filing of the NYC case, 48 New York counties have
filed lawsuits against the pharmaceutical industry, including
the Company and Monarch. The allegations in all of these cases
are virtually the same as the allegations in the NYC case. All
of these lawsuits are currently pending in the MDL Court, except
for the Erie, Oswego and Schenectady County cases, which were
removed in October 2006 and remanded to New York state court in
September 2007. Motions to dismiss were granted in part and
denied in part for all defendants in all NYC and county cases
pending in the MDL Court. The Erie motion to dismiss was granted
in part and denied in part by the state court before removal.
Motions to dismiss were filed in October 2007 in the Oswego and
Schenectady cases, and these cases were subsequently transferred
to Erie County for coordination with the Erie County case. A
hearing on these motions to dismiss is scheduled for
December 10, 2009. It is not anticipated that any trials
involving the Company will be set in any of these cases within
the next year.
In January 2005, the State of Alabama filed a lawsuit in Alabama
state court against 79 defendants, including the Company and
Monarch. The four causes of action center on the allegation that
all defendants fraudulently inflated the AWPs of their products.
A motion to dismiss was filed and denied by the Court, but the
Court did require an amended complaint to be filed. The Company
filed an answer and counterclaim for return of rebates overpaid
to the state. Alabama filed a motion to dismiss the
counterclaim, which was granted. The Company appealed the
dismissal. The Alabama Supreme Court affirmed the dismissal. In
a separate appeal of a motion to sever denied by the trial
court, the Alabama Supreme Court severed all defendants into
single-defendant cases. Trials against AstraZeneca
International, Novartis Pharmaceuticals, SmithKline Beecham
Corporation and Sandoz resulted in verdicts for the State. These
defendants appealed their verdicts. On October 16, 2009,
the Alabama Supreme Court reversed all of the verdicts against
AstraZeneca, Novartis and SmithKline Beecham and rendered
judgment in favor of these companies. A trial against Watson in
June 2009 resulted in a deadlocked jury. In April 2009, the
Court established various trial dates for all defendants. The
Company was scheduled for trial in January 2011.
24
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In October 2005, the State of Mississippi filed a lawsuit in
Mississippi state court against the Company, Monarch and 84
other defendants, alleging fourteen causes of action. Many of
those causes of action allege that all defendants fraudulently
inflated the AWPs and wholesale acquisition costs of their
products. A motion to dismiss the criminal statute counts and a
motion for more definite statement were granted. Mississippi
filed an amended complaint dismissing the Company and Monarch
from the lawsuit without prejudice. These claims could be
refiled.
Over half of the states have filed similar lawsuits but the
Company has not been named in any other case except Iowas.
The Company filed a motion to dismiss the Iowa complaint. On
February 20, 2008, the Iowa case was transferred to the MDL
Court. The relief sought in all of these cases is similar to the
relief sought in the NYC lawsuit. The MDL Court granted in part
and denied in part the Companys motion to dismiss, and the
Company has filed its answer. Discovery is proceeding in these
cases. The Company intends to defend all of the AWP lawsuits
vigorously, but is currently unable to predict the outcome or
reasonably estimate the range of potential loss.
See also AWP Litigation under the section
Alpharma Matters below.
Governmental
Pricing Investigation and Related Matters
As previously reported, during the first quarter of 2006, the
Company paid approximately $129,268 related to underpayment of
rebates owed to Medicaid and other governmental pricing programs
during the period from 1994 to 2002. On October 31, 2005,
the Company also entered into a five-year corporate integrity
agreement with the Office of the Inspector General of the United
States Department of Health and Human Services.
Beginning in March 2003, a number of purported class action
complaints were filed by holders of the Companys
securities against the Company, its directors, former directors,
executive officers, former executive officers, a Company
subsidiary and a former director of the subsidiary. These cases
were settled in January 2007.
Beginning in March 2003, four purported shareholder derivative
complaints were also filed in Tennessee state court alleging a
breach of fiduciary duty, among other things, by some of the
Companys current and former officers and directors. These
cases were consolidated. The parties reached agreement on a
stipulation of settlement on August 21, 2008. The
settlement requires the Company to maintain
and/or adopt
certain corporate governance measures and provides for payment
of attorneys fees and expenses to plaintiffs counsel
in the amount of $13,500. This amount has been paid by the
Companys insurance carriers. The stipulation of settlement
was filed with the Court on August 22, 2008. The Court
entered an order approving the settlement on December 17,
2008. A shareholder appealed the Courts approval of the
settlement, but this appeal was later voluntarily withdrawn. The
Company regards the matter as concluded.
During the third quarter of 2006, the second quarter of 2007,
the second quarter of 2008 and the third quarter of 2008, the
Company recorded anticipated insurance recoveries of legal fees
in the amounts of $6,750, $3,398, $3,001 and $8,000,
respectively, for the class action and derivative suits
described above. In November 2006, July 2007, August 2008 and
October 2008, respectively, the Company received payments from
its insurance carriers for the recovery of these legal fees.
Fen-Phen
Litigation
Many distributors, marketers and manufacturers of anorexigenic
drugs have been subject to claims relating to the use of these
drugs. Generally, the lawsuits allege that the defendants
(1) misled users of the products with respect to the
dangers associated with them, (2) failed to adequately test
the products and (3) knew or should have known about the
negative effects of the drugs, and should have informed the
public about the risks of such negative effects. Claims include
product liability, breach of warranty, misrepresentation and
negligence. The actions have been filed in various state and
federal jurisdictions throughout the United States. A
multidistrict litigation court has been established in
Philadelphia, Pennsylvania, In re Fen-Phen Litigation.
The plaintiffs seek, among other things, compensatory and
punitive damages
and/or
court-supervised medical monitoring of persons who have ingested
these products.
25
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys wholly-owned subsidiary, King Research and
Development, is a defendant in approximately 50 multi-plaintiff
(approximately 200 plaintiffs) lawsuits involving the
manufacture and sale of dexfenfluramine, fenfluramine and
phentermine. These lawsuits have been filed in various
jurisdictions throughout the United States and in each of these
lawsuits King Research and Development, as the successor to
Jones Pharma Incorporated (Jones), is one of many
defendants, including manufacturers and other distributors of
these drugs. Although Jones did not at any time manufacture
dexfenfluramine, fenfluramine or phentermine, Jones was a
distributor of a generic phentermine product and, after its
acquisition of Abana Pharmaceuticals, was a distributor of
Obenix®,
Abanas branded phentermine product. The manufacturer of
the phentermine purchased by Jones filed for bankruptcy
protection and is no longer in business. The plaintiffs in these
cases, in addition to the claims described above, claim injury
as a result of ingesting a combination of these weight-loss
drugs and are seeking compensatory and punitive damages as well
as medical care and court-supervised medical monitoring. The
plaintiffs claim liability based on a variety of theories,
including, but not limited to, product liability, strict
liability, negligence, breach of warranty, fraud and
misrepresentation.
King Research and Development denies any liability incident to
Jones distribution and sale of
Obenix®
or Jones generic phentermine product. King Research and
Developments insurance carriers are currently defending
King Research and Development in these lawsuits. The
manufacturers of fenfluramine and dexfenfluramine have settled
many of these cases. As a result of these settlements, King
Research and Development has routinely received voluntary
dismissals without the payment of settlement proceeds. In the
event that King Research and Developments insurance
coverage is inadequate to satisfy any resulting liability, King
Research and Development will have to assume defense of these
lawsuits and be responsible for the damages, if any, that are
awarded against it.
While the Company cannot predict the outcome of these lawsuits,
management believes that the claims against King Research and
Development are without merit and intends to vigorously pursue
all defenses available. The Company is unable to disclose an
aggregate dollar amount of damages claimed because many of these
complaints are multi-party suits and do not state specific
damage amounts. Rather, these claims typically state damages as
may be determined by the court or similar language and state no
specific amount of damages against King Research and
Development. Consequently, the Company cannot reasonably
estimate possible losses related to the lawsuits.
Hormone
Replacement Therapy
Currently, the Company is named as a defendant by 22 plaintiffs
in lawsuits involving the manufacture and sale of hormone
replacement therapy drugs. The first of these lawsuits was filed
in July 2004. Numerous other pharmaceutical companies have also
been sued. The Company was sued by approximately 1,000
plaintiffs, but most of those claims were voluntarily dismissed
or dismissed by the Court for lack of product identification.
The remaining 22 lawsuits were filed in Alabama, Arkansas,
Missouri, Pennsylvania, Ohio, Florida, Maryland, Mississippi and
Minnesota. A federal multidistrict litigation court has been
established in Little Rock, Arkansas, In re: Prempro Products
Liability Litigation, and all of the plaintiffs claims
have been transferred and are pending in that Court except for
one lawsuit pending in Philadelphia, Pennsylvania state court.
Many of these plaintiffs allege that the Company and other
defendants failed to conduct adequate research and testing
before the sale of the products and post-sale monitoring to
establish the safety and efficacy of the long-term hormone
therapy regimen and, as a result, misled consumers when
marketing their products. Plaintiffs also allege negligence,
strict liability, design defect, breach of implied warranty,
breach of express warranty, fraud and misrepresentation.
Discovery of the plaintiffs claims against the Company has
begun but is limited to document discovery. No trial has
occurred in the hormone replacement therapy litigation against
the Company or any other defendants except Wyeth and Pfizer. The
trials against Wyeth have resulted in verdicts for and against
Wyeth, with several verdicts against Wyeth reversed on
post-trial motions. Pfizer has lost two jury verdicts. One of
these verdicts was later reversed, and the other is being
appealed. The Company does not expect to have any trials set in
the next year. The Company intends to defend these lawsuits
vigorously but is currently unable to predict the outcome or to
reasonably estimate the range of potential loss, if any. The
Company may have limited insurance for these claims. The Company
would have to assume defense of the lawsuits and be responsible
for damages, fees and expenses, if any, that are awarded against
it or for amounts in excess of the Companys product
liability coverage.
26
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Alpharma
Matters
The following matters relate to our Alpharma subsidiary
and/or
certain of its subsidiaries.
Department
of Justice Investigation
As previously disclosed, Alpharma, acquired by the Company in
December 2008, received a subpoena from DOJ in February, 2007 in
connection with its investigation of alleged improper sales and
marketing practices related to the sale of the pain medicine
Kadian®.
The Company divested Alpharmas
Kadian®
assets to Actavis LLC simultaneously with the closing of the
acquisition of Alpharma.
In September 2009, the Company reached an agreement in principle
with the U.S. Attorneys Office and DOJ which would, if
completed, resolve this investigation. The Company recorded a
reserve of $42,500 in connection with this development in the
third quarter of 2009 as an adjustment to the goodwill
associated with the purchase of Alpharma. Final agreement is
subject to the execution of a definitive settlement agreement
approved by Kings Board of Directors and the DOJ.
Chicken
Litter Litigation
Alpharma and one of its subsidiaries are two of multiple
defendants that have been named in several lawsuits that allege
that one of its animal health products causes chickens to
produce manure that contains an arsenical compound which, when
used as agricultural fertilizer by chicken farmers, degrades
into inorganic arsenic and may have caused a variety of diseases
in the plaintiffs (who allegedly live in close proximity to such
farm fields). Alpharma provided notice to its insurance carriers
and its primary insurance carriers have responded by accepting
their obligations to defend or pay Alpharmas defense
costs, subject to reservation of rights to later reject coverage
for these lawsuits. One of the carriers has filed a declaratory
judgment action in state court in which it has sought a ruling
concerning the allocation of its coverage obligations to
Alpharma among the several insurance carriers and, to the extent
Alpharma does not have full insurance coverage, to Alpharma.
Further, this declaratory judgment action requests that the
Court rule that certain of the carriers policies provide
no coverage because certain policy exclusions allegedly operate
to limit its coverage obligations under said policies. The
insurance carriers may take the position that some, or all, of
the applicable insurance policies contain certain provisions
that could limit coverage for future product liability claims
arising in connection with product sold on and after
December 16, 2003.
In addition to the potential for personal injury damages to the
approximately 155 plaintiffs, the plaintiffs are asking for
punitive damages and requesting that Alpharma be enjoined from
the future sale of the product at issue. In September 2006, in
the first trial, which was brought by three plaintiffs, the
Circuit Court of Washington County, Arkansas, Second Division
entered a jury verdict in favor of Alpharma. The plaintiffs
appealed the verdict, challenging certain pretrial expert
rulings; however, in May 2008, the Supreme Court of Arkansas
denied plaintiffs challenges. In its ruling, the Supreme
Court of Arkansas also overturned the trial courts grant
of summary judgment that had the effect of dismissing certain
poultry company co-defendants from the case. The case was tried
against the poultry company
co-defendants
in April and May 2009, resulting in a defense verdict. In
July 2009, the plaintiffs filed a notice of appeal of that
verdict. It is expected that the appeal of the case will be
heard in 2010. No additional cases have been set for trial.
Subsequent cases may be tried against both the poultry companies
and Alpharma together.
While the Company can give no assurance of the outcome of any
future trial in this litigation, it believes that it will be
able to continue to present credible scientific evidence that
its product is not the cause of any injuries the plaintiffs may
have suffered. There is also the possibility of an adverse
customer reaction to the allegations in these lawsuits, as well
as additional lawsuits in other jurisdictions where the product
has been sold. Worldwide sales of this product were
approximately $19,600 in 2008, and approximately $6,053 and
$16,086, respectively, in the three and nine months ended
September 30, 2009.
AWP
Litigation
Alpharma, and in certain instances one of its subsidiaries, are
defendants in connection with various elements of the litigation
described above under the heading Average Wholesale Price
Litigation, primarily related to sale of
27
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Kadian®
capsules. At present, Alpharma is involved in proceedings in the
following states: Alaska, Florida, Illinois, Iowa, New York, and
South Carolina. The Mississippi and Texas cases against Alpharma
were dismissed without prejudice.
These lawsuits vary with respect to the particular causes of
action and relief sought. The relief sought in these lawsuits
includes statutory causes of action including civil penalties
and treble damages, common law causes of action, declaratory and
injunctive relief, and punitive damages, including, in certain
lawsuits, disgorgement of profits. The Company believes it has
meritorious defenses and intends to vigorously defend its
positions in these lawsuits. Numerous other pharmaceutical
companies are defendants in similar lawsuits.
Environmental
Matters
In May 2009, the Company received an information request from
the U.S. Environmental Protection Agency (EPA)
pursuant to section 114 of the Clean Air Act regarding the
Companys historic air emissions and its operation of
certain pollution control equipment (Information
Request). In June 2009, the Company provided EPA with its
initial response to the Information Request, identifying past
deviations from the requirements of its state conditional major
air emissions operating permit related to the Companys
operation of certain pollution control equipment at its Bristol,
Tennessee facility. The Company has subsequently provided
additional information to EPA and the Tennessee Department of
Environment and Conservation. At this time, the Company cannot
predict or determine the outcome of this matter or reasonably
estimate the amount or range of amounts of fines or penalties,
if any, that might result from an adverse outcome.
Other
Contingencies
The Company has a supply agreement with a third party to produce
metaxalone, the active ingredient in
Skelaxin®.
This supply agreement requires the Company to purchase certain
minimum levels of metaxalone and expires in 2010. If sales of
Skelaxin®
are not consistent with current forecasts, the Company could
incur losses in connection with purchase commitments for
metaxalone, which could have a material adverse effect upon the
Companys results of operations and cash flows.
|
|
11.
|
Accounting
Developments
|
In May 2008, the FASB issued a statement that requires the
issuer of certain convertible debt instruments that may be
settled in cash, or other assets, on conversion to separately
account for the liability and equity components in a manner that
reflects the issuers non-convertible debt borrowing rate.
Please see Note 9 for a discussion of the adoption of and
the additional disclosures required by the FASB.
During the first quarter of 2009, the FASB required additional
disclosures for derivative instruments and hedging activities.
Please see Note 4 for these additional disclosures.
Effective January 1, 2009, the FASB issued an amendment to
the accounting and disclosure requirements in the event of a
business combination. This amendment addresses how an acquirer
recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree and recognizes and
measures the goodwill acquired in the business combination or a
gain from a bargain purchase. This amendment also requires an
acquirer to recognize and measure in-process research and
development projects as intangible assets at fair value on the
acquisition date. They also set forth the disclosures required
to be made in the financial statements to evaluate the nature
and financial effects of the business combination. This
amendment will be applied by the Company to business
combinations occurring on or after January 1, 2009.
In December 2008, the FASB required enhanced disclosures about
an employers plan assets in a defined benefit pension plan
or other postretirement plan. The required disclosures include a
discussion on the inputs and valuation techniques used to
develop fair value measurements of plan assets. In addition, the
fair value of each major category of plan assets is required to
be disclosed separately for pension plans and other
postretirement benefit plans. This statement is effective for
fiscal years ending after December 15, 2009. The Company
does not anticipate this will have a material effect on its
financial statements.
28
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In April 2009, the FASB required disclosures about fair value of
financial instruments in interim financial statements as well as
in annual financial statements. This is effective for interim
periods ending after June 15, 2009. Please see Note 4
and Note 9 for these additional disclosures.
In April 2009, the FASB provided additional guidance for
determining fair value when the volume of activity for an asset
or liability has significantly decreased or price quotations or
observable inputs are not associated with orderly transactions.
This guidance is effective for interim periods ending after
June 15, 2009. The Company adopted this guidance on
April 1, 2009, and the adoption did not have a material
effect on our financial statements.
In March 2009, the FASB issued a statement that provided
guidance in determining whether impairments in debt securities
are
other-than-temporary,
and modifies the presentation and disclosures surrounding such
instruments. This statement is effective for interim periods
ending after June 15, 2009. The Company adopted this
statement on April 1, 2009. Please see Note 4 for
information regarding the adoption of this statement.
In May 2009, the FASB established the general standards of
accounting for and disclosure of subsequent events. In addition,
this statement requires disclosure of the date through which an
entity has evaluated subsequent events and the basis for that
date. The Company initially adopted this standard for the
quarterly period ending June 30, 2009. The adoption did not
have a material impact on our financial statements. Please see
Note 1 for information regarding the adoption of this
standard.
In June 2009, the FASB issued an amendment to the accounting and
disclosure requirements for transfers of financial assets. This
amendment requires greater transparency and additional
disclosures for transfers of financial assets and the
entitys continuing involvement with them and changes the
requirements for derecognizing financial assets. In addition,
this amendment eliminates the concept of a qualifying
special-purpose entity (QSPE). This amendment is
effective for financial statements issued for fiscal years
beginning after November 15, 2009. The Company does not
anticipate the adoption of this amendment will have a material
effect on its financial statements.
In June 2009, the FASB also issued an amendment to the
accounting and disclosure requirements for the consolidation of
variable interest entities (VIEs). The elimination
of the concept of a QSPE, as discussed above, removes the
exception from applying the consolidation guidance within this
amendment. This amendment requires an enterprise to perform a
qualitative analysis when determining whether or not it must
consolidate a VIE. The amendment also requires an enterprise to
continuously reassess whether it must consolidate a VIE.
Additionally, the amendment requires enhanced disclosures about
an enterprises involvement with VIEs and any significant
change in risk exposure due to that involvement, as well as how
its involvement with VIEs impacts the enterprises
financial statements. Finally, an enterprise will be required to
disclose significant judgments and assumptions used to determine
whether or not to consolidate a VIE. This amendment is effective
for financial statements issued for fiscal years beginning after
November 15, 2009. The Company does not anticipate the
adoption of this amendment will have a material effect on its
financial statements.
In June 2009, the FASB Accounting Standards Codification
(Codification) was issued. The Codification will
become the single source for all authoritative generally
accepted accounting principles (GAAP) recognized by
the FASB to be applied for financial statements issued for
periods ending after September 15, 2009. The Codification
does not change GAAP and it will not have a material effect on
the Companys financial statements.
During the three months and nine months ended September, 30,
2009, the Companys effective income tax rate was 37.5% and
41.2%, respectively. These rates were higher than the statutory
rate of 35% primarily due to losses from foreign subsidiaries
with no tax benefit, taxes related to stock compensation and
state taxes.
During each the three months and nine months ended
September 30, 2008, the Companys effective income tax
rate from continuing operations was 33.8%. This rate varied from
the statutory rate of 35% in 2008 primarily due to
29
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
tax benefits related to tax-exempt interest income and domestic
manufacturing deductions, which benefits were partially offset
by state taxes.
The Companys business is classified into six reportable
segments: branded prescription pharmaceuticals, Animal Health,
Meridian Auto-Injector, royalties, contract manufacturing and
all other. The branded prescription pharmaceuticals segment
includes a variety of branded prescription products that are
separately categorized into neuroscience, hospital and legacy
products. These branded prescription products are aggregated
because of their similarity in regulatory environment,
manufacturing processes, methods of distribution and types of
customer. The animal health business is a global leader in the
development, registration, manufacture and marketing of
medicated feed additives and water soluble therapeutics
primarily for poultry, cattle and swine. Meridian Auto-Injector
products are sold to both commercial and government markets. The
principal source of revenues in the commercial market is the
EpiPen®
product, an epinephrine filled auto-injector which is primarily
prescribed for the treatment of severe allergic reactions and
which is primarily marketed, distributed and sold by Dey, L.P.
Government revenues in the Meridian Auto-Injector segment are
principally derived from the sale of nerve agent antidotes and
other emergency medicine auto-injector products marketed to the
U.S. Department of Defense and other federal, state and
local agencies, particularly those involved in homeland
security, as well as to approved foreign governments. Royalties
include revenues the Company derives from pharmaceutical
products after the Company has transferred the manufacturing or
marketing rights to third parties in exchange for licensing fees
or royalty payments. The contract manufacturing segment consists
primarily of pharmaceutical manufacturing services provided to
the Companys branded prescription pharmaceutical segment.
The Company primarily evaluates its segments based on segment
profit. Reportable segments are separately identified based on
revenues, segment profit (excluding depreciation, amortization
and impairments) and total assets. Revenues among the segments
are presented in the individual segments and removed through
eliminations in the information below. Substantially all of the
eliminations relate to sales from the contract manufacturing
segment to the branded prescription pharmaceuticals segment.
The following represents selected information for the
Companys reportable segments for the periods indicated.
Note that for the three months and nine months ended
September 30, 2008, the tables for revenues and segment
profit below do not include revenues and segment profit for the
animal health segment, or for the
Flector®
Patch product within the branded prescription pharmaceuticals
segment, since these are part of Alpharma, a company that King
acquired at the end of December 2008.
30
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded prescription pharmaceuticals
|
|
$
|
283,414
|
|
|
$
|
301,879
|
|
|
$
|
836,228
|
|
|
$
|
986,966
|
|
Animal Health
|
|
|
95,843
|
|
|
|
|
|
|
|
258,502
|
|
|
|
|
|
Meridian Auto-Injector
|
|
|
71,841
|
|
|
|
67,515
|
|
|
|
200,539
|
|
|
|
165,687
|
|
Royalties
|
|
|
11,932
|
|
|
|
18,456
|
|
|
|
41,399
|
|
|
|
61,257
|
|
Contract manufacturing
|
|
|
122,753
|
|
|
|
109,874
|
|
|
|
440,655
|
|
|
|
363,210
|
|
All other
|
|
|
(49
|
)
|
|
|
(63
|
)
|
|
|
(101
|
)
|
|
|
2,345
|
|
Eliminations
|
|
|
(122,385
|
)
|
|
|
(109,216
|
)
|
|
|
(439,828
|
)
|
|
|
(362,136
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total net revenues
|
|
$
|
463,349
|
|
|
$
|
388,445
|
|
|
$
|
1,337,394
|
|
|
$
|
1,217,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded prescription pharmaceuticals(1)
|
|
$
|
204,063
|
|
|
$
|
227,701
|
|
|
$
|
620,059
|
|
|
$
|
761,710
|
|
Animal Health(1)
|
|
|
42,471
|
|
|
|
|
|
|
|
88,028
|
|
|
|
|
|
Meridian Auto-Injector
|
|
|
43,336
|
|
|
|
42,810
|
|
|
|
122,719
|
|
|
|
103,868
|
|
Royalties
|
|
|
10,452
|
|
|
|
16,175
|
|
|
|
36,294
|
|
|
|
53,772
|
|
Contract manufacturing
|
|
|
229
|
|
|
|
359
|
|
|
|
567
|
|
|
|
537
|
|
All other
|
|
|
1
|
|
|
|
(65
|
)
|
|
|
(102
|
)
|
|
|
2,331
|
|
Other operating costs and expenses
|
|
|
(213,384
|
)
|
|
|
(164,180
|
)
|
|
|
(683,476
|
)
|
|
|
(620,482
|
)
|
Other income
|
|
|
(19,144
|
)
|
|
|
1,786
|
|
|
|
(65,559
|
)
|
|
|
13,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before tax
|
|
$
|
68,024
|
|
|
$
|
124,586
|
|
|
$
|
118,530
|
|
|
$
|
315,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The segment profit for branded prescription pharmaceuticals for
the three months ended September 30, 2009 includes a charge
of $2,566 related to the mark up of inventory upon acquisition
of Alpharma. The segment profit for branded prescription
pharmaceuticals and Animal Health for the nine months ended
September 30, 2009 includes charges of $6,022 and $34,128,
respectively. For additional information, please see Note 7. |
The following represents branded prescription pharmaceutical
revenues by the Companys target markets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neuroscience
|
|
$
|
185,908
|
|
|
$
|
150,084
|
|
|
$
|
513,862
|
|
|
$
|
466,377
|
|
Hospital
|
|
|
46,350
|
|
|
|
70,084
|
|
|
|
151,007
|
|
|
|
207,987
|
|
Legacy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular/metabolic
|
|
|
35,507
|
|
|
|
63,441
|
|
|
|
113,293
|
|
|
|
251,623
|
|
Other
|
|
|
15,649
|
|
|
|
18,270
|
|
|
|
58,066
|
|
|
|
60,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated branded pharmaceutical revenues
|
|
$
|
283,414
|
|
|
$
|
301,879
|
|
|
$
|
836,228
|
|
|
$
|
986,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14.
|
Restructuring
Activities
|
First
Quarter of 2009 Action
In January 2009, the U.S. District Court for the Eastern
District of New York issued an order ruling invalid two patents
relating to the Companys product
Skelaxin®.
In June 2009, the Court entered judgment against the Company.
The Company has appealed the judgment and intends to vigorously
defend its interests. The entry of the order may lead to generic
versions of
Skelaxin®
entering the market sooner than previously anticipated, which
would likely cause the Companys sales of
Skelaxin®
to decline significantly. For additional information regarding
Skelaxin®
litigation, please see Note 10.
Following the decision of the District Court, the Companys
senior management team conducted an extensive examination of the
Company and developed a restructuring initiative designed to
partially offset the potential decline in
Skelaxin®
sales in the event that a generic competitor enters the market.
This initiative included, based on an analysis of the
Companys strategic needs: a reduction in sales, marketing
and other personnel; leveraging of staff; expense reductions and
additional controls over spending; and reorganization of sales
teams.
The Company incurred restructuring charges of approximately
$50,000 during the nine months of 2009 related to severance pay
and other employee termination expenses. Almost all of the
restructuring charges are cash expenditures and were
substantially paid in the second quarter of 2009. The remaining
severance pay and other employee termination costs are expected
to be fully paid by the third quarter of 2010.
The restructuring charges include employee termination costs
associated with a workforce reduction of approximately
520 employees, including approximately 380 members of our
sales force.
Fourth
Quarter of 2008 Action
As part of the acquisition of Alpharma, management developed a
restructuring plan to eliminate redundancies in operations
created by the acquisition. This plan includes a reduction in
personnel, staff leverage, reductions in duplicate expenses and
a realignment of research and development priorities.
The Company has estimated total costs of $69,265 associated with
this restructuring plan, $62,718 of which has been included in
the liabilities assumed in the purchase price of Alpharma. The
restructuring plan includes employee termination costs
associated with a workforce reduction of 250 employees. The
restructuring plan also includes contract termination costs of
$14,328 and other exit costs of $181 as a result of the
acquisition. All employee termination costs are expected to be
paid by the end of 2011. All contract termination costs are
expected to be paid by the end of 2018.
32
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the types of costs accrued and incurred are
summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
Balance at
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
Statement
|
|
|
Alpharma
|
|
|
Cash
|
|
|
Non-Cash
|
|
|
September 30,
|
|
|
|
2008
|
|
|
Impact
|
|
|
Acquisition
|
|
|
Payments
|
|
|
Costs
|
|
|
2009
|
|
|
Third quarter of 2009 action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
$
|
|
|
|
$
|
1,026
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,026
|
|
First quarter of 2009 action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
|
|
|
|
|
48,563
|
|
|
|
|
|
|
|
44,557
|
|
|
|
3,187
|
|
|
|
819
|
|
Contract termination
|
|
|
|
|
|
|
575
|
|
|
|
|
|
|
|
575
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
459
|
|
|
|
|
|
|
|
459
|
|
|
|
|
|
|
|
|
|
Accelerated depreciation(1)
|
|
|
|
|
|
|
485
|
|
|
|
|
|
|
|
|
|
|
|
485
|
|
|
|
|
|
Fourth quarter of 2008 action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
|
49,437
|
|
|
|
1,000
|
|
|
|
4,015
|
|
|
|
34,612
|
|
|
|
(793
|
)
|
|
|
20,633
|
|
Contract termination
|
|
|
16,801
|
|
|
|
(3
|
)
|
|
|
(2,471
|
)
|
|
|
6,472
|
|
|
|
(635
|
)
|
|
|
8,490
|
|
Other
|
|
|
182
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
182
|
|
Accelerated depreciation(1)
|
|
|
|
|
|
|
196
|
|
|
|
|
|
|
|
|
|
|
|
196
|
|
|
|
|
|
Third quarter of 2008 action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
Third quarter of 2007 action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
|
103
|
|
|
|
(103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract termination
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
Third quarter of 2006 action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
|
2,462
|
|
|
|
(342
|
)
|
|
|
|
|
|
|
843
|
|
|
|
30
|
|
|
|
1,247
|
|
Accelerated depreciation(1)
|
|
|
|
|
|
|
582
|
|
|
|
|
|
|
|
|
|
|
|
582
|
|
|
|
|
|
Fourth quarter of 2005 action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
69,002
|
|
|
$
|
52,441
|
|
|
$
|
1,544
|
|
|
$
|
87,538
|
|
|
$
|
3,052
|
|
|
$
|
32,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in depreciation and amortization on the Consolidated
Statements of Operations. |
The restructuring charges in 2009 primarily relate to the
branded prescription pharmaceutical segment. The accrued
employee separation payments as of September 30, 2009 are
expected to be paid by the end of 2011.
|
|
15.
|
Stock-Based
Compensation
|
During the third quarter of 2009, the Company granted to certain
employees pursuant to its Incentive Plan 65,000 RSAs and 15,600
RSUs.
During the second quarter of 2009, the Company granted 53,000
RSAs to certain employees, pursuant to its Incentive Plan, and
107,506 RSUs were granted to non-employee directors.
During the first quarter of 2009, the Company granted to certain
employees, pursuant to its Incentive Plan, 843,990 RSAs, 561,450
LPUs with a one-year performance cycle, 240,580 LPUs with a
three-year performance cycle, 1,580 restricted stock units and
1,985,690 nonqualified stock options.
The RSAs are grants of shares of common stock restricted from
sale or transfer for three years from grant date.
RSUs represent the right to receive a share of common stock at
the expiration of a restriction period, generally three years
from grant, but may be restricted over other designated periods
as determined by the Companys Board
33
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of Directors or a committee of the Board. The RSUs granted to
non-employee directors under the current Compensation Policy for
Non-Employee Directors have a restriction period that generally
ends one year after the date of the grant, unless a deferral
election is made in advance.
The LPUs are rights to receive common stock of the Company in
which the number of shares ultimately received depends on the
Companys performance over time. LPUs with a one-year
performance cycle, followed by a two-year restriction period,
will be earned based on 2009 operating targets. LPUs with a
three-year performance cycle will be earned based on
market-related performance targets over the years 2009 through
2011. At the end of the applicable performance period, the
number of shares of common stock awarded is either 0% or between
50% and 200% of a target number. The final performance
percentage on which the number of shares of common stock issued
is based, considering performance metrics established for the
performance period, will be determined by the Companys
Board of Directors or a committee of the Board at its sole
discretion.
The nonqualified stock options were granted at option prices
equal to the fair market value of the common stock at the date
of grant and vest approximately in one-third increments on each
of the first three anniversaries of the grant date.
|
|
16.
|
Pension
Plans and Postretirement Benefits
|
The Company maintains two qualified noncontributory, defined
benefit pension plans covering its U.S. (domestic)
employees at its Alpharma subsidiary: the previously frozen
Alpharma Inc. Pension Plan and the previously frozen Faulding
Inc. Pension Plan. The benefits payable from these plans are
based on years of service and the employees highest
consecutive five years compensation during the last ten
years of service. The Companys funding policy is to
contribute annually an amount that can be deducted for federal
income tax purposes. Ideally, the Plan assets will approximate
the accumulated benefit obligation (ABO). The plan
assets are held by two custodians and managed by two investment
managers. Plan assets are invested in equities, government
securities and bonds.
The Company also has an unfunded supplemental executive pension
plan providing additional benefits to certain employees upon
termination of employment or death. The Company has an unfunded
postretirement medical and nominal life insurance plan
(postretirement benefits) covering certain domestic
employees who were eligible as of January 1, 1993. The plan
has not been extended to any additional employees. Retired
eligible employees are required to make premium contributions
for coverage as if they were active employees.
The Company uses a measurement date of December 31, 2008
for its pension plans and other postretirement plans. The net
periodic benefit costs for the Companys pension plans and
other postretirement plans are, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30, 2009
|
|
|
Nine Months Ended September 30, 2009
|
|
|
|
Pension
|
|
|
Postretirement
|
|
|
Pension
|
|
|
Postretirement
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Service Cost
|
|
$
|
|
|
|
$
|
21
|
|
|
$
|
|
|
|
$
|
63
|
|
Interest Cost
|
|
|
758
|
|
|
|
101
|
|
|
|
2,274
|
|
|
|
303
|
|
Expected return on plan assets
|
|
|
(707
|
)
|
|
|
|
|
|
|
(2,121
|
)
|
|
|
|
|
Recognized net actuarial loss
|
|
|
24
|
|
|
|
53
|
|
|
|
72
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
75
|
|
|
$
|
175
|
|
|
$
|
225
|
|
|
$
|
525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A competitor entered the market with a generic substitute for
Altace in December 2007 and additional competitors entered the
market in June 2008. The Companys calculation for
Medicaid, Medicare and commercial rebate reserves are based on
estimates of utilization by rebate-eligible customers, estimates
of the level of inventory of the Companys products in the
distribution channel that remain potentially subject to those
rebates, and the terms of the Companys rebate obligations.
During the first quarter of 2008, the Company estimated the
effect that the
34
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
initial generic substitute would have on
Altace®
utilization by rebate-eligible customers. Actual
Altace®
rebates for the first quarter were lower than originally
anticipated, resulting in a change in estimate during the second
quarter of 2008. This change in estimate resulted in a decrease
in rebate expense of approximately $5,000 and a corresponding
increase in
Altace®
net sales in the second quarter of 2008. As a result of this
increase in net sales, the co-promotion expense related to net
sales of
Altace®
in the second quarter of 2008 increased by approximately $1,000.
Accordingly, the effect of the change in estimate on second
quarter 2008 operating income was an increase of approximately
$4,000, fully offsetting the effect of the estimate in the first
quarter of 2008.
|
|
18.
|
Guarantor
Financial Statements
|
Each of the Companys U.S. subsidiaries guaranteed on
a full, unconditional and joint and several basis the
Companys performance under the $400,000 aggregate
principal amount of the Convertible Senior Notes (such
subsidiaries the Guarantor Subsidiaries).
There are no restrictions under the Companys current
financing arrangements on the ability of the Guarantor
Subsidiaries to distribute funds to the Company in the form of
cash dividends, loans or advances. The following combined
financial data provides information regarding the financial
position, results of operations and cash flows of the Guarantor
Subsidiaries for the $400,000 aggregate principal amount of the
Convertible Senior Notes (condensed consolidating financial
data). Separate financial statements and other disclosures
concerning the Guarantor Subsidiaries are not presented because
management has determined that such information would not be
material to the holders of the debt.
35
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GUARANTOR
SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Eliminating
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Eliminating
|
|
|
King
|
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Entries
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Entries
|
|
|
Consolidated
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
193,412
|
|
|
$
|
46,752
|
|
|
$
|
239,804
|
|
|
$
|
|
|
|
$
|
479,968
|
|
|
$
|
401,657
|
|
|
$
|
52
|
|
|
$
|
538,503
|
|
|
$
|
|
|
|
$
|
940,212
|
|
Investments in debt securities
|
|
|
39,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,624
|
|
|
|
6,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,441
|
|
Marketable securities
|
|
|
1,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,930
|
|
|
|
511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
511
|
|
Accounts receivable, net
|
|
|
2,975
|
|
|
|
187,862
|
|
|
|
36,193
|
|
|
|
|
|
|
|
227,030
|
|
|
|
61
|
|
|
|
140,502
|
|
|
|
104,507
|
|
|
|
|
|
|
|
245,070
|
|
Inventories
|
|
|
83,627
|
|
|
|
94,037
|
|
|
|
31,393
|
|
|
|
(1,407
|
)
|
|
|
207,650
|
|
|
|
59,279
|
|
|
|
26,406
|
|
|
|
172,618
|
|
|
|
|
|
|
|
258,303
|
|
Deferred income tax assets
|
|
|
36,744
|
|
|
|
63,352
|
|
|
|
481
|
|
|
|
|
|
|
|
100,577
|
|
|
|
36,041
|
|
|
|
26,146
|
|
|
|
27,326
|
|
|
|
|
|
|
|
89,513
|
|
Income taxes receivable
|
|
|
15,008
|
|
|
|
(2,431
|
)
|
|
|
(526
|
)
|
|
|
|
|
|
|
12,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
20,411
|
|
|
|
77,270
|
|
|
|
1,693
|
|
|
|
|
|
|
|
99,374
|
|
|
|
14,090
|
|
|
|
8,283
|
|
|
|
106,841
|
|
|
|
|
|
|
|
129,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
393,731
|
|
|
|
466,842
|
|
|
|
309,038
|
|
|
|
(1,407
|
)
|
|
|
1,168,204
|
|
|
|
518,080
|
|
|
|
201,389
|
|
|
|
949,795
|
|
|
|
|
|
|
|
1,669,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
148,344
|
|
|
|
243,205
|
|
|
|
9,613
|
|
|
|
|
|
|
|
401,162
|
|
|
|
140,314
|
|
|
|
115,996
|
|
|
|
160,949
|
|
|
|
|
|
|
|
417,259
|
|
Intangible assets, net
|
|
|
|
|
|
|
787,512
|
|
|
|
35,077
|
|
|
|
|
|
|
|
822,589
|
|
|
|
|
|
|
|
633,300
|
|
|
|
300,919
|
|
|
|
|
|
|
|
934,219
|
|
Goodwill
|
|
|
|
|
|
|
453,008
|
|
|
|
|
|
|
|
|
|
|
|
453,008
|
|
|
|
|
|
|
|
129,150
|
|
|
|
321,398
|
|
|
|
|
|
|
|
450,548
|
|
Deferred income tax assets
|
|
|
(29,147
|
)
|
|
|
281,306
|
|
|
|
(2,142
|
)
|
|
|
|
|
|
|
250,017
|
|
|
|
(18,117
|
)
|
|
|
340,764
|
|
|
|
(54,898
|
)
|
|
|
|
|
|
|
267,749
|
|
Investments in debt securities
|
|
|
292,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
292,034
|
|
|
|
353,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
353,848
|
|
Other assets
|
|
|
50,144
|
|
|
|
24,916
|
|
|
|
319
|
|
|
|
|
|
|
|
75,379
|
|
|
|
72,442
|
|
|
|
23,704
|
|
|
|
26,680
|
|
|
|
|
|
|
|
122,826
|
|
Assets held for sale
|
|
|
|
|
|
|
7,900
|
|
|
|
|
|
|
|
|
|
|
|
7,900
|
|
|
|
|
|
|
|
11,500
|
|
|
|
|
|
|
|
|
|
|
|
11,500
|
|
Investments in subsidiaries
|
|
|
3,019,105
|
|
|
|
941,129
|
|
|
|
(68
|
)
|
|
|
(3,960,166
|
)
|
|
|
|
|
|
|
2,896,242
|
|
|
|
|
|
|
|
|
|
|
|
(2,896,242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,874,211
|
|
|
$
|
3,205,818
|
|
|
$
|
351,837
|
|
|
$
|
(3,961,573
|
)
|
|
$
|
3,470,293
|
|
|
$
|
3,962,809
|
|
|
$
|
1,455,803
|
|
|
$
|
1,704,843
|
|
|
$
|
(2,896,242
|
)
|
|
$
|
4,227,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
30,133
|
|
|
$
|
54,805
|
|
|
$
|
2,173
|
|
|
|
|
|
|
$
|
87,111
|
|
|
$
|
61,255
|
|
|
$
|
20,107
|
|
|
$
|
59,546
|
|
|
$
|
|
|
|
$
|
140,908
|
|
Accrued expenses
|
|
|
27,355
|
|
|
|
271,967
|
|
|
|
10,640
|
|
|
|
|
|
|
|
309,962
|
|
|
|
32,456
|
|
|
|
165,460
|
|
|
|
213,572
|
|
|
|
|
|
|
|
411,488
|
|
Income taxes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,288
|
|
|
|
169
|
|
|
|
8,991
|
|
|
|
|
|
|
|
10,448
|
|
Short-term debt
|
|
|
|
|
|
|
|
|
|
|
4,101
|
|
|
|
|
|
|
|
4,101
|
|
|
|
|
|
|
|
|
|
|
|
5,230
|
|
|
|
|
|
|
|
5,230
|
|
Current portion of long-term debt
|
|
|
122,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122,449
|
|
|
|
53,820
|
|
|
|
|
|
|
|
385,227
|
|
|
|
|
|
|
|
439,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
179,937
|
|
|
|
326,772
|
|
|
|
16,914
|
|
|
|
|
|
|
|
523,623
|
|
|
|
148,819
|
|
|
|
185,736
|
|
|
|
672,566
|
|
|
|
|
|
|
|
1,007,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
505,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
505,904
|
|
|
|
877,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
877,638
|
|
Other liabilities
|
|
|
51,281
|
|
|
|
37,618
|
|
|
|
16,459
|
|
|
|
|
|
|
|
105,358
|
|
|
|
54,355
|
|
|
|
4,595
|
|
|
|
51,072
|
|
|
|
|
|
|
|
110,022
|
|
Intercompany payable (receivable)
|
|
|
801,681
|
|
|
|
(812,804
|
)
|
|
|
11,123
|
|
|
|
|
|
|
|
|
|
|
|
649,565
|
|
|
|
(655,145
|
)
|
|
|
5,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,538,803
|
|
|
|
(448,414
|
)
|
|
|
44,496
|
|
|
|
|
|
|
|
1,134,885
|
|
|
|
1,730,377
|
|
|
|
(464,814
|
)
|
|
|
729,218
|
|
|
|
|
|
|
|
1,994,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
2,335,408
|
|
|
|
3,654,232
|
|
|
|
307,341
|
|
|
|
(3,961,573
|
)
|
|
|
2,335,408
|
|
|
|
2,232,432
|
|
|
|
1,920,617
|
|
|
|
975,625
|
|
|
|
(2,896,242
|
)
|
|
|
2,232,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
3,874,211
|
|
|
$
|
3,205,818
|
|
|
$
|
351,837
|
|
|
$
|
(3,961,573
|
)
|
|
$
|
3,470,293
|
|
|
$
|
3,962,809
|
|
|
$
|
1,455,803
|
|
|
$
|
1,704,843
|
|
|
$
|
(2,896,242
|
)
|
|
$
|
4,227,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GUARANTOR
SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2009
|
|
|
Three Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
King
|
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
82,122
|
|
|
$
|
417,659
|
|
|
$
|
44,393
|
|
|
$
|
(92,757
|
)
|
|
$
|
451,417
|
|
|
$
|
96,526
|
|
|
$
|
372,073
|
|
|
$
|
1,141
|
|
|
$
|
(99,751
|
)
|
|
$
|
369,989
|
|
Royalty revenue
|
|
|
|
|
|
|
11,932
|
|
|
|
|
|
|
|
|
|
|
|
11,932
|
|
|
|
|
|
|
|
18,456
|
|
|
|
|
|
|
|
|
|
|
|
18,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
82,122
|
|
|
|
429,591
|
|
|
|
44,393
|
|
|
|
(92,757
|
)
|
|
|
463,349
|
|
|
|
96,526
|
|
|
|
390,529
|
|
|
|
1,141
|
|
|
|
(99,751
|
)
|
|
|
388,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
18,865
|
|
|
|
210,844
|
|
|
|
26,561
|
|
|
|
(93,473
|
)
|
|
|
162,797
|
|
|
|
27,727
|
|
|
|
172,779
|
|
|
|
755
|
|
|
|
(99,796
|
)
|
|
|
101,465
|
|
Selling, general and administrative
|
|
|
51,790
|
|
|
|
76,525
|
|
|
|
7,427
|
|
|
|
|
|
|
|
135,742
|
|
|
|
51,926
|
|
|
|
47,297
|
|
|
|
55
|
|
|
|
|
|
|
|
99,278
|
|
Research and development
|
|
|
1,270
|
|
|
|
22,613
|
|
|
|
(1,243
|
)
|
|
|
|
|
|
|
22,640
|
|
|
|
1,764
|
|
|
|
32,091
|
|
|
|
|
|
|
|
|
|
|
|
33,855
|
|
Depreciation and amortization
|
|
|
4,622
|
|
|
|
47,873
|
|
|
|
854
|
|
|
|
|
|
|
|
53,349
|
|
|
|
4,799
|
|
|
|
25,035
|
|
|
|
60
|
|
|
|
|
|
|
|
29,894
|
|
Asset impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
732
|
|
|
|
921
|
|
|
|
|
|
|
|
|
|
|
|
1,653
|
|
|
|
26
|
|
|
|
1,127
|
|
|
|
|
|
|
|
|
|
|
|
1,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
77,279
|
|
|
|
358,776
|
|
|
|
33,599
|
|
|
|
(93,473
|
)
|
|
|
376,181
|
|
|
|
86,242
|
|
|
|
278,329
|
|
|
|
870
|
|
|
|
(99,796
|
)
|
|
|
265,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
4,843
|
|
|
|
70,815
|
|
|
|
10,794
|
|
|
|
716
|
|
|
|
87,168
|
|
|
|
10,284
|
|
|
|
112,200
|
|
|
|
271
|
|
|
|
45
|
|
|
|
122,800
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
704
|
|
|
|
24
|
|
|
|
299
|
|
|
|
|
|
|
|
1,027
|
|
|
|
8,092
|
|
|
|
14
|
|
|
|
4
|
|
|
|
|
|
|
|
8,110
|
|
Interest expense
|
|
|
(21,407
|
)
|
|
|
(749
|
)
|
|
|
(62
|
)
|
|
|
|
|
|
|
(22,218
|
)
|
|
|
(5,295
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,300
|
)
|
Gain (loss) on investments
|
|
|
521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
503
|
|
|
|
(939
|
)
|
|
|
1,962
|
|
|
|
|
|
|
|
1,526
|
|
|
|
(1,084
|
)
|
|
|
776
|
|
|
|
(716
|
)
|
|
|
|
|
|
|
(1,024
|
)
|
Equity in earnings (loss) of subsidiaries
|
|
|
52,625
|
|
|
|
5,798
|
|
|
|
(100
|
)
|
|
|
(58,323
|
)
|
|
|
|
|
|
|
93,677
|
|
|
|
|
|
|
|
|
|
|
|
(93,677
|
)
|
|
|
|
|
Intercompany interest (expense) income
|
|
|
(3,306
|
)
|
|
|
12,791
|
|
|
|
(9,485
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,704
|
)
|
|
|
2,710
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
29,640
|
|
|
|
16,925
|
|
|
|
(7,386
|
)
|
|
|
(58,323
|
)
|
|
|
(19,144
|
)
|
|
|
92,686
|
|
|
|
3,495
|
|
|
|
(718
|
)
|
|
|
(93,677
|
)
|
|
|
1,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
34,483
|
|
|
|
87,740
|
|
|
|
3,408
|
|
|
|
(57,607
|
)
|
|
|
68,024
|
|
|
|
102,970
|
|
|
|
115,695
|
|
|
|
(447
|
)
|
|
|
(93,632
|
)
|
|
|
124,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
(8,005
|
)
|
|
|
30,788
|
|
|
|
2,753
|
|
|
|
|
|
|
|
25,536
|
|
|
|
20,498
|
|
|
|
21,601
|
|
|
|
15
|
|
|
|
|
|
|
|
42,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
42,488
|
|
|
$
|
56,952
|
|
|
$
|
655
|
|
|
$
|
(57,607
|
)
|
|
$
|
42,488
|
|
|
$
|
82,472
|
|
|
$
|
94,094
|
|
|
$
|
(462
|
)
|
|
$
|
(93,632
|
)
|
|
$
|
82,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GUARANTOR
SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF
OPERATIONS (Continued)
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2009
|
|
|
Nine Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
King
|
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
260,844
|
|
|
$
|
1,219,337
|
|
|
$
|
114,232
|
|
|
$
|
(298,418
|
)
|
|
$
|
1,295,995
|
|
|
$
|
326,231
|
|
|
$
|
1,157,558
|
|
|
$
|
1,420
|
|
|
$
|
(329,137
|
)
|
|
$
|
1,156,072
|
|
Royalty revenue
|
|
|
|
|
|
|
41,399
|
|
|
|
|
|
|
|
|
|
|
|
41,399
|
|
|
|
|
|
|
|
61,257
|
|
|
|
|
|
|
|
|
|
|
|
61,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
260,844
|
|
|
|
1,260,736
|
|
|
|
114,232
|
|
|
|
(298,418
|
)
|
|
|
1,337,394
|
|
|
|
326,231
|
|
|
|
1,218,815
|
|
|
|
1,420
|
|
|
|
(329,137
|
)
|
|
|
1,217,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
76,958
|
|
|
|
616,718
|
|
|
|
76,127
|
|
|
|
(299,974
|
)
|
|
|
469,829
|
|
|
|
94,076
|
|
|
|
529,399
|
|
|
|
1,076
|
|
|
|
(329,440
|
)
|
|
|
295,111
|
|
Selling, general and administrative
|
|
|
157,662
|
|
|
|
222,845
|
|
|
|
21,133
|
|
|
|
|
|
|
|
401,640
|
|
|
|
186,684
|
|
|
|
154,349
|
|
|
|
76
|
|
|
|
|
|
|
|
341,109
|
|
Research and development
|
|
|
3,864
|
|
|
|
64,775
|
|
|
|
2,459
|
|
|
|
|
|
|
|
71,098
|
|
|
|
4,068
|
|
|
|
112,457
|
|
|
|
|
|
|
|
|
|
|
|
116,525
|
|
Depreciation and amortization
|
|
|
14,272
|
|
|
|
142,582
|
|
|
|
2,706
|
|
|
|
|
|
|
|
159,560
|
|
|
|
14,941
|
|
|
|
106,628
|
|
|
|
180
|
|
|
|
|
|
|
|
121,749
|
|
Asset impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114
|
|
|
|
39,315
|
|
|
|
|
|
|
|
|
|
|
|
39,429
|
|
Restructuring charges
|
|
|
15,039
|
|
|
|
36,139
|
|
|
|
|
|
|
|
|
|
|
|
51,178
|
|
|
|
(330
|
)
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
1,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
267,795
|
|
|
|
1,083,059
|
|
|
|
102,425
|
|
|
|
(299,974
|
)
|
|
|
1,153,305
|
|
|
|
299,553
|
|
|
|
944,148
|
|
|
|
1,332
|
|
|
|
(329,440
|
)
|
|
|
915,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(6,951
|
)
|
|
|
177,677
|
|
|
|
11,807
|
|
|
|
1,556
|
|
|
|
184,089
|
|
|
|
26,678
|
|
|
|
274,667
|
|
|
|
88
|
|
|
|
303
|
|
|
|
301,736
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
3,132
|
|
|
|
301
|
|
|
|
1,888
|
|
|
|
|
|
|
|
5,321
|
|
|
|
30,910
|
|
|
|
81
|
|
|
|
9
|
|
|
|
|
|
|
|
31,000
|
|
Interest expense
|
|
|
(69,875
|
)
|
|
|
(2,826
|
)
|
|
|
(212
|
)
|
|
|
|
|
|
|
(72,913
|
)
|
|
|
(15,544
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
(15,571
|
)
|
Gain (loss) on investments
|
|
|
(826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
544
|
|
|
|
1,008
|
|
|
|
1,307
|
|
|
|
|
|
|
|
2,859
|
|
|
|
(1,613
|
)
|
|
|
7
|
|
|
|
(245
|
)
|
|
|
|
|
|
|
(1,851
|
)
|
Equity in earnings of subsidiaries
|
|
|
124,175
|
|
|
|
17,846
|
|
|
|
(60
|
)
|
|
|
(141,961
|
)
|
|
|
|
|
|
|
204,349
|
|
|
|
|
|
|
|
|
|
|
|
(204,349
|
)
|
|
|
|
|
Intercompany interest (expense) income
|
|
|
(5,993
|
)
|
|
|
22,264
|
|
|
|
(16,271
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,424
|
)
|
|
|
9,443
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses)
|
|
|
51,157
|
|
|
|
38,593
|
|
|
|
(13,348
|
)
|
|
|
(141,961
|
)
|
|
|
(65,559
|
)
|
|
|
208,678
|
|
|
|
9,504
|
|
|
|
(255
|
)
|
|
|
(204,349
|
)
|
|
|
13,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
44,206
|
|
|
|
216,270
|
|
|
|
(1,541
|
)
|
|
|
(140,405
|
)
|
|
|
118,530
|
|
|
|
235,356
|
|
|
|
284,171
|
|
|
|
(167
|
)
|
|
|
(204,046
|
)
|
|
|
315,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
(25,495
|
)
|
|
|
72,624
|
|
|
|
1,700
|
|
|
|
|
|
|
|
48,829
|
|
|
|
26,567
|
|
|
|
79,917
|
|
|
|
41
|
|
|
|
|
|
|
|
106,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
69,701
|
|
|
$
|
143,646
|
|
|
$
|
(3,241
|
)
|
|
$
|
(140,405
|
)
|
|
$
|
69,701
|
|
|
$
|
208,789
|
|
|
$
|
204,254
|
|
|
$
|
(208
|
)
|
|
$
|
(204,046
|
)
|
|
$
|
208,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GUARANTOR
SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2009
|
|
|
Nine Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
King
|
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Consolidated
|
|
|
Cash flows provided by operating activities
|
|
$
|
(43,719
|
)
|
|
$
|
285,141
|
|
|
$
|
20,742
|
|
|
$
|
262,164
|
|
|
$
|
69,823
|
|
|
$
|
279,846
|
|
|
$
|
215
|
|
|
$
|
349,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers from (to) restricted cash
|
|
|
(42
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
(69
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
Purchases of investments in debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(279,175
|
)
|
|
|
|
|
|
|
|
|
|
|
(279,175
|
)
|
Proceeds from maturities and sales of investments in debt
securities
|
|
|
38,473
|
|
|
|
|
|
|
|
|
|
|
|
38,473
|
|
|
|
1,185,830
|
|
|
|
|
|
|
|
|
|
|
|
1,185,830
|
|
Purchases of property, plant and equipment
|
|
|
(22,506
|
)
|
|
|
(6,892
|
)
|
|
|
(210
|
)
|
|
|
(29,608
|
)
|
|
|
(34,901
|
)
|
|
|
(10,622
|
)
|
|
|
|
|
|
|
(45,523
|
)
|
Proceeds from sale of property and equipment
|
|
|
10
|
|
|
|
327
|
|
|
|
|
|
|
|
337
|
|
|
|
10,350
|
|
|
|
40
|
|
|
|
|
|
|
|
10,390
|
|
Proceeds from sale of
Kadian®
|
|
|
|
|
|
|
59,800
|
|
|
|
|
|
|
|
59,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Alpharma
|
|
|
(13,533
|
)
|
|
|
(56,697
|
)
|
|
|
|
|
|
|
(70,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of
Avinza®
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
(43
|
)
|
Forward foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
(8,906
|
)
|
|
|
(8,906
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of intellectual property and product rights
|
|
|
|
|
|
|
(2,178
|
)
|
|
|
|
|
|
|
(2,178
|
)
|
|
|
|
|
|
|
(7,890
|
)
|
|
|
|
|
|
|
(7,890
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
2,394
|
|
|
|
(5,667
|
)
|
|
|
(9,116
|
)
|
|
|
(12,389
|
)
|
|
|
882,055
|
|
|
|
(18,472
|
)
|
|
|
|
|
|
|
863,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
1,742
|
|
|
|
|
|
|
|
|
|
|
|
1,742
|
|
|
|
347
|
|
|
|
|
|
|
|
|
|
|
|
347
|
|
Net payments related to stock-based award activity
|
|
|
(3,554
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,554
|
)
|
|
|
(2,372
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,372
|
)
|
Payments on long-term debt
|
|
|
(324,073
|
)
|
|
|
(385,227
|
)
|
|
|
(1,129
|
)
|
|
|
(710,429
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt issuance costs
|
|
|
(1,313
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,313
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
|
|
|
160,278
|
|
|
|
(137,491
|
)
|
|
|
(22,787
|
)
|
|
|
|
|
|
|
263,120
|
|
|
|
(263,125
|
)
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(166,920
|
)
|
|
|
(522,718
|
)
|
|
|
(23,916
|
)
|
|
|
(713,554
|
)
|
|
|
261,095
|
|
|
|
(263,125
|
)
|
|
|
5
|
|
|
|
(2,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from exchange rate changes
|
|
|
|
|
|
|
|
|
|
|
3,535
|
|
|
|
3,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(208,245
|
)
|
|
|
(243,244
|
)
|
|
|
(8,755
|
)
|
|
|
(460,244
|
)
|
|
|
1,212,973
|
|
|
|
(1,751
|
)
|
|
|
220
|
|
|
|
1,211,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
401,657
|
|
|
|
289,996
|
|
|
|
248,559
|
|
|
|
940,212
|
|
|
$
|
9,718
|
|
|
$
|
4,645
|
|
|
$
|
5,646
|
|
|
$
|
20,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
193,412
|
|
|
$
|
46,752
|
|
|
$
|
239,804
|
|
|
$
|
479,968
|
|
|
$
|
1,222,691
|
|
|
$
|
2,894
|
|
|
$
|
5,866
|
|
|
$
|
1,231,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion contains certain forward-looking
statements that reflect managements current views of
future events and operations. This discussion should be read in
conjunction with the following: (a) Risk
Factors in our Annual Report on
Form 10-K
for the year ended December 31, 2008, which are
supplemented by the discussion under Risk Factors in
this report; (b) our audited consolidated financial
statements and related notes which are included in our Annual
Report on
Form 10-K
for the year ended December 31, 2008; and (c) our
unaudited consolidated financial statements and related notes
which are included in this report on
Form 10-Q.
Please see the sections entitled Risk Factors and
A Warning About Forward-Looking Statements in this
report for a discussion of the uncertainties, risks and
assumptions associated with these statements.
Our
Business
We are a vertically integrated pharmaceutical company that
performs basic research and develops, manufactures, markets and
sells branded prescription pharmaceutical products and animal
health products. By vertically integrated, we mean
that we have the following capabilities:
|
|
|
research and development
|
|
distribution
|
manufacturing
|
|
sales and marketing
|
packaging
|
|
business development
|
quality control and assurance
|
|
regulatory management
|
Our branded prescription pharmaceuticals include neuroscience
products (primarily pain medicines), hospital products, and
legacy brands. We also manufacture and market acute care
medicines that are delivered using an auto-injector. Our
Alpharma Animal Health business is focused on medicated feed
additives (MFAs) and water-soluble therapeutics
primarily for poultry, cattle and swine.
Our corporate strategy is focused on specialty markets,
particularly specialty-driven branded prescription
pharmaceutical markets. We believe our target markets have
significant potential, and our organization is aligned
accordingly. Our growth in specialty markets is achieved through
organic growth and acquisitions.
Under our corporate strategy we work to achieve organic growth
by maximizing the potential of our currently marketed products
through sales and marketing and prudent product life-cycle
management. By product life-cycle management, we
mean the extension of the economic life of a product, including
seeking and gaining necessary related governmental approvals, by
such means as:
|
|
|
|
|
securing from the U.S. Food and Drug Administration
(FDA) additional approved uses
(indications) for our products;
|
|
|
|
developing and producing different strengths;
|
|
|
|
producing different package sizes;
|
|
|
|
developing new dosage forms; and
|
|
|
|
developing new product formulations.
|
Our strategy also focuses on growth through the acquisition of
novel branded prescription pharmaceutical products in various
stages of development and the acquisition of prescription
pharmaceutical technologies, particularly those products and
technologies that we believe have significant market potential
and complement the commercial footprint we have established in
the neuroscience and hospital markets. Using our internal
resources and a disciplined business development process, we
strive to be a leader in developing and commercializing
innovative, clinically-differentiated therapies and technologies
in these target, specialty-driven markets. We may also seek
company acquisitions that add products or products in
development, technologies or sales and marketing capabilities to
our existing platforms or that otherwise complement our
operations. We also work to achieve organic growth by continuing
to develop investigational drugs, as we have a commitment to
research and development and advancing the products and
technologies in our development pipeline.
40
We market our branded prescription pharmaceutical products
primarily through a dedicated sales force to general/family
practitioners, internal medicine physicians, neurologists, pain
specialists, surgeons and hospitals across the United States and
in Puerto Rico. Branded prescription pharmaceutical products are
innovative products sold under a brand name that have, or
previously had, some degree of market exclusivity. When we refer
to branded prescription pharmaceutical products, we
mean branded prescription pharmaceutical products that are
intended for humans.
The animal health products of our wholly-owned subsidiary
Alpharma Inc. (Alpharma) are marketed through a
staff of trained sales and technical service and marketing
employees, many of whom are veterinarians and nutritionists.
Sales offices are located in the U.S., Europe, Canada, Mexico,
South America and Asia. Elsewhere, animal health products are
sold primarily through the use of distributors and other
third-party sales companies.
Recent
Developments
Embedatm
In August 2009, the U.S. Food and Drug Administration approved
Embedatm
(morphine sulfate and naltrexone hydrochloride) Extended Release
Capsules, a long-acting Schedule II opioid analgesic for
the management of moderate to severe pain when a continuous,
around-the-clock
opioid analgesic is needed for an extended period of time.
Embedatm
contains pellets of an extended-release oral formulation of
morphine sulfate, an opioid receptor agonist, surrounding an
inner core of naltrexone hydrochloride, an opioid receptor
antagonist.
Embedatm
is the first
FDA-approved
long-acting opioid designed to reduce drug liking and euphoria
when tampered with by crushing or chewing. However, the clinical
significance of the degree of reduction in drug liking and
euphoria reported in clinical studies has not yet been
established. There is no evidence that the naltrexone in
Embedatm
reduces the abuse liability of
Embedatm.
Embedatm
became commercially available in late September 2009.
On October 8, 2009, we received a warning letter from the
FDA, Division of Drug Marketing, Advertising, and Communications
(DDMAC) regarding certain materials utilized in our
recent commercial launch of
Embedatm.
The letter indicated these materials are false or misleading
because they omit and minimize the risks associated with the use
of
Embedatm,
fail to present the limitations to its approved indication, and
present misleading claims. We have ceased the dissemination of
these materials and have taken steps to conform other materials
we currently utilize with
Embedatm
to the guidance set forth in the warning letter. On October 16,
2009, we responded to the warning letter, providing DDMAC with a
list of materials that were discontinued and a comprehensive
plan of action to appropriately disseminate corrective messages
to those that received the original materials. We continue to
cooperate fully with DDMAC in this matter. In addition, we will
be meeting with members of the FDA staff to discuss the scope
and meaning of certain provisions of the warning letter.
Remoxy®
In early July 2009, we met with the FDA to discuss the Complete
Response Letter received by us in December 2008 regarding our
New Drug Application (NDA) for
Remoxy®.
The outcome of this meeting provided us with a clearer path
forward to resubmit the
Remoxy®
NDA and to address all FDA comments in the Complete Response
Letter. We believe the timing of the resubmission will be
determined principally by the generation of six-month stability
data. We are not required by the FDA to conduct clinical trials
in order to provide additional safety or efficacy data in
patients with moderate to severe chronic pain. As part of the
resubmission plan, and in order to strengthen the NDA, we will
conduct a likeability study and a pharmacokinetic trial in
volunteers. We anticipate the resubmission of the NDA could
occur by approximately the middle of 2010.
Remoxy®
is a unique long-acting formulation of oral oxycodone with a
proposed indication for the management of moderate to severe
pain when a continuous,
around-the-clock,
opioid analgesic is needed for an extended period of time. This
formulation uses the
Oradurtm
platform technology which provides a unique physical barrier
that is designed to provide controlled pain relief and resist
certain common methods used to extract the opioid more rapidly
than intended as can occur with products currently on the
market. Common methods used to cause a rapid extraction of an
opioid include crushing, chewing and dissolution in alcohol.
These methods are typically used to cause failure of the
controlled release dosage form, resulting in dose
dumping of oxycodone, or the immediate release of the
active drug.
41
Acurox®
Tablets
On June 30, 2009, the FDA issued a Complete Response Letter
regarding the NDA for
Acurox®
Tablets. The Complete Response Letter raises issues regarding
the potential abuse deterrent benefits of
Acurox®.
In early September 2009, we and Acura Pharmaceuticals, Inc.
(Acura) met with the FDA to discuss the Complete
Response Letter. The FDA and the Companies agreed to take the
NDA to an FDA advisory committee to consider the evidence to
support the potential opioid abuse deterrent effects of
Acurox®
Tablets. While the FDA indicated that no new clinical trials are
required at this time, we and Acura plan to initiate an
additional clinical study in volunteers to further assess the
abuse deterent features of
Acurox®.
The FDA has not yet set a meeting date for the Advisory
Committees review of the NDA. We expect the meeting to be
convened in the first half of 2010.
Acurox®
Tablets, a patented, orally administered, immediate release
tablet containing oxycodone HCl as its sole active analgesic
ingredient, has a proposed indication for the relief of moderate
to severe pain.
Acurox®
uses Acuras patented
Aversion®
Technology, which is designed to deter misuse and abuse by
intentional swallowing of excess quantities of tablets,
intravenous injection of dissolved tablets and nasal snorting of
crushed tablets. Attempts to extract oxycodone from an
Acurox®
Tablet by dissolving it in liquid result in the formation of a
viscous gel which is intended to sequester the opioid and deter
I.V. injection. Crushing an
Acurox®
Tablet for the purposes of nasal snorting releases an ingredient
that is intended to cause nasal irritation and thereby
discourage this method of misuse and abuse. Swallowing excessive
numbers of
Acurox®
Tablets releases niacin in quantities that are intended to cause
unpleasant and undesirable side effects.
CorVuetm
(binodenoson) for Injection
In December 2008, we submitted an NDA for
CorVuetm
to the FDA. On October 19, 2009, we received a Complete
Response Letter from the FDA with respect to the NDA for
Corvuetm.
We are currently evaluating the FDAs Complete Response
Letter.
CorVuetm
is a cardiac pharmacologic stress agent for use as an adjunct in
SPECT (single-photon-emission computed tomographic) cardiac
imaging intended for use in patients with or at risk for
coronary artery disease who are unable to perform a cardiac
exercise stress test.
Ketoprofen
in
Transfersome®
Gel
In September 2007, Alpharma, acquired by us in December 2008,
entered into an agreement with IDEA AG (IDEA),
through which Alpharma obtained the exclusive U.S. license
and distribution rights from IDEA to market ketoprofen in
Transfersome®
gel, a prescription topical NSAID (non-steroidal
anti-inflammatory drug).
Transfersome®
gel is IDEAs proprietary technology platform for
delivering drugs to targeted areas through the skin barrier.
Based upon a review of the progress of the licensed
products development and our view of its commercial
potential, in August 2009, pursuant to provisions in the
agreement, we provided written notice to IDEA of our intention
to terminate the agreement. The agreement was terminated in
October 2009.
Department
of Justice Investigation
As previously disclosed, Alpharma, acquired by us in December
2008, received a subpoena from DOJ in February 2007 in
connection with its investigation of alleged improper sales and
marketing practices related to the sale of the pain medicine
Kadian®.
The Company divested Alpharmas
Kadian®
assets to Actavis LLC simultaneously with the closing of the
acquisition of Alpharma.
In September 2009, we reached an agreement in principle with the
U.S. Attorneys Office and DOJ which would, if
completed, resolve this investigation. We recorded a reserve of
$42.5 million in connection with this development in the
third quarter of 2009 as an adjustment to the goodwill
associated with the purchase of Alpharma. Final agreement is
subject to the execution of a definitive settlement agreement
approved by our Board of Directors and the DOJ.
42
|
|
II.
|
RESULTS
OF OPERATIONS
|
Three
and Nine Months Ended September 30, 2009 and
2008
The following table summarizes total revenues and cost of
revenues by operating segment, excluding intercompany
transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded prescription pharmaceuticals
|
|
$
|
283,414
|
|
|
$
|
301,879
|
|
|
$
|
836,228
|
|
|
$
|
986,966
|
|
Animal Health
|
|
|
95,843
|
|
|
|
|
|
|
|
258,502
|
|
|
|
|
|
Meridian Auto-Injector
|
|
|
71,841
|
|
|
|
67,515
|
|
|
|
200,539
|
|
|
|
165,687
|
|
Royalties
|
|
|
11,932
|
|
|
|
18,456
|
|
|
|
41,399
|
|
|
|
61,257
|
|
Contract manufacturing
|
|
|
368
|
|
|
|
658
|
|
|
|
827
|
|
|
|
1,074
|
|
Other
|
|
|
(49
|
)
|
|
|
(63
|
)
|
|
|
(101
|
)
|
|
|
2,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
463,349
|
|
|
$
|
388,445
|
|
|
$
|
1,337,394
|
|
|
$
|
1,217,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues, exclusive of depreciation, amortization and
impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded prescription pharmaceuticals
|
|
$
|
79,351
|
|
|
$
|
74,178
|
|
|
$
|
216,169
|
|
|
$
|
225,256
|
|
Animal Health
|
|
|
53,372
|
|
|
|
|
|
|
|
170,474
|
|
|
|
|
|
Meridian Auto-Injector
|
|
|
28,505
|
|
|
|
24,705
|
|
|
|
77,820
|
|
|
|
61,819
|
|
Royalties
|
|
|
1,480
|
|
|
|
2,281
|
|
|
|
5,105
|
|
|
|
7,485
|
|
Contract manufacturing
|
|
|
139
|
|
|
|
299
|
|
|
|
260
|
|
|
|
537
|
|
Other
|
|
|
(50
|
)
|
|
|
2
|
|
|
|
1
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
162,797
|
|
|
$
|
101,465
|
|
|
$
|
469,829
|
|
|
$
|
295,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes our deductions from gross sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Gross Sales
|
|
$
|
548,854
|
|
|
$
|
458,171
|
|
|
$
|
1,578,731
|
|
|
$
|
1,482,548
|
|
Commercial Rebates
|
|
|
18,484
|
|
|
|
15,390
|
|
|
|
48,329
|
|
|
|
72,398
|
|
Medicare Part D Rebates
|
|
|
3,243
|
|
|
|
3,830
|
|
|
|
8,881
|
|
|
|
25,460
|
|
Medicaid Rebates
|
|
|
8,113
|
|
|
|
8,045
|
|
|
|
31,136
|
|
|
|
29,351
|
|
Chargebacks
|
|
|
28,155
|
|
|
|
21,283
|
|
|
|
83,035
|
|
|
|
67,069
|
|
Returns
|
|
|
5,926
|
|
|
|
2,927
|
|
|
|
14,154
|
|
|
|
11,352
|
|
Trade discounts/other
|
|
|
21,584
|
|
|
|
18,251
|
|
|
|
55,802
|
|
|
|
59,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
463,349
|
|
|
$
|
388,445
|
|
|
$
|
1,337,394
|
|
|
$
|
1,217,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross sales increased in the third quarter of 2009 compared to
the third quarter of 2008 and in the first nine months of 2009
compared to the first nine months of 2008, primarily due to
additional sales from the acquisition of Alpharma at the end of
December 2008 and an increase in sales in the Meridian
Auto-Injector segment. Gross sales of several key branded
prescription pharmaceuticals products decreased due to market
competition as discussed below.
Based on inventory data provided to us by our customers, we
believe that wholesale inventory levels of our key products,
Skelaxin®,
Thrombin-JMI®,
Flector®
Patch,
Avinza®,
and
Levoxyl®,
are at or below normal levels as of
43
September 30, 2009. We estimate that wholesale and retail
inventories of our products as of September 30, 2009
represent gross sales of approximately $120 million to
$130 million.
The following tables provide the activity and ending balances
for our significant deductions from gross sales:
Accrual
for Rebates, including Administrative Fees (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Balance at January 1, net of prepaid amounts
|
|
$
|
58,129
|
|
|
$
|
65,301
|
|
Current provision related to sales made in current period
|
|
|
28,512
|
|
|
|
67,155
|
|
Current provision related to sales made in prior periods
|
|
|
1,109
|
|
|
|
2,982
|
|
Alpharma acquisition
|
|
|
1,772
|
|
|
|
|
|
Rebates paid
|
|
|
(34,482
|
)
|
|
|
(83,660
|
)
|
|
|
|
|
|
|
|
|
|
Balance at March 31, net of prepaid amounts
|
|
$
|
55,040
|
|
|
$
|
51,778
|
|
|
|
|
|
|
|
|
|
|
Current provision related to sales made in current period
|
|
$
|
31,219
|
|
|
$
|
36,297
|
|
Current provision related to sales made in prior periods
|
|
|
(2,334
|
)
|
|
|
(6,490
|
)
|
Alpharma acquisition
|
|
|
885
|
|
|
|
|
|
Rebates paid
|
|
|
(35,474
|
)
|
|
|
(55,692
|
)
|
|
|
|
|
|
|
|
|
|
Balance at June 30, net of prepaid amounts
|
|
$
|
49,336
|
|
|
$
|
25,893
|
|
|
|
|
|
|
|
|
|
|
Current provision related to sales made in current period
|
|
$
|
30,200
|
|
|
$
|
27,225
|
|
Current provision related to sales made in prior periods
|
|
|
(360
|
)
|
|
|
40
|
|
Alpharma acquisition
|
|
|
886
|
|
|
|
|
|
Rebates paid
|
|
|
(41,124
|
)
|
|
|
(34,028
|
)
|
|
|
|
|
|
|
|
|
|
Balance at September 30, net of prepaid amounts
|
|
$
|
38,938
|
|
|
$
|
19,130
|
|
|
|
|
|
|
|
|
|
|
Rebates include commercial, Medicaid and Medicare rebates.
A competitor entered the market with a generic substitute for
Altace®
during December 2007 and additional competitors entered the
market in June 2008. As a result of this competition, sales of
Altace®
and utilization of
Altace®
by rebate-eligible customers significantly decreased in each
quarter of 2008 and 2009. The decrease in utilization of
Altace®
by rebate-eligible customers has, in turn, significantly
decreased the current provision related to sales made in
the current period and rebates paid in the
table above. For a discussion regarding
Altace®
net sales, please see
Altace®
within the Sales of Key Products section below.
Our calculation for Medicaid, Medicare and commercial rebate
reserves are based on estimates of utilization by
rebate-eligible customers, estimates of the level of inventory
of our products in the distribution channel that remain
potentially subject to those rebates and the terms of our rebate
obligations. During the first quarter of 2008, we estimated the
effect that the initial generic substitute would have on
Altace®
utilization by rebate-eligible customers. Actual
Altace®
rebates for the first quarter were lower than originally
anticipated, resulting in a change in estimate during the second
quarter of 2008. This change in estimate resulted in a decrease
in rebate expense of approximately $5.0 million and a
corresponding increase in
Altace®
net sales in the second quarter of 2008 and is included in the
current provision related to sales made in prior
periods in the table above. As a result of this increase
in net sales, the co-promotion expense related to net sales of
Altace®
in the second quarter of 2008 increased by approximately
$1.0 million. Accordingly, the net effect of the change in
estimate on second quarter 2008 operating income was an increase
of approximately $4.0 million fully offsetting the effect
of the estimate in the first quarter of 2008.
44
Accrual
for Returns (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Balance at January 1
|
|
$
|
33,471
|
|
|
$
|
32,860
|
|
Current provision
|
|
|
2,883
|
|
|
|
4,450
|
|
Actual returns
|
|
|
(4,646
|
)
|
|
|
(4,135
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance at March 31
|
|
$
|
31,708
|
|
|
$
|
33,175
|
|
|
|
|
|
|
|
|
|
|
Current provision
|
|
$
|
5,345
|
|
|
$
|
3,975
|
|
Actual returns
|
|
|
(6,062
|
)
|
|
|
(6,845
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance at June 30
|
|
$
|
30,991
|
|
|
$
|
30,305
|
|
|
|
|
|
|
|
|
|
|
Current provision
|
|
$
|
5,926
|
|
|
$
|
2,927
|
|
Actual returns
|
|
|
(7,743
|
)
|
|
|
(5,832
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance at September 30
|
|
$
|
29,174
|
|
|
$
|
27,400
|
|
|
|
|
|
|
|
|
|
|
Accrual
for Chargebacks (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Balance at January 1
|
|
$
|
9,965
|
|
|
$
|
11,120
|
|
Current provision
|
|
|
28,176
|
|
|
|
20,212
|
|
Actual chargebacks
|
|
|
(27,244
|
)
|
|
|
(21,080
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance at March 31
|
|
$
|
10,897
|
|
|
$
|
10,252
|
|
|
|
|
|
|
|
|
|
|
Current provision
|
|
$
|
26,704
|
|
|
$
|
25,574
|
|
Actual chargebacks
|
|
|
(27,958
|
)
|
|
|
(25,286
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance at June 30
|
|
$
|
9,643
|
|
|
$
|
10,540
|
|
|
|
|
|
|
|
|
|
|
Current provision
|
|
$
|
28,155
|
|
|
$
|
21,283
|
|
Actual chargebacks
|
|
|
(28,041
|
)
|
|
|
(22,918
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance at September 30
|
|
$
|
9,757
|
|
|
$
|
8,905
|
|
|
|
|
|
|
|
|
|
|
Branded
Prescription Pharmaceuticals Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Change
|
|
|
Nine Months
|
|
|
Change
|
|
|
|
Ended September 30,
|
|
|
2009 vs. 2008
|
|
|
Ended September 30,
|
|
|
2009 vs. 2008
|
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Branded Prescription Pharmaceutical Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skelaxin®
|
|
$
|
102,080
|
|
|
$
|
109,990
|
|
|
$
|
(7,910
|
)
|
|
|
(7.2
|
)%
|
|
$
|
304,857
|
|
|
$
|
333,095
|
|
|
$
|
(28,238
|
)
|
|
|
(8.5
|
)%
|
Thrombin-JMI®
|
|
|
43,409
|
|
|
|
66,813
|
|
|
|
(23,404
|
)
|
|
|
(35.0
|
)
|
|
|
139,310
|
|
|
|
197,585
|
|
|
|
(58,275
|
)
|
|
|
(29.5
|
)
|
Flector®
Patch
|
|
|
40,397
|
|
|
|
|
|
|
|
40,397
|
|
|
|
|
|
|
|
95,794
|
|
|
|
|
|
|
|
95,794
|
|
|
|
|
|
Avinza®
|
|
|
30,774
|
|
|
|
35,928
|
|
|
|
(5,154
|
)
|
|
|
(14.3
|
)
|
|
|
98,646
|
|
|
|
102,941
|
|
|
|
(4,295
|
)
|
|
|
(4.2
|
)
|
Levoxyl®
|
|
|
16,995
|
|
|
|
17,608
|
|
|
|
(613
|
)
|
|
|
(3.5
|
)
|
|
|
51,847
|
|
|
|
53,462
|
|
|
|
(1,615
|
)
|
|
|
(3.0
|
)
|
Altace®
|
|
|
10,119
|
|
|
|
29,950
|
|
|
|
(19,831
|
)
|
|
|
(66.2
|
)
|
|
|
27,989
|
|
|
|
154,485
|
|
|
|
(126,496
|
)
|
|
|
(81.9
|
)
|
Embedatm
|
|
|
11,230
|
|
|
|
|
|
|
|
11,230
|
|
|
|
|
|
|
|
11,230
|
|
|
|
|
|
|
|
11,230
|
|
|
|
|
|
Other
|
|
|
28,410
|
|
|
|
41,590
|
|
|
|
(13,180
|
)
|
|
|
(31.7
|
)
|
|
|
106,555
|
|
|
|
145,398
|
|
|
|
(38,843
|
)
|
|
|
(26.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
283,414
|
|
|
$
|
301,879
|
|
|
$
|
(18,465
|
)
|
|
|
(6.1
|
)%
|
|
$
|
836,228
|
|
|
$
|
986,966
|
|
|
$
|
(150,738
|
)
|
|
|
(15.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues, exclusive of depreciation, amortization and
impairments
|
|
$
|
79,351
|
|
|
$
|
74,178
|
|
|
$
|
5,173
|
|
|
|
7.0
|
%
|
|
$
|
216,169
|
|
|
$
|
225,256
|
|
|
$
|
(9,087
|
)
|
|
|
(4.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
Sales
of Key Products
Skelaxin®
In January 2009, the U.S. District Court for the Eastern
District of New York issued an order ruling invalid two patents
related to
Skelaxin®.
In June 2009, the court entered judgment against King. We have
appealed the judgment and plan to vigorously defend our
interests. The entry of the courts order may lead to
generic versions of
Skelaxin®
entering the market sooner than previously anticipated, which
would likely cause net sales of
Skelaxin®
to decline significantly.
Net sales of
Skelaxin®
decreased in the third quarter and first nine months of 2009
from the third quarter and first nine months of 2008 primarily
due to a decrease in prescriptions, partially offset by a price
increase taken in the fourth quarter of 2008 and the second
quarter of 2009. Due to a decrease in promotional efforts, total
prescriptions for
Skelaxin®
decreased approximately 22.0% and 18.5% in the third quarter and
first nine months of 2009, respectively, from the third quarter
and first nine months of 2008, according to IMS America, Ltd.
(IMS) monthly prescription data. We expect net sales
of
Skelaxin®
will continue to decrease during 2009 as a result of the
decrease in promotional efforts. We anticipate additional
decreases in net sales if generic competition enters the market.
In January 2008, we entered into an agreement with CorePharma,
LLC (CorePharma) granting CorePharma a license to
launch an authorized generic version of
Skelaxin®
in December 2012, or earlier under certain conditions.
For a discussion regarding
Skelaxin®
litigation and the risk of potential generic competition for
Skelaxin®,
please see Note 10, Commitments and
Contingencies, in Part I, Item 1,
Financial Statements.
Thrombin-JMI®
Net sales of our
Thrombin-JMI®
product decreased in the third quarter and first nine months of
2009 compared to the third quarter and first nine months of
2008, primarily due to additional price concessions and the
market entry of two competing products which caused a decrease
in gross sales. The first competing product entered the market
in the fourth quarter of 2007 and another entered the market in
the first quarter of 2008. Net sales of our
Thrombin-JMI®
product may continue to decrease as a result of competition.
Flector®
Patch
Flector®
Patch was part of the acquisition of Alpharma at the end of
December 2008. Total prescriptions for
Flector®
Patch increased approximately 27.8% and 58.7% in the third
quarter and first nine months of 2009, respectively, compared to
the third quarter and first nine months of 2008, according to
IMS monthly prescription data. At the time of acquisition, the
wholesale inventory level of
Flector®
Patch exceeded our normal levels. During the first quarter of
2009, we reduced these inventories to a level consistent with
our other promoted products. As a result, net sales of
Flector®
Patch were lower than prescription demand in the first quarter
of 2009. We believe that
Flector®
Patch net sales more closely reflected prescription demand in
the second quarter of 2009. Alpharma began selling
Flector®
Patch in January 2008.
Avinza®
Net sales of
Avinza®
decreased in the third quarter and first nine months of 2009
compared to the third quarter and first nine months of 2008
primarily due to a decrease in prescriptions, partially offset
by a price increase taken in the first quarter of 2009. Total
prescriptions for
Avinza®
decreased approximately 11.5% and 6.8% in the third quarter and
first nine months of 2009, respectively, compared to the third
quarter and first nine months of 2008, according to IMS monthly
prescription data.
On March 24, 2008, we received a warning letter from DDMAC
regarding promotional material for
Avinza®
that was created and submitted to the DDMAC by Ligand
Pharmaceuticals (the company from whom we acquired
Avinza®
in late February 2007). The letter expressed concern with the
balance of the described risks and benefits associated with the
use of the product and the justification for certain statements
made in the promotional material. We discontinued the use of
promotional materials created by Ligand prior to receiving the
letter and have
46
communicated this to DDMAC. In addition, DDMAC requested support
for certain statements included in
Avinza®
promotional materials which were then in use. We promptly
responded to this request and asked for a meeting with DDMAC to
discuss this matter.
Our request resulted in a teleconference with DDMAC
representatives on January 6, 2009. After this call, we
immediately ceased the dissemination of promotional materials
for
Avinza®
that included any statements with which DDMAC took issue in its
March 24, 2008 letter. Further, we directed our sales
representatives to discontinue the use of such materials and
ceased all advertising containing the statements discussed in
that letter. We have taken the additional corrective actions
agreed upon with DDMAC.
For a discussion regarding the risk of potential generic
competition for
Avinza®,
please see Note 10, Commitments and
Contingencies, in Part I, Item 1,
Financial Statements.
Embedatm
In August 2009, the FDA approved
Embedatm
(morphine sulfate and naltrexone hydrochloride) Extended Release
Capsules, a long-acting Schedule II opioid analgesic for
the management of moderate to severe pain when a continuous,
around-the-clock
opioid analgesic is needed for an extended period of time. We
began selling
Embedatm
in late September 2009.
Levoxyl®
Net sales of
Levoxyl®
decreased in the third quarter of 2009 compared to the third
quarter of 2008 primarily due to a decrease in prescriptions,
partially offset by price increases taken in the fourth quarter
of 2008. Net sales of
Levoxyl®
decreased in the first nine months of 2009 compared to the first
nine months of 2008 primarily due to decreases in prescriptions,
partially offset by a decrease in wholesale inventory levels in
2008 and price increases taken in the fourth quarter of 2008.
Total prescriptions for
Levoxyl®
decreased approximately 8.9% and 12.3% in the third quarter and
first nine months of 2009, respectively, compared to the third
quarter and first nine months of 2008, according to IMS monthly
prescription data. We anticipate net sales for this product will
decline in 2009 due to decreasing prescriptions.
Altace®
Net sales of
Altace®
decreased significantly in the third quarter and first nine
months of 2009 from the third quarter and first nine months of
2008 due to competitors entering the market in December 2007 and
June 2008 with generic substitutes for
Altace®.
Total prescriptions for
Altace®
decreased approximately 65.7% and 84.3% in the third quarter and
first nine months of 2009, respectively, from the third quarter
and first nine months of 2008 according to IMS monthly
prescription data.
For a discussion regarding the generic competition for
Altace®,
please see Note 10, Commitments and
Contingencies in Part I, Item 1, Financial
Statements.
Other
Other branded prescription pharmaceutical products are not
promoted through our sales force, and prescriptions for many of
our products included in this category are declining. Net sales
of other branded pharmaceutical products were lower in the third
quarter of 2009 compared to the third quarter of 2008 primarily
due to lower net sales of
Cytomel®
and a decrease in prescriptions. Net sales of other branded
pharmaceutical products were lower in the first nine months of
2009 compared to the first nine months of 2008 primarily due to
lower net sales of
Sonata®
and
Cytomel®
and a decrease in prescriptions.
47
In April 2009, a third party entered the market with a generic
substitute for
Cytomel®.
As a result of the entry of generic competition, net sales
declined in the second and third quarters of 2009 and we expect
net sales of
Cytomel®
to continue to decline in the future. Net sales of
Cytomel®
decreased from $14.1 million and $38.0 million in the
third quarter and first nine months of 2008, respectively, to
$6.6 million and $27.9 million in the third quarter
and first nine months of 2009, respectively.
Net sales of
Sonata®
decreased from $4.2 million and $30.3 million in the
third quarter and first nine months of 2008, respectively, to
$1.4 million and $3.3 million in the third quarter and
first nine months of 2009, respectively, primarily due to
competition entering the market with generic substitutes for
Sonata®.
The composition of matter patent covering
Sonata®
expired in June 2008, at which time several competitors entered
the market with generic substitutes.
As a result of generic competition for
Sonata®
and
Cytomel®
and declining demand for many other products included in this
category, we anticipate net sales of other branded prescription
pharmaceutical products will continue to decline in 2009.
Cost
of Revenues
Cost of revenues from branded pharmaceutical products decreased
in the third quarter and first nine months of 2009 versus the
third quarter and first nine months of 2008 primarily due to a
decrease in unit sales of several key products, as discussed
above, partially offset by additional cost of revenues for
Flector®
Patch which was part of the acquisition of Alpharma at the end
of December 2008.
The royalty rate on
Skelaxin®
increased in the second quarter of 2009 due to the achievement
of certain regulatory milestones under our agreement with
Mutual. For additional information on the Mutual agreement,
please see Other within the Liquidity and
Capital Resources section below.
At the time of our acquisition of Alpharma, we valued the
inventory that was acquired based on the accounting requirements
for business combinations. As a result, we increased the
carrying value of the
Flector®
Patch inventory by approximately $7.8 million. During the
third quarter and first nine months of 2009, the cost of
revenues for the branded prescription pharmaceutical products
segment reflects a charge of $2.6 million and
$6.0 million, respectively, related to the sale of this
marked-up inventory.
Special items are those particular material income or expense
items that our management believes are not related to our
ongoing, underlying business, are not recurring, or are not
generally predictable. These items include, but are not limited
to, merger and restructuring expenses; non-capitalized expenses
associated with acquisitions, such as in-process research and
development charges and inventory valuation adjustment charges;
charges resulting from the early extinguishments of debt; asset
impairment charges; expenses of drug recalls; and gains and
losses resulting from the divestiture of assets. We believe the
identification of special items enhances an analysis of our
ongoing, underlying business and an analysis of our financial
results when comparing those results to that of a previous or
subsequent like period. However, it should be noted that the
determination of whether to classify an item as a special item
involves judgments by us.
Animal
Health
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
|
|
Nine
|
|
|
Months Ended
|
|
Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
(In thousands)
|
|
(In thousands)
|
|
Animal Health revenue
|
|
$
|
95,843
|
|
|
$
|
|
|
|
$
|
258,502
|
|
|
$
|
|
|
Cost of revenues, exclusive of depreciation, amortization and
impairments
|
|
|
53,372
|
|
|
|
|
|
|
|
170,474
|
|
|
|
|
|
The Animal Health segment was part of the acquisition of
Alpharma at the end of December 2008.
At the time of the acquisition of Alpharma, we valued the
inventory that was acquired based on the accounting requirements
for business combinations. As a result, we increased the
carrying value of the Animal Health inventory
48
by approximately $34 million. During the first nine months
of 2009, the cost of revenues for the Animal Health segment
reflects a charge of $34.1 million related to the sale of
this marked-up inventory.
Meridian
Auto-Injector
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
|
|
|
|
Nine
|
|
|
|
|
Months Ended
|
|
Change
|
|
Months Ended
|
|
Change
|
|
|
September 30,
|
|
2009 vs. 2008
|
|
September 30,
|
|
2009 vs. 2008
|
|
|
2009
|
|
2008
|
|
$
|
|
%
|
|
2009
|
|
2008
|
|
$
|
|
%
|
|
|
(In thousands)
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Meridian Auto-Injector revenue
|
|
$
|
71,841
|
|
|
$
|
67,515
|
|
|
$
|
4,326
|
|
|
|
6.4
|
%
|
|
$
|
200,539
|
|
|
$
|
165,687
|
|
|
$
|
34,852
|
|
|
|
21.0
|
%
|
Cost of revenues, exclusive of depreciation, amortization and
impairments
|
|
|
28,505
|
|
|
|
24,705
|
|
|
|
3,800
|
|
|
|
15.4
|
|
|
|
77,820
|
|
|
|
61,819
|
|
|
|
16,001
|
|
|
|
25.9
|
|
Revenues and cost of revenues from our Meridian Auto-Injector
segment increased in the third quarter of 2009 compared to the
third quarter of 2008 primarily due to higher unit sales of
EpiPen. Revenues and cost of revenues from our Meridian
Auto-Injector segment increased in the first nine months of 2009
compared to the first nine months of 2008 primarily due to
higher unit sales of EpiPen and higher unit sales of products
sold to the government.
Revenues from the Meridian Auto-Injector segment fluctuate based
on the buying patterns of Dey, L.P. and government customers.
With respect to auto-injector products sold to government
entities, demand for these products is affected by the cyclical
nature of procurements as well as response to domestic and
international events. Demand for
EpiPen®
is seasonal as a result of its use in the emergency treatment of
allergic reactions for both insect stings or bites, more of
which occur in the warmer months, and food allergies, for which
demand increases in the months preceding the start of a new
school year. Most of our
EpiPen®
sales are based on our supply agreement with Dey, L.P., which
markets, distributes and sells the product worldwide, except for
Canada, where it is marketed, distributed and sold by us. Total
prescriptions for
EpiPen®
in the United States increased approximately 10.8% and 10.0% in
the third quarter and the first nine months of 2009,
respectively, compared to the third quarter and the first nine
months of 2008, according to IMS monthly prescription data.
For a discussion regarding the risk of potential generic
competition for
EpiPen®,
please see Note 10. Commitments and
Contingencies, in Part I, Item 1,
Financial Statements.
Royalties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
|
|
|
|
Nine
|
|
|
|
|
Months Ended
|
|
Change
|
|
Months Ended
|
|
Change
|
|
|
September 30,
|
|
2009 vs. 2009
|
|
September 30,
|
|
2009 vs. 2008
|
|
|
2009
|
|
2008
|
|
$
|
|
%
|
|
2009
|
|
2008
|
|
$
|
|
%
|
|
|
(In thousands)
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Royalty revenue
|
|
$
|
11,932
|
|
|
$
|
18,456
|
|
|
$
|
(6,524
|
)
|
|
|
(35.3
|
)%
|
|
$
|
41,399
|
|
|
$
|
61,257
|
|
|
$
|
(19,858
|
)
|
|
|
(32.4
|
)%
|
Cost of revenues, exclusive of depreciation, amortization and
impairments
|
|
|
1,480
|
|
|
|
2,281
|
|
|
|
(801
|
)
|
|
|
(35.1
|
)
|
|
|
5,105
|
|
|
|
7,485
|
|
|
|
(2,380
|
)
|
|
|
(31.8
|
)
|
Revenues from royalties are derived primarily from payments we
receive based on sales of
Adenoscan®.
We are not responsible for the marketing of this product.
On April 10, 2008, CV Therapeutics, Inc. and Astellas
Pharma US, Inc. (Astellas) announced that the FDA
approved regadenoson injection, an A2A adenosine receptor
agonist product that competes with
Adenoscan®.
Regadenoson has been commercialized by Astellas. Astellas is
also responsible for the marketing and sale of
Adenoscan®
pursuant to agreements we have with Astellas. With the
commercial launch of regadenoson, sales of Adenoscan and our
royalty have declined and may continue to decline. However, our
agreements with Astellas provide for minimum royalty payments to
us of $40.0 million per year for three years (beginning
June 1, 2008 and ending May 31, 2011). We will
continue to receive royalties on the sale of
Adenoscan®
through expiration of the
49
patents covering the product, but the minimum guaranteed portion
of the royalty payments terminates upon certain events,
including a finding of invalidity or unenforceability of the
patents related to
Adenoscan®.
In October 2007, we entered into an agreement with Astellas and
a subsidiary of Teva Pharmaceutical Industries Ltd. providing
Teva with the right to launch a generic version of
Adenoscan®
pursuant to a license in September 2012 or earlier under certain
conditions.
Operating
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
|
|
|
|
|
|
Nine
|
|
|
|
|
|
|
Months Ended
|
|
|
Change
|
|
|
Months Ended
|
|
|
Change
|
|
|
|
September 30,
|
|
|
2009 vs. 2008
|
|
|
September 30,
|
|
|
2009 vs. 2008
|
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Cost of revenues, exclusive of depreciation, amortization and
impairments as shown below
|
|
$
|
162,797
|
|
|
$
|
101,465
|
|
|
$
|
61,332
|
|
|
|
60.4
|
%
|
|
$
|
469,829
|
|
|
$
|
295,111
|
|
|
$
|
174,718
|
|
|
|
59.2
|
%
|
Selling, general and administrative
|
|
|
135,742
|
|
|
|
99,278
|
|
|
|
36,464
|
|
|
|
36.7
|
|
|
|
401,640
|
|
|
|
341,109
|
|
|
|
60,531
|
|
|
|
17.7
|
|
Research and development
|
|
|
22,640
|
|
|
|
33,855
|
|
|
|
(11,215
|
)
|
|
|
(33.1
|
)
|
|
|
71,098
|
|
|
|
116,525
|
|
|
|
(45,427
|
)
|
|
|
(39.0
|
)
|
Depreciation and amortization
|
|
|
53,349
|
|
|
|
29,894
|
|
|
|
23,455
|
|
|
|
78.5
|
|
|
|
159,560
|
|
|
|
121,749
|
|
|
|
37,811
|
|
|
|
31.1
|
|
Asset impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,429
|
|
|
|
(39,429
|
)
|
|
|
(100.0
|
)
|
Restructuring charges
|
|
|
1,653
|
|
|
|
1,153
|
|
|
|
500
|
|
|
|
43.4
|
|
|
|
51,178
|
|
|
|
1,670
|
|
|
|
49,508
|
|
|
|
>100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
$
|
376,181
|
|
|
$
|
265,645
|
|
|
$
|
110,536
|
|
|
|
41.6
|
%
|
|
$
|
1,153,305
|
|
|
$
|
915,593
|
|
|
$
|
237,712
|
|
|
|
26.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
|
|
|
|
|
|
Nine
|
|
|
|
|
|
|
Months Ended
|
|
|
Change
|
|
|
Months Ended
|
|
|
Change
|
|
|
|
September 30,
|
|
|
2009 vs. 2008
|
|
|
September 30,
|
|
|
2009 vs. 2008
|
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Selling, general and administrative, exclusive of co-promotion
fees
|
|
$
|
134,315
|
|
|
$
|
93,291
|
|
|
$
|
41,024
|
|
|
|
44.0
|
%
|
|
$
|
390,885
|
|
|
$
|
307,102
|
|
|
$
|
83,783
|
|
|
|
27.3
|
%
|
Acquisition related costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,733
|
|
|
|
|
|
|
|
6,733
|
|
|
|
|
|
Co-promotion fees
|
|
|
1,427
|
|
|
|
5,987
|
|
|
|
(4,560
|
)
|
|
|
(76.2
|
)
|
|
|
4,022
|
|
|
|
34,007
|
|
|
|
(29,985
|
)
|
|
|
(88.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative
|
|
$
|
135,742
|
|
|
$
|
99,278
|
|
|
$
|
36,464
|
|
|
|
36.7
|
%
|
|
$
|
401,640
|
|
|
$
|
341,109
|
|
|
$
|
60,531
|
|
|
|
17.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total revenues, total selling, general, and
administrative expenses were 29.3% and 25.6% in the third
quarter of 2009 and in the third quarter of 2008, respectively.
As a percentage of total revenues, total selling, general, and
administrative expenses were 30.0% and 28.0% in the first nine
months of 2009 and 2008, respectively.
Total selling, general and administrative expenses increased in
the third quarter and first nine months of 2009 compared to the
third quarter and first nine months of 2008 primarily due to the
acquisition of Alpharma in late December of 2008, partially
offset by a decrease in co-promotion expenses for fees that we
pay to Wyeth under our Amended and Restated Co-Promotion
Agreement (the Amended Co-Promotion Agreement). The
decrease in co-promotion expense is due to a decrease in
Altace®
net sales and the lower percentage of net sales of
Altace®
that we pay Wyeth in 2009 compared to 2008 under the Amended
Co-Promotion Agreement. For additional discussion regarding the
Amended Co-Promotion Agreement, please see Other
within the Liquidity and Capital
50
Resources section below. For a discussion regarding net
sales of
Altace®,
please see
Altace®
within the Sales of Key Products section above.
We incurred special charges of $6.7 million in the first
nine months of 2009 for costs related to the acquisition and
integration of Alpharma. For additional information related to
the acquisition of Alpharma, please see Note 7,
Acquisitions, Dispositions, Co-Promotions and
Alliances, in Part I, Item 1, Financial
Statements.
Selling, general and administrative expense includes income of
$6.7 million and $4.7 million in the third quarter of
2008 and the first nine months of 2008, respectively, primarily
due to insurance recovery of professional fees, partially offset
by professional fees related to the previously completed
investigations of our company by the Office of the Inspector
General of the U.S. Department of Health and Human
Services (HHS/OIG) and the SEC, and the private
plaintiff securities litigation. During the second and third
quarters of 2008, we recorded anticipated insurance recovery of
legal fees in the amounts of $3.0 million and
$8.0 million, respectively, related to the securities
litigation. For additional information, please see Note 10,
Commitments and Contingencies, in Part I,
Item 1, Financial Statements.
Research
and Development Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
|
|
|
|
|
|
Nine
|
|
|
|
|
|
|
Months Ended
|
|
|
Change
|
|
|
Months Ended
|
|
|
Change
|
|
|
|
September 30,
|
|
|
2009 vs. 2008
|
|
|
September 30,
|
|
|
2009 vs. 2008
|
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
22,640
|
|
|
$
|
33,855
|
|
|
$
|
(11,215
|
)
|
|
|
(33.1
|
)%
|
|
$
|
71,098
|
|
|
$
|
111,025
|
|
|
$
|
(39,927
|
)
|
|
|
(36.0
|
)%
|
Research and development in-process upon acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,500
|
|
|
|
(5,500
|
)
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development
|
|
$
|
22,640
|
|
|
$
|
33,855
|
|
|
$
|
(11,215
|
)
|
|
|
(33.1
|
)%
|
|
$
|
71,098
|
|
|
$
|
116,525
|
|
|
$
|
(45,427
|
)
|
|
|
(39.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development represents expenses associated with the
ongoing development of investigational drugs and product
life-cycle management projects in our research and development
pipeline. These expenses decreased in the third quarter and
first nine months of 2009 compared to the third quarter and
first nine months of 2008 primarily due to milestone payments
made in 2008. During the third quarter of 2008, we expensed and
paid milestones of $5.1 million associated with the
acceptance of an investigational new drug application under our
agreements with Pain Therapeutics. In the second quarter of
2008, we accrued development milestones of $15.8 million,
which were paid in the third quarter of 2008, associated with
the acceptance of the NDA filing for
Remoxy®
by the FDA. Also, during the second quarter of 2008, we expensed
and paid a $5.0 million milestone payment to Acura
associated with positive top-line results from the
Phase III clinical trial evaluating
Acuroxtm.
Research and development in-process upon acquisition
represents the actual cost of acquiring rights to novel branded
pharmaceutical projects in development from third parties, which
costs were expensed during 2008 at the time of acquisition. We
classified these costs as special items and they include the
following:
|
|
|
|
|
A charge of $3.0 million in the first nine months of 2008
for our acquisition of in-process research and development
related to the exercise of our portion for a third
immediate-release opioid product under a License, Development
and Commercialization Agreement with Acura to develop and
commercialize certain opioid analgesic products utilizing
Acuras
Aversion®
Technology in the United States, Canada and Mexico. We believe
there is a reasonable probability of completing the project
successfully; however, the success of the project depends on the
successful outcome of the clinical development program and
approval of the product by the FDA. The estimated cost to
complete the project at the time of the execution of the
agreement was approximately $16.0 million.
|
|
|
|
A charge of $2.5 million in the first nine months of 2008
for our acquisition of in-process research and development
associated with our Product Development Agreement with
CorePharma to develop new formulations of
Skelaxin®.
Any intellectual property created as a result of the agreement
will belong to us and we will grant CorePharma a non-exclusive,
royalty-free license to use this newly created intellectual
property with any product not containing metaxalone. The success
of the project depends on additional
|
51
|
|
|
|
|
development activities and FDA approval. The estimated cost to
complete the development activities at the time of the execution
of the agreement was approximately $2.5 million.
|
For a discussion regarding recent research and development
activities, please see Recent Developments above.
Depreciation
and Amortization Expense
Depreciation and amortization expense increased in the third
quarter of 2009 compared to the third quarter of 2008 primarily
due to an increase in depreciation and amortization expense
associated with the acquisition of Alpharma in late December of
2008, and an increase in amortization expense associated with
Skelaxin®.
Depreciation and amortization expense increased in the first
nine months of 2009 compared to the first nine months of 2008
primarily due to an increase in amortization expense associated
with
Skelaxin®
and an increase in depreciation and amortization expense
associated with Alpharma, which we acquired in late 2008,
partially offset by a decrease in amortization expense
associated with
Altace®.
Following the U.S. District Courts order ruling
invalid two
Skelaxin®
patents on January 20, 2009, we estimated the potential
effect on future net sales of the product. We believe that the
intangible assets associated with
Skelaxin®
are not currently impaired based on estimated undiscounted cash
flows associated with these assets. However, as a result of the
order described above, we reduced the estimated remaining useful
life of the intangible assets of
Skelaxin®
during the first quarter of 2009. The amortization expense
associated with
Skelaxin®
increased to $20.0 million in the third quarter of 2009
from $6.0 million in the third quarter of 2008 and to
$60.1 million in the first nine months of 2009 from
$17.7 million in the first nine months of 2008. If our
current estimates regarding future cash flows adversely change,
we may have to further reduce the estimated remaining useful
life and/or
write off a portion or all of these intangible assets. As of
September 30, 2009, the net intangible assets associated
with
Skelaxin®
total approximately $56.9 million.
Following the Circuit Courts decision in September 2007
invalidating our 722 patent that covered
Altace®,
we undertook an analysis of its potential effect on future net
sales of the product. Based upon this analysis, we reduced the
estimated remaining useful life of
Altace®.
Accordingly, amortization of the remaining intangibles
associated with
Altace®
was completed during the first quarter of 2008. The amortization
expense associated with
Altace®
during the first quarter of 2008 was $29.7 million.
In April 2009, a competitor entered the market with a generic
substitute for
Cytomel®.
As a result, we lowered our future sales forecast for this
product. We believe that the intangible assets associated with
Cytomel®
are not currently impaired based on estimated undiscounted cash
flows associated with these assets. However, if our estimates
regarding future cash flows adversely change, we may have to
reduce the estimated remaining useful life
and/or write
off a portion or all of these intangible assets. As of
September 30, 2009, the net intangible assets associated
with
Cytomel®
total approximately $10.6 million.
End-user demand for
Synercid®
has declined in recent years. As of September 30, 2009, the
net intangible assets associated with
Synercid®
total approximately $24.6 million. We believe that these
intangible assets are not currently impaired based on estimated
undiscounted cash flows associated with these assets. However,
if our estimates regarding future cash flows prove to be
incorrect or adversely change, we may have to reduce the
estimated remaining useful life
and/or write
off a portion or all of these intangible assets.
In addition, certain generic pharmaceutical companies have
challenged the patent covering
Avinza®.
For additional information, please see Note 10,
Commitments and Contingencies, in Part I,
Item 1, Financial Statements. If a generic
version of
Avinza®
enters the market, we may have to write off a portion or all of
the intangible assets associated with this product.
Depreciation and amortization expense included special items of
$0.7 million in the third quarter of 2008, and
$1.3 million and $1.9 million in the first nine months
of 2009 and 2008, respectively, due to accelerated depreciation
on certain assets. There was no accelerated depreciation in the
third quarter of 2009.
52
Other
Operating Expenses
In addition to the special items described above, we incurred
other special items affecting operating costs and expenses.
These other special items included the following:
|
|
|
|
|
Asset impairment charges of $39.4 million in the second
quarter of 2008, primarily associated with a decline in end-user
demand for
Synercid®.
|
|
|
|
Restructuring charges of $1.7 million and
$51.2 million in the third quarter and first nine months of
2009, respectively, primarily due to our restructuring
initiative designed to partially offset the potential decline in
Skelaxin®
net sales in the event a generic competitor enters the market.
For additional information on the first quarter 2009
restructuring event, please see Note 14,
Restructuring Activities. in Part I,
Item 1, Financial Statements.
|
Non-Operating
Items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Interest income
|
|
$
|
1,027
|
|
|
$
|
8,110
|
|
|
$
|
5,321
|
|
|
$
|
31,000
|
|
Interest expense
|
|
|
(22,218
|
)
|
|
|
(5,300
|
)
|
|
|
(72,913
|
)
|
|
|
(15,571
|
)
|
Gain (loss) on investment
|
|
|
521
|
|
|
|
|
|
|
|
(826
|
)
|
|
|
|
|
Other, net
|
|
|
1,526
|
|
|
|
(1,024
|
)
|
|
|
2,859
|
|
|
|
(1,851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
$
|
(19,144
|
)
|
|
$
|
1,786
|
|
|
$
|
(65,559
|
)
|
|
$
|
13,578
|
|
Income tax expense
|
|
|
25,536
|
|
|
|
42,114
|
|
|
|
48,829
|
|
|
|
106,525
|
|
Gain
(loss) on Investment
We incurred a gain of $0.5 million and a loss of
$0.8 million in the third quarter of 2009 and first nine
months of 2009, respectively, related to our investments in debt
securities.
Interest
Income
Interest income decreased during the third quarter and first
nine months of 2009 compared to the third quarter and first nine
months of 2008 primarily due to a lower average balance of cash,
cash equivalents and investments in debt securities due to the
acquisition of Alpharma in late December 2008, and a decrease in
interest rates.
Interest
Expense
Interest expense increased in the third quarter and first nine
months of 2009 compared to the third quarter and first nine
months of 2008 primarily due to an increase in borrowings as a
result of the acquisition of Alpharma in late December 2008. The
acquisition of Alpharma was funded with available cash on hand,
borrowings of $425.0 million under the Senior Secured
Revolving Credit Facility, as amended on December 5, 2008,
and borrowings of $200.0 million under a new Senior Secured
Term Facility.
On January 1, 2009, we adopted the Financial Accounting
Standards Board (FASB) statement that requires us to
separately account for the liability and equity components of
our $400.0 million
11/4% Convertible
Senior Notes due April 1, 2026 (the Convertible
Senior Notes) that can be settled for cash based on the
estimated nonconvertible debt borrowing rate. It requires
retrospective application to all periods presented. Thus
interest expense increased by $4.5 million and
$4.2 million in the third quarter of 2009 and the third
quarter of 2008, respectively, and $13.3 million and
$12.4 million in the first nine months of 2009 and 2008,
respectively, due to the adoption of this standard.
53
Income
Tax Expense
During the third quarter and first nine months of 2009, our
effective income tax rate was 37.5% and 41.2%, respectively.
These rates are greater than the statutory rate of 35% primarily
due to losses from foreign subsidiaries with no tax benefit,
taxes related to stock compensation and state taxes.
During each the third quarter and first nine months of 2008, our
effective income tax rate was 33.8%. This rate varied from the
statutory rate of 35% due primarily to tax benefits related to
tax-exempt interest income and domestic manufacturing
deductions, which benefits were partially offset by state taxes.
Liquidity
and Capital Resources
General
We believe that existing balances of cash, cash equivalents,
cash generated from operations and our existing revolving credit
facility are sufficient to finance our current operations and
working capital requirements on both a short-term and long-term
basis. However, we cannot predict the amount or timing of our
need for additional funds. We cannot provide assurance that
funds will be available to us when needed on favorable terms, or
at all.
Investments
in Debt Securities
As of September 30, 2009, our investments in debt
securities consisted solely of tax-exempt auction rate
securities and did not include any mortgage-backed securities or
any securities backed by corporate debt obligations. The
tax-exempt auction rate securities that we hold are long-term
variable rate bonds tied to short-term interest rates that are
intended to reset through an auction process generally every
seven, 28 or 35 days. Our investment policy requires us to
maintain an investment portfolio with a high credit quality.
Accordingly, our investments in debt securities are limited to
issues which were rated AA or higher at the time of purchase.
In the event that we attempt to liquidate a portion of our
holdings through an auction and are unable to do so, we term it
an auction failure. On February 11, 2008, we
began to experience auction failures. As of September 30,
2009, all our investments in auction rate securities, with a
total par value of $377.2 million, have experienced
multiple failed auctions. In the event of an auction failure,
the interest rate on the security is reset according to the
contractual terms in the underlying indenture. As of November 2,
2009, we have received all scheduled interest payments
associated with these securities.
The current instability in the credit markets may continue to
affect our ability to liquidate these securities. The funds
associated with failed auctions will not be accessible until a
successful auction occurs, the issuer calls or restructures the
underlying security, the underlying security matures or a buyer
outside the auction process emerges. Based on the frequency of
auction failures and the lack of market activity, current market
prices are not available for determining the fair value of these
investments. As a result, we have measured $377.2 million
in par value of our investments in debt securities and the UBS
put right discussed below, or 44.7% of the assets that we have
measured at fair value, using unobservable inputs which are
classified as Level 3 measurements. For additional
information regarding this, please see Note 4, Fair
Value Measurements, in Part I, Item 1,
Financial Statements.
As of September 30, 2009, there were cumulative unrealized
holding losses of $37.0 million recorded in accumulated
other comprehensive income (loss) on the Condensed Consolidated
Balance Sheets associated with investments in debt securities
with a par value of $323.9 million classified as available
for sale. All of these investments in debt securities have been
in continuous unrealized loss positions for greater than twelve
months. As of September 30, 2009, we believed the decline
was temporary and it was probable that the par amount of these
auction rate securities would be collectible under their
contractual terms.
During the second quarter of 2009, we sold certain auction rate
securities associated with student loans with a par value of
$20.4 million for $18.9 million to the issuer and
recognized a realized loss of $1.4 million in the Condensed
Consolidated Statement of Operations. During the fourth quarter
of 2009, we received and accepted offers from two separate
issuers of certain auction rate securities associated with
student loans that were outstanding at September 30, 2009
with par values totaling $60.9 million for
$56.7 million. The estimated fair market value of these
auction rate securities at September 30, 2009 was
$52.3 million. The unrealized loss of $8.6 million was
54
recorded in accumulated other comprehensive income (loss) on the
accompanying Condensed Consolidated Balance Sheet at
September 30, 2009 as we had no intent to sell and believed
it was more likely than not that we would not be required to
sell the security prior to recovery. During the fourth quarter
of 2009 a realized loss of $4.2 million will be recorded in
the Condensed Consolidated Statement of Operations. We have not
sold any other investments in debt securities below par value
during the periods presented in the accompanying Condensed
Consolidated Statement of Operations.
During the fourth quarter of 2008, we accepted an offer from UBS
Financial Services, Inc. (UBS) providing us the
right to sell at par value certain auction rate securities
outstanding at September 30, 2009 with a par value of $38.3
million to UBS during the period from June 30, 2010 to
July 2, 2012. We have elected the fair value option to
account for this right. As a result, gains and losses associated
with this right are recorded in other income (expense) in the
Condensed Consolidated Statement of Operations. The value of the
right to sell certain auction rate securities to UBS was
estimated considering the present value of future cash flows,
the fair value of the auction rate security and counterparty
risk. As of September 30, 2009 and December 31, 2008,
the fair value of the right to sell the auction rate securities
to UBS at par was $3.6 million and $4.0 million,
respectively. With respect to this right, during the third
quarter and first nine months of 2009, we recognized an
unrealized gain of less than $0.1 million and an unrealized
loss of $0.4 million, respectively, in other income
(expense) in the Condensed Consolidated Statement of Operations.
In addition, during the fourth quarter of 2008, we transferred
the classification of the auction rate securities that are
included in this right from
available-for-sale
securities to trading securities. As of September 30, 2009
and December 31, 2008, the fair value of the investments in
debt securities classified as trading was $34.7 million and
$36.0 million, respectively. During the third quarter and
first nine months of 2009, we recognized unrealized gains
related to these securities of $0.5 million and
$1.0 million, respectively, in other income (expense) in
the Condensed Consolidated Statement of Operations.
As of September 30, 2009, we had unrealized holding gains
of $0.9 million associated with a security that was
previously impaired, as it was determined that the losses in
previous periods were
other-than-temporary.
As of September 30, 2009, we had approximately
$377.2 million, in par value, invested in tax-exempt
auction rate securities which consisted of $258.9 million
associated with student loans backed by the Federal Family
Education Loan Program (FFELP), $89.4 million associated
with municipal bonds in which performance is supported by bond
insurers and $28.9 million associated with student loans
collateralized by loan pools which equal at least 200% of the
bond issue.
As of September 30, 2009, we classified $39.6 million
of auction rate securities as current assets and
$292.0 million as long-term assets.
Skelaxin®
As previously disclosed, we are involved in multiple legal
proceedings over patents relating to our product
Skelaxin®.
In January 2009, the U.S. District Court for the Eastern
District of New York issued an order ruling invalid two of these
patents. In June 2009, the Court entered judgment against us. We
have appealed the judgment and intend to vigorously defend our
interests. The entry of the order may lead to generic versions
of
Skelaxin®
entering the market sooner than previously anticipated, which
would likely cause net sales of
Skelaxin®
to decline significantly. For additional information regarding
Skelaxin®
litigation, please see Note 10, Commitments and
Contingencies, in Part 1, Item 1,
Financial Statements.
Following the decision of the District Court in January 2009, we
conducted an extensive examination of the company and developed
a restructuring initiative designed to partially offset the
potential material decline in Skelaxin sales in the event that a
generic competitor enters the market. This initiative included,
based on an analysis of our strategic needs: a reduction in
sales, marketing and other personnel; leveraging of staff;
expense reductions and additional controls over spending; and
reorganization of sales teams. Our animal health activities were
not affected by the restructuring.
55
We incurred total restructuring costs of approximately
$50.0 million, almost all of which was paid during the
second quarter of 2009. These costs relate to severance pay and
other employee termination expenses. For additional information,
please see Note 14, Restructuring Activities in
Part I, Item 1, Financial Statements.
Alpharma
On December 29, 2008, we completed our acquisition of all
the outstanding shares of Class A Common Stock, together
with the associated preferred stock purchase rights, of Alpharma
at a price of $37.00 per share in cash, for an aggregate
purchase price of approximately $1.6 billion. Alpharma was
a branded specialty pharmaceutical company with a growing
specialty pharmaceutical franchise in the U.S. pain market
with its
Flector®
Patch (diclofenac epolamine topical patch) and a pipeline of new
pain medicines led by
Embedatm.
Alpharma is also a global leader in the development,
registration, manufacture and marketing of MFAs and water
soluble therapeutics for food-producing animals, including
poultry, cattle and swine.
The acquisition was financed with available cash on hand,
borrowings under the Senior Secured Revolving Credit Facility of
$425.0 million and borrowings under the Term Loan of
$200.0 million. For additional information on the
borrowings, please see below.
In connection with the acquisition of Alpharma, we together with
Alpharma executed a consent order (the Consent
Order) with the U.S. Federal Trade Commission. The
Consent Order required us to divest the assets related to
Alpharmas branded oral long-acting opioid analgesic drug
Kadian®
to Actavis Elizabeth, L.L.C., (Actavis LLC). In
accordance with the Consent Order, effective upon the
acquisition of Alpharma, on December 29, 2008, we divested
the
Kadian®
product to Actavis LLC. Actavis LLC is entitled to sell
Kadian®
as a branded or generic product. Prior to this divestiture,
Actavis LLC supplied
Kadian®
to Alpharma.
Actavis LLC will pay a purchase price of up to an aggregate of
$127.5 million in cash based on the achievement of certain
Kadian®
quarterly gross profit-related milestones for the period
beginning January 1, 2009 and ending June 30, 2010.
The maximum purchase price payment associated with each calendar
quarter is as follows:
|
|
|
|
|
|
|
Maximum
|
|
|
Purchase
|
|
|
Price Payment
|
|
First Quarter 2009
|
|
$
|
30.0 million
|
|
Second Quarter 2009
|
|
|
25.0 million
|
|
Third Quarter 2009
|
|
|
25.0 million
|
|
Fourth Quarter 2009
|
|
|
20.0 million
|
|
First Quarter 2010
|
|
|
20.0 million
|
|
Second Quarter 2010
|
|
|
7.5 million
|
|
None of the quarterly payments above, when combined with all
prior payments made by Actavis LLC, shall exceed the aggregate
amount of gross profits from the sale of
Kadian®
in the United States by Actavis LLC and its affiliates for the
period beginning on January 1, 2009 and ending on the last
day of such calendar quarter. Any quarterly purchase price
payment that is not paid by Actavis LLC due to the application
of such provision will be carried forward to the next calendar
quarter, increasing the maximum quarterly payment in the
subsequent quarter. However, the cumulative purchase price
payable by Actavis LLC will not exceed the lesser of
(a) $127.5 million and (b) the gross profits from
the sale of
Kadian®,
as determined by the agreement, in the United States by Actavis
LLC and its affiliates for the period from January 1, 2009
through June 30, 2010. At the time of the divestiture, we
recorded a receivable of $115.0 million reflecting the
present value of the estimated future purchase price payments
from Actavis LLC. There was no gain or loss recorded as a result
of the divestiture. In accordance with the agreement, quarterly
payments will be received one quarter in arrears. During the
third quarter of 2009 we received $25.0 million from
Actavis LLC related to the second quarter of 2009 gross
profit from sales. During the first nine months of 2009 we
received $59.8 million from Actavis LLC, $55.0 million
related to gross profit from sales during the first and second
quarters of 2009 and $4.8 million related to inventory sold
to Actavis LLC of the time of the divestiture.
56
As part of the integration of Alpharma, management developed a
restructuring initiative to eliminate redundancies in operations
created by the acquisition. This initiative included, based on
an analysis of our strategic needs: a reduction in sales,
marketing and other personnel; leveraging of staff; expense
reductions and additional controls over spending; and
reorganization of sales teams.
We estimated total costs of approximately $69.3 million
associated with this restructuring plan, almost all of which are
cash-related costs. All employee termination costs are expected
to be paid by the end of 2011. All contract termination costs
are expected to be paid by the end of 2018. For additional
information, please see Note 14, Restructuring
Activities, in Part I, Item 1, Financial
Statements.
During the first quarter of 2009, we paid $385.2 million to
redeem the Convertible Senior Notes of Alpharma outstanding at
the time of the acquisition and at December 31, 2008. For
additional information, please see Alpharma Convertible
Senior Notes in Certain Indebtedness and Other
Matters.
Senior
Secured Revolving Credit Facility
On April 23, 2002, we established a $400.0 million
five-year Senior Secured Revolving Credit Facility which was
scheduled to mature in April 2007. On April 19, 2007, this
facility was terminated and replaced with a new
$475.0 million five-year Senior Secured Revolving Credit
Facility, as amended on December 5, 2008 (the
Revolving Credit Facility). The Revolving Credit
Facility matures in April 2012 or in September 2011 if the
Convertible Senior Notes have not been refinanced. In connection
with the acquisition of Alpharma on December 29, 2008, we
borrowed $425.0 million in principal amount under the
Revolving Credit Facility.
During the third quarter and first nine months of 2009, we made
payments of $18.6 million and $152.8 million,
respectively, on the Revolving Credit Facility,
$91.3 million in excess of that required by the terms of
the Revolving Credit Facility during the first nine months of
2009. The average interest rate on borrowings under the
Revolving Credit Facility was 5.8% in the third quarter of 2009
and 5.9% in the first nine months of 2009. The availability
under the Revolving Credit Facility was reduced to
$336.5 million as of September 30, 2009. As of
September 30, 2009, the remaining undrawn commitment amount
under the Revolving Credit Facility totals approximately
$61.3 million after giving effect to outstanding letters of
credit totaling approximately $3.0 million.
Under the Revolving Credit Facility, we are required to make
annual prepayments equal to 50% of our annual excess cash flows,
which can be reduced to 25% upon the existence of certain
conditions. In addition, we are required to make prepayments
upon the occurrence of certain events, such as an asset sale,
the issuance of debt or equity or the liquidation of auction
rate securities. These mandatory prepayments will be allocated
among the Revolving Credit Facility and the Term Facility
described below in accordance with those agreements and will
permanently reduce the commitments under the Revolving Credit
Facility. However, commitments under the Revolving Credit
Facility will not be reduced in any event below
$150.0 million.
Under the terms of the Revolving Credit Facility the credit
commitment will be automatically and permanently reduced, on a
quarterly basis, to the amounts set forth below:
|
|
|
|
|
December 31, 2009
|
|
$
|
403.8 million
|
|
December 31, 2010
|
|
|
308.8 million
|
|
December 31, 2011
|
|
|
213.8 million
|
|
March 31, 2012
|
|
|
190.0 million
|
|
We have the right to prepay, without penalty (other than
customary breakage costs), any borrowing under the Revolving
Credit Facility.
For additional discussion regarding the Revolving Credit
Facility, please see Senior Secured Revolving Credit
Facility within the Certain Indebtedness and Other
Matters section below.
Senior
Secured Term Facility
On December 29, 2008, we entered into a $200.0 million
term loan credit agreement, comprised of a
four-year
senior secured term loan facility (the Term
Facility) with a maturity date of December 28, 2012
or in September 2011 if the Convertible Senior Notes have not
been refinanced. During the third quarter and first nine months
of
57
2009, we made payments of $105.5 million and
$171.3 million, respectively, on the Term Facility,
$97.6 million and $131.5 million, respectively, in
excess of that required by our repayment schedule and the
provisions related to mandatory prepayments under the Term
Facility. The average interest rate on borrowings under the Term
Facility was 8.1% in the third quarter and first nine months of
2009.
In October 2009, we paid the outstanding balance of the Senior
Secured Term Facility, of $28.7 million, completing our
repayment obligations under the facility.
For additional discussion regarding the Term Facility, please
see Senior Secured Term Facility within the
Certain Indebtedness and Other Matters section below.
CorePharma
In June 2008, we entered into a Product Development Agreement
with CorePharma to collaborate in the development of new
formulations of metaxalone that we currently market under the
brand name
Skelaxin®.
Under the Agreement, we and CorePharma granted each other
non-exclusive cross-licenses to certain pre-existing
intellectual property. Any intellectual property created as a
result of the agreement will belong to us and we will grant
CorePharma a non-exclusive, royalty-free license to use this
newly created intellectual property with any product not
containing metaxalone. In the second quarter of 2008, we made a
non-refundable cash payment of $2.5 million to CorePharma.
Under the terms of the agreement, we will reimburse CorePharma
for its incurred cost to complete the development activities
under the agreement, subject to a cap. In addition, we could be
required to make milestone payments based on the achievement and
success of specified development activities and the achievement
of specified net sales thresholds of such formulations, as well
as royalty payments based on net sales.
Acura
In October 2007, we entered into a License, Development and
Commercialization Agreement with Acura to develop and
commercialize certain opioid analgesic products utilizing
Acuras
Aversion®
Technology in the United States, Canada and Mexico. The
agreement provides us with an exclusive license for
Acurox®
Tablets and another opioid product utilizing Acuras
Aversion®
Technology. In addition, the agreement provides us with an
option to license all future opioid analgesic products developed
utilizing Acuras
Aversion®
Technology. In May 2008 and December 2008, we exercised our
options for third and fourth immediate-release opioid products
under the agreement. In connection with the exercise of the
options, we paid non-refundable option exercise fees to Acura of
$3.0 million for each option.
Under the terms of the agreement, we made a non-refundable cash
payment of $30.0 million to Acura in December 2007. In
addition, we will reimburse Acura for all research and
development expenses incurred beginning from September 19,
2007 for
Acurox®
Tablets and all research and development expenses related to
future products after the exercise of our option to an exclusive
license for each future product. During January 2008, we made an
additional payment of $2.0 million to Acura, which was
accrued as of December 31, 2007, for certain research and
development expenses incurred by Acura prior to the closing date
of the agreement. We may make additional non-refundable cash
milestone payments to Acura based on the successful achievement
of certain clinical and regulatory milestones for
Acurox®
Tablets and for each other product developed under the
agreement. In June 2008, we made a milestone payment of
$5.0 million associated with positive top-line results from
the Phase III clinical trial evaluating
Acurox®
Tablets. We will also make an additional $50.0 million
non-refundable cash milestone payment to Acura in the first year
that the aggregate net sales of all products developed under the
agreement exceeds $750.0 million. In addition, we will make
royalty payments to Acura ranging from 5% to 25% based on the
level of combined annual net sales of all products developed
under the agreement.
Altace®
In December 2007, a third party launched a generic substitute
for
Altace®.
In June 2008, additional competitors entered the market with
generic substitutes for
Altace®.
As a result of the entry of generic competition,
Altace®
net sales decreased in 2008 and we expect net sales of
Altace®
will continue to decline significantly during 2009. For a
discussion regarding the generic competition for
Altace®,
please see Note 10, Commitments and
Contingencies, in Part I, Item 1,
Financial Statements.
58
Following the Circuit Courts decision in September 2007
invalidating our 722 Patent that covered
Altace®,
our senior management team conducted an extensive examination of
our company and developed a restructuring initiative. This
initiative included a reduction in personnel, staff leverage,
expense reductions and additional controls over spending,
reorganization of sales teams and a realignment of research and
development priorities. We incurred total costs of approximately
$67.0 million in connection with this initiative. This
total included a contract termination payment paid to Depomed,
Inc. in October of 2007 of approximately $29.7 million. We
made additional cash payments of $22.2 million during the
first quarter of 2008 primarily related to employee termination
costs. For additional information, please see Note 14,
Restructuring Activities, in Part I,
Item 1, Financial Statements.
Avinza®
In September 2006, we entered into a definitive asset purchase
agreement and related agreements with Ligand Pharmaceuticals
Incorporated (Ligand) to acquire rights to
Avinza®
(morphine sulfate long-acting).
Avinza®
is a long-acting formulation of morphine and is indicated as a
once-daily treatment for moderate to severe pain in patients who
require continuous opioid therapy for an extended period of time.
As part of the transaction, we have agreed to pay Ligand an
ongoing royalty and assume payment of Ligands royalty
obligations to third parties. We paid Ligand a royalty of 15% of
net sales of
Avinza®
until October 2008. Subsequent royalty payments to Ligand will
be based upon calendar year net sales of
Avinza®
as follows:
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|
|
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If calendar year net sales are less than $200.0 million,
the royalty payment will be 5% of all net sales.
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|
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If calendar year net sales are greater than $200.0 million,
then the royalty payment will be 10% of all net sales up to
$250.0 million, plus 15% of net sales greater than
$250.0 million.
|
Other
In June 2000, we entered into a Co-Promotion Agreement with
Wyeth to promote
Altace®
in the United States and Puerto Rico through October 29,
2008, with possible extensions as outlined in the Co-Promotion
Agreement. Under the agreement, Wyeth paid an upfront fee to us
of $75.0 million. In connection with the Co-Promotion
Agreement, we agreed to pay Wyeth a promotional fee based on
annual net sales of
Altace®.
In July 2006, we entered into an Amended and Restated
Co-Promotion Agreement with Wyeth regarding
Altace®.
Effective January 1, 2007, we assumed full responsibility
for selling and marketing
Altace®.
We have paid or will pay Wyeth a reduced annual fee as follows:
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For 2006, 15% of
Altace®
net sales up to $165.0 million, 42.5% of
Altace®
net sales in excess of $165.0 million and less than or
equal to $465.0 million, and 52.5% of
Altace®
net sales that are in excess of $465.0 million and less
than or equal to $585.0 million.
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For 2007, 30% of
Altace®
net sales, with the fee not to exceed $178.5 million.
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For 2008, 22.5% of
Altace®
net sales, with the fee not to exceed $134.0 million.
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For 2009, 14.2% of
Altace®
net sales, with the fee not to exceed $84.5 million.
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For 2010, 25% of
Altace®
net sales, with the fee not to exceed $5.0 million.
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The annual fee is accrued quarterly based on a percentage of
Altace®
net sales at a rate equal to the expected relationship of the
expected fee for the year to applicable expected
Altace®
net sales for the year.
In March 2006, we acquired the exclusive right to market,
distribute and sell
EpiPen®
throughout Canada and certain other assets from Allerex
Laboratory LTD (Allerex). Under the terms of the
agreements, the initial purchase price was approximately
$23.9 million, plus acquisition costs of approximately
$0.7 million. As an additional component of the purchase
price, we pay Allerex an earn-out equal to a percentage of
future sales of
EpiPen®
in Canada over a fixed period of time. As these additional
payments accrue, we will increase intangible assets by the
amount of the accrual. As of September 30, 2009, we have
incurred a total of $11.5 million for these earn-out
payments. The aggregate amount of these payments will not exceed
$13.2 million.
59
In December 2005, we entered into a cross-license agreement with
Mutual. Under the terms of the agreement, each of the parties
has granted the other a worldwide license to certain
intellectual property, including patent rights and know-how,
relating to metaxalone. As of January 1, 2006, we began
paying royalties on net sales of products containing metaxalone
to Mutual. This royalty increased in the fourth quarter of 2006
and the second quarter of 2009 due to the achievement of certain
milestones. The royalty percentage we pay to Mutual is currently
in the low-double-digits and could potentially increase by an
additional 10% depending on the achievement of certain
regulatory and commercial milestones in the future. In the event
certain specified net sales levels are not achieved, the royalty
could be reduced to a lower double-digit or single-digit rate.
No increases in the royalty rate are presently anticipated. The
royalty we pay to Mutual is in addition to the royalty we pay to
Elan Corporation, plc (Elan) on our current
formulation of metaxalone, which we refer to as
Skelaxin®.
During the fourth quarter of 2005, we entered into a strategic
alliance with Pain Therapeutics, Inc. to develop and
commercialize
Remoxy®
and other opioid painkillers.
Remoxy®
is an investigational novel formulation of long-acting oxycodone
with a proposed indication for the treatment of moderate to
severe pain. Under the strategic alliance, we made an upfront
cash payment of $150.0 million in December 2005 and made a
milestone payment of $5.0 million in July 2006 to Pain
Therapeutics. In August 2008, we made milestone payments
totaling $20.0 million. In addition, we may pay additional
milestone payments of up to $125.0 million in cash based on
the successful clinical and regulatory development of
Remoxy®
and other opioid products. This amount includes
$15.0 million upon FDA approval of
Remoxy®.
In March 2009, we exercised rights under our Collaboration
Agreement with Pain Therapeutics and assumed sole control and
responsibility for the development of
Remoxy®.
This includes all communications with the FDA regarding
Remoxy®
and ownership of the
Remoxy®
NDA. We are responsible for research and development expenses
related to this alliance subject to certain limitations set
forth in the agreement. After regulatory approval and
commercialization of
Remoxy®
or other products developed through this alliance, we will pay a
royalty of 15% of the cumulative net sales up to
$1.0 billion and 20% of the cumulative net sales over
$1.0 billion.
Governmental
Pricing Investigation and Related Matters
For information on these matters, please see Note 10,
Commitments and Contingencies, in Part I,
Item 1, Financial Statements.
Patent
Challenges
Certain generic companies have challenged patents on
Skelaxin®,
Avinza®
and
EpiPen®.
For additional information, please see Note 10,
Commitments and Contingencies, in Part I,
Item 1, Financial Statements. If a generic
version of
Skelaxin®,
Avinza®
or
EpiPen®
enters the market, our business, financial condition, results of
operations and cash flows could be materially adversely affected.
Cash
Flows
Operating
Activities
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|
|
|
|
|
|
|
|
Nine Months
|
|
|
Ended September 30,
|
|
|
2009
|
|
2008
|
|
|
(In thousands)
|
|
Net cash provided by operating activities
|
|
$
|
262,164
|
|
|
$
|
349,884
|
|
Our net cash from operations was lower in 2009 than in 2008
primarily due to a decrease in net sales of several key branded
prescription pharmaceutical products. While total net sales
increased from 2008 to 2009, gross margins decreased due to a
change in the composition of net sales. The branded prescription
pharmaceutical segment net sales decreased, while net sales in
the Meridian Auto-Injector and Animal Health segments increased.
Our branded prescription pharmaceutical segment has higher gross
margins than our other segments. The decrease in net sales in
the branded prescription pharmaceutical segment was partially
offset by a decrease in co-promotion fees. Please see the
section entitled Results of Operations for a
discussion of net sales, selling, general and administrative
expenses and co-promotion fees.
60
In addition, we made cash payments related to the
Skelaxin®
and Alpharma restructuring actions during the first nine months
of 2009 which reduced operating cash flows. For information
regarding the restructuring actions, please see Note 14,
Restructuring Activities in Part I,
Item 1, Financial Statements.
The following table summarizes the changes in operating assets
and liabilities and deferred taxes for the nine months
ended September 30, 2009 and 2008.
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|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Accounts receivable, net of allowance
|
|
$
|
17,672
|
|
|
$
|
14,563
|
|
Inventories
|
|
|
11,495
|
|
|
|
17,917
|
|
Prepaid expenses and other current assets
|
|
|
(11,908
|
)
|
|
|
(16,151
|
)
|
Accounts payable
|
|
|
(53,472
|
)
|
|
|
(2,294
|
)
|
Accrued expenses and other liabilities
|
|
|
(81,352
|
)
|
|
|
(152,662
|
)
|
Income taxes payable
|
|
|
(18,141
|
)
|
|
|
46,411
|
|
Deferred revenue
|
|
|
(3,510
|
)
|
|
|
(3,510
|
)
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Other assets
|
|
|
9,835
|
|
|
|
23,177
|
|
Deferred taxes
|
|
|
41,460
|
|
|
|
12,957
|
|
|
|
|
|
|
|
|
|
|
Total changes in operating assets and liabilities and deferred
taxes
|
|
$
|
(87,921
|
)
|
|
$
|
(59,592
|
)
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Ended September 30,
|
|
|
2009
|
|
2008
|
|
|
(In thousands)
|
|
Net cash (used in) provided by investing activities
|
|
$
|
(12,389
|
)
|
|
$
|
863,583
|
|
Our cash flows from investing activities for 2009 were primarily
due to payments made in connection with our acquisition of
Alpharma of $70.2 million and capital expenditures of
$29.6 million, partially offset by proceeds related to the
sale of
Kadian®
of $59.8 million and proceeds from the sale of debt securities
of $38.5 million. Our cash flows from investing activities for
2008 were primarily due to net sales of our investments in debt
securities of $906.7 million, partially offset by capital
expenditures of $45.5 million.
We anticipate capital expenditures, including capital lease
obligations, for the year ending December 31, 2009 of
approximately $40.0 to $45.0 million, which will be funded
with cash from operations. The principal capital expenditures
are anticipated to include costs associated with the preparation
of our facilities to manufacture new products as they emerge
from our research and development pipeline.
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Ended September 30,
|
|
|
2009
|
|
2008
|
|
|
(In thousands)
|
|
Net cash used in financing activities
|
|
$
|
(713,554
|
)
|
|
$
|
(2,025
|
)
|
Our cash flows used in financing activities for 2009 were
primarily related to payments on long-term debt, which included
$385.2 million related to Alpharmas convertible debt.
Our cash flows used in financing activities for 2008 were
primarily related to activities associated with our stock
compensation plans, including the exercise of employee stock
options.
61
Certain
Indebtedness and Other Matters
Convertible
Senior Notes
During 2006, we issued the Convertible Senior Notes. The
Convertible Senior Notes are unsecured obligations and are
guaranteed by each of our domestic subsidiaries on a joint and
several basis. The Convertible Senior Notes accrue interest at
an initial rate of
11/4%.
Beginning with the six-month interest period that commences on
April 1, 2013, we will pay additional interest during any
six-month interest period if the average trading price of the
Convertible Senior Notes during the five consecutive trading
days ending on the second trading day immediately preceding the
first day of such six-month period equals 120% or more of the
principal amount of the Convertible Senior Notes. Interest is
payable on April 1 and October 1 of each year, beginning
October 1, 2006.
On or after April 5, 2013, we may redeem for cash some or
all of the Convertible Senior Notes at any time at a price equal
to 100% of the principal amount of the Convertible Senior Notes
to be redeemed, plus any accrued and unpaid interest, and
liquidated damages, if any, to but excluding the date fixed for
redemption. Holders may require us to purchase for cash some or
all of their Convertible Senior Notes on April 1, 2013,
April 1, 2016 and April 1, 2021, or upon the
occurrence of a fundamental change, at 100% of the principal
amount of the Convertible Senior Notes to be purchased, plus any
accrued and unpaid interest, and liquidated damages, if any, up
to but excluding the purchase date.
Senior
Secured Revolving Credit Facility
On April 23, 2002, we established a $400.0 million,
five-year Senior Secured Revolving Credit Facility which was
scheduled to mature in April 2007. On April 19, 2007, this
facility was terminated and replaced with a new $475.0 five-year
Senior Secured Revolving Credit Facility, as amended on
December 5, 2008 (the Revolving Credit
Facility). The Revolving Credit Facility matures in April
2012 or in September 2011 if the Convertible Senior Notes have
not been refinanced. In connection with our acquisition of
Alpharma on December 29, 2008, we borrowed
$425.0 million in principal. The Revolving Credit Facility
requires us to pledge as collateral substantially all of our
assets, including 100% of the equity of our
U.S. subsidiaries and 65% of the equity of any material
foreign subsidiaries. Our obligations under this facility are
unconditionally guaranteed on a senior basis by all of our
U.S. subsidiaries. As of September 30, 2009,
$272.2 million was outstanding under the Revolving Credit
Facility and letters of credit totaled $3.0 million.
Under the terms of the Revolving Credit Facility, the credit
commitments will be automatically and permanently reduced, on a
quarterly basis. Additionally, we have the right, without
penalty (other than customary breakage costs), to prepay any
borrowing under the Revolving Credit Facility and, subject to
certain conditions, we are be required to make mandatory
prepayments. For additional information, please see the
discussion in the section titled Liquidity and Capital
Resources Senior Secured Revolving Credit
Facility above.
Our borrowings under the Revolving Credit Facility bear interest
at annual rates that, at our option, will be either:
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a base rate generally defined as the sum of (i) the greater
of (a) the prime rate of Credit Suisse and (b) the
federal funds effective rate plus 0.5% and
(ii) 4.0%; or
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an adjusted rate generally defined as the sum of (i) the
product of (a) LIBOR (by reference to the British Banking
Association Interest Settlement Rates) and (b) a fraction,
the numerator of which is one and the denominator of which is
the number one minus certain maximum statutory reserves for
Eurocurrency liabilities and (ii) 5.0%.
|
Interest on our borrowings is payable quarterly, in arrears, for
base rate loans and at the end of each interest rate period (but
not less often than quarterly) for LIBO rate loans. We are
required to pay an unused commitment fee on the difference
between committed amounts and amounts actually borrowed under
the Revolving Credit Facility equal to 0.5% per annum. We are
required to pay a letter of credit participation fee based upon
the aggregate face amount of outstanding letters of credit equal
to 5.0% per annum.
62
The Revolving Credit Facility requires us to meet certain
financial tests, including, without limitation:
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maintenance of maximum funded debt to consolidated EBITDA ratios
that range from 1.50:1 to 3.25:1 (depending on dates and the
occurrence of certain events relating to certain
patents); and
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maintenance of minimum consolidated EBITDA to interest expense
ratios that range from 3.75:1 to 4.00:1 (depending on dates and
the occurrence of certain events relating to certain patents).
|
As of September 30, 2009 and throughout 2009, we were in
compliance with these covenants.
In addition, the Revolving Credit Facility contains certain
covenants that, among other things, restrict additional
indebtedness, liens and encumbrances, sale and leaseback
transactions, loans and investments, acquisitions, dividends and
other restricted payments, transactions with affiliates, asset
dispositions, mergers and consolidations, prepayments,
redemptions and repurchases of other indebtedness, capital
expenditures and other matters customarily restricted in such
agreements. The Revolving Credit Facility contains customary
events of default, including, without limitation, payment
defaults, breaches of representations and warranties, covenant
defaults, cross-defaults to certain other material indebtedness
in excess of specified amounts, certain events of bankruptcy and
insolvency, certain ERISA events, judgments in excess of
specified amounts, certain impairments to the guarantees, and
change in control.
The Revolving Credit Facility requires us to maintain hedging
agreements that will fix the interest rates on 50% of our
outstanding long-term debt beginning 90 days after the
amendment to the facility for a period of not less than two
years. Accordingly, in March 2009, we entered into an interest
rate swap with an aggregate notional amount of
$112.5 million which was designated as a cash flow hedge of
the overall variability of cash flows. As a result of the
reduction of our variable rate
long-term
debt, we maintain greater than 50% of our outstanding
long-term
debt at fixed rates and, therefore, an interest rate swap is no
longer required. In September 2009, we terminated the interest
rate swap for $0.8 million and recognized the cost in
interest expense during the third quarter 2009.
In connection with the borrowings, we incurred approximately
$22.2 million of deferred financing costs that are being
amortized ratably from the date of the borrowing through the
maturity date.
Senior
Secured Term Facility
On December 29, 2008, we entered into a $200.0 million
term loan credit agreement, comprised of a four-year senior
secured term loan facility (the Term Facility) with
a maturity date of December 28, 2012 or in September 2011
if the Convertible Senior Notes have not been refinanced. We
borrowed $200.0 million under the Term Facility and
received proceeds of $192.0 million, net of the discount at
issuance. The Term Facility required us to pledge as collateral
substantially all of our assets, including 100% of the equity of
our U.S. subsidiaries and 65% of the equity of any material
foreign subsidiaries. Our obligations under this facility were
unconditionally guaranteed on a senior basis by all of our
U.S. subsidiaries. As of September 30, 2009, the
carrying value of the borrowings under the Term Facility was
$28.4 million. In October 2009, we paid the outstanding
balance of the Senior Secured Term Facility, of
$28.7 million, completing our repayment obligations under
the facility.
For additional information please see the discussion in the
section titled Liquidity and Capital Resources
Senior Secured Term Facility above.
Prior to our completing repayment of the Term Facility, it
required us to meet certain financial tests, including, without
limitation:
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maintenance of maximum funded debt to consolidated EBITDA ratios
that range from 1.50:1 to 3.25:1 (depending on dates and the
occurrence of certain events relating to certain
patents); and
|
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maintenance of minimum consolidated EBITDA to interest expense
ratios that range from 3.75:1 to 4.00:1 (depending on dates and
the occurrence of certain events relating to certain patents).
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As of September 30, 2009 and throughout 2009, we were in
compliance with these covenants.
63
In addition, the Term Facility contained certain covenants that,
among other things, restricted additional indebtedness, liens
and encumbrances, sale and leaseback transactions, loans and
investments, acquisitions, dividends and other restricted
payments, transactions with affiliates, asset dispositions,
mergers and consolidations, prepayments, redemptions and
repurchases of other indebtedness, capital expenditures and
other matters customarily restricted in such agreements. The
Term Facility contained customary events of default, including,
without limitation, payment defaults, breaches of
representations and warranties, covenant defaults,
cross-defaults to certain other material indebtedness in excess
of specified amounts, certain events of bankruptcy and
insolvency, certain ERISA events, judgments in excess of
specified amounts, certain impairments to the guarantees, and
change in control.
The Term Facility required us to maintain hedging agreements
that fixed the interest rates on 50% of our outstanding
long-term debt beginning 90 days after the borrowing under
the facility for a period of two years. Accordingly, in March
2009, we entered into an interest rate swap with an aggregate
notional amount of $112.5 million which was designated as a
cash flow hedge used to offset the overall variability of cash
flows. As a result of the reduction of our variable rate
long-term
debt, we maintain greater than 50% of our outstanding
long-term
debt at fixed rates and therefore an interest rate swap was no
longer required. In September 2009, we terminated the interest
rate swap for $0.8 million and recognized the cost in
interest expense during the third quarter 2009.
In connection with the borrowings, we incurred approximately
$8.7 million of deferred financing costs that were
amortized ratably from the date of the borrowing based on our
repayments.
Alpharma
Convertible Senior Notes
At the time of our acquisition of Alpharma, Alpharma had
$300.0 million of Convertible Senior Notes outstanding (the
Alpharma Notes). The Alpharma Notes were convertible
into shares of Alpharmas Class A common stock at an
initial conversion rate of 30.6725 Alpharma common shares per
$1,000 principal amount. The conversion rate of the Alpharma
Notes was subject to adjustment upon the direct or indirect sale
of all or substantially all of Alpharmas assets or more
than 50% of the outstanding shares of the Alpharma common stock
to a third party (a Fundamental Change). In the
event of a Fundamental Change, the Alpharma Notes included a
make-whole provision that adjusted the conversion rate by a
predetermined number of additional shares of Alpharmas
common stock based on (1) the effective date of the
Fundamental Change and (2) Alpharmas common stock
market price as of the effective date. The acquisition of
Alpharma by us was a Fundamental Change. As a result, Alpharma
Notes converted in connection with the acquisition were entitled
to be converted at an increased rate of 34.7053 Alpharma common
shares, at the acquisition price of $37 per share,
per $1,000 principal amount of the Alpharma Notes at a date
no later than 35 trading days after the occurrence of the
Fundamental Change.
During the first quarter of 2009, we paid $385.2 million to
redeem the Alpharma Notes.
Impact
of Inflation
We have experienced only moderate raw material and labor price
increases in recent years. In general, the price increases we
have passed along to our customers have offset inflationary
pressures.
Recently
Issued Accounting Standards
For information regarding recently issued accounting standards,
please see Note 11, Accounting Developments, in
Part I, Item 1, Financial Statements.
Critical
Accounting Policies and Estimates
We have chosen accounting policies that we believe are
appropriate to accurately and fairly report our operating
results and financial position, and apply those accounting
policies in a consistent manner.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and
64
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period.
Significant estimates for which it is reasonably possible that a
material change in estimate could occur in the near term include
forecasted future cash flows used in testing for impairments of
intangible and tangible assets and loss accruals for excess
inventory and fixed purchase commitments under our supply
contracts. Forecasted future cash flows in particular require
considerable judgment and are subject to inherent imprecision.
In the case of impairment testing, changes in estimates of
future cash flows could result in a material impairment charge
and, whether they result in an immediate impairment charge,
could result prospectively in a reduction in the estimated
remaining useful life of tangible or intangible assets, which
could be material to the financial statements.
Other significant estimates include accruals for Medicaid,
Medicare, and other rebates, returns and chargebacks, allowances
for doubtful accounts and estimates used in applying the revenue
recognition policy.
We are subject to risks and uncertainties that may cause actual
results to differ from the related estimates, and our estimates
may change from time to time in response to actual developments
and new information.
The significant accounting estimates that we believe are
important to aid in fully understanding our reported financial
results include the following:
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Intangible assets, goodwill and other long-lived
assets. When we acquire product rights in
conjunction with either business or asset acquisitions, we
allocate an appropriate portion of the purchase price to
intangible assets, goodwill and other long-lived assets. The
purchase price is allocated to products, acquired research and
development, if any, and other intangibles using the assistance
of valuation consultants. We estimate the useful lives of the
assets by factoring in the characteristics of the products such
as: patent protection, competition by products prescribed for
similar indications, estimated future introductions of competing
products and other issues. The factors that drive the estimate
of the life of the asset are inherently uncertain. We use the
straight-line method of amortization for our intangible assets.
|
We review our property, plant and equipment and intangible
assets for possible impairment whenever events or circumstances
indicate that the carrying amount of an asset may not be
recoverable. We review our goodwill for possible impairment
annually, during the first quarter, or whenever events or
circumstances indicate that the carrying amount may not be
recoverable. In any event, we evaluate the remaining useful
lives of our intangible assets each reporting period to
determine whether events and circumstances warrant a revision to
the remaining period of amortization. This evaluation is
performed through our quarterly evaluation of intangibles for
impairment. Further, on an annual basis, we review the life of
each intangible asset and make adjustments as deemed
appropriate. In evaluating goodwill for impairment, we estimate
the fair value of our individual business reporting units on a
discounted cash flow basis. Assumptions and estimates used in
the evaluation of impairment may affect the carrying value of
long-lived assets, which could result in impairment charges in
future periods. Such assumptions include projections of future
cash flows and, in some cases, the current fair value of the
asset. In addition, our depreciation and amortization policies
reflect judgments on the estimated useful lives of assets.
We may incur impairment charges in the future if prescriptions
for, or sales of, our products are less than current
expectations and result in a reduction of our estimated
undiscounted future cash flows. This may be caused by many
factors, including competition from generic substitutes,
significant delays in the manufacture or supply of materials,
the publication of negative results of studies or clinical
trials, new legislation or regulatory proposals.
65
The gross carrying amount and accumulated amortization as of
September 30, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Branded Prescription Pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
Avinza®
|
|
$
|
285,700
|
|
|
$
|
68,848
|
|
|
$
|
216,852
|
|
Skelaxin®
|
|
|
278,853
|
|
|
|
221,997
|
|
|
|
56,856
|
|
Sonata®
|
|
|
61,961
|
|
|
|
61,961
|
|
|
|
|
|
Flector®
Patch
|
|
|
130,000
|
|
|
|
8,864
|
|
|
|
121,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neuroscience
|
|
|
756,514
|
|
|
|
361,670
|
|
|
|
394,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Synercid®
|
|
|
70,959
|
|
|
|
46,404
|
|
|
|
24,555
|
|
Other hospital
|
|
|
8,442
|
|
|
|
6,655
|
|
|
|
1,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital
|
|
|
79,401
|
|
|
|
53,059
|
|
|
|
26,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bicillin®
|
|
|
92,350
|
|
|
|
34,045
|
|
|
|
58,305
|
|
Other legacy products
|
|
|
324,035
|
|
|
|
279,107
|
|
|
|
44,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy products
|
|
|
416,385
|
|
|
|
313,152
|
|
|
|
103,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Branded
|
|
|
1,252,300
|
|
|
|
727,881
|
|
|
|
524,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Animal Health
|
|
|
170,000
|
|
|
|
7,167
|
|
|
|
162,833
|
|
Meridian Auto-Injector
|
|
|
182,587
|
|
|
|
47,480
|
|
|
|
135,107
|
|
Royalties
|
|
|
3,731
|
|
|
|
3,501
|
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
1,608,618
|
|
|
$
|
786,029
|
|
|
$
|
822,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts of impairments and amortization expense for the
three months ended September 30, 2009 and 2008 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
Amortization
|
|
|
|
Impairments
|
|
|
Expense
|
|
|
Impairments
|
|
|
Expense
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Branded Prescription Pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avinza®
|
|
$
|
|
|
|
$
|
6,639
|
|
|
$
|
|
|
|
$
|
6,638
|
|
Skelaxin®
|
|
|
|
|
|
|
20,041
|
|
|
|
|
|
|
|
5,973
|
|
Flector®
Patch
|
|
|
|
|
|
|
2,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neuroscience
|
|
|
|
|
|
|
29,634
|
|
|
|
|
|
|
|
12,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Synercid®
|
|
|
|
|
|
|
1,485
|
|
|
|
|
|
|
|
1,491
|
|
Other hospital
|
|
|
|
|
|
|
76
|
|
|
|
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital
|
|
|
|
|
|
|
1,561
|
|
|
|
|
|
|
|
1,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bicillin®
|
|
|
|
|
|
|
925
|
|
|
|
|
|
|
|
926
|
|
Other legacy products
|
|
|
|
|
|
|
1,430
|
|
|
|
|
|
|
|
2,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy products
|
|
|
|
|
|
|
2,355
|
|
|
|
|
|
|
|
3,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Branded
|
|
|
|
|
|
|
33,550
|
|
|
|
|
|
|
|
18,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Animal Health
|
|
|
|
|
|
|
2,348
|
|
|
|
|
|
|
|
|
|
Meridian Auto-Injector
|
|
|
|
|
|
|
2,102
|
|
|
|
|
|
|
|
1,981
|
|
Royalties
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
38,011
|
|
|
$
|
|
|
|
$
|
20,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
The amounts of impairments and amortization expense for the nine
months ended September 30, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
Amortization
|
|
|
|
Impairments
|
|
|
Expense
|
|
|
Impairments
|
|
|
Expense
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Branded Prescription Pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avinza®
|
|
$
|
|
|
|
$
|
19,915
|
|
|
$
|
|
|
|
$
|
19,915
|
|
Skelaxin®
|
|
|
|
|
|
|
60,123
|
|
|
|
|
|
|
|
17,686
|
|
Sonata®
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
315
|
|
Flector®
Patch
|
|
|
|
|
|
|
8,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neuroscience
|
|
|
|
|
|
|
88,902
|
|
|
|
|
|
|
|
37,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Synercid®
|
|
|
|
|
|
|
4,453
|
|
|
|
38,064
|
|
|
|
6,241
|
|
Other hospital
|
|
|
|
|
|
|
228
|
|
|
|
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital
|
|
|
|
|
|
|
4,681
|
|
|
|
38,064
|
|
|
|
6,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bicillin®
|
|
|
|
|
|
|
2,775
|
|
|
|
|
|
|
|
2,777
|
|
Altace®
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,687
|
|
Other legacy products
|
|
|
|
|
|
|
4,290
|
|
|
|
1,251
|
|
|
|
8,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy products
|
|
|
|
|
|
|
7,065
|
|
|
|
1,251
|
|
|
|
41,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Branded
|
|
|
|
|
|
|
100,648
|
|
|
|
39,315
|
|
|
|
85,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Animal Health
|
|
|
|
|
|
|
7,167
|
|
|
|
|
|
|
|
|
|
Meridian Auto-Injector
|
|
|
|
|
|
|
6,199
|
|
|
|
|
|
|
|
5,846
|
|
Royalties
|
|
|
|
|
|
|
324
|
|
|
|
|
|
|
|
552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
114,338
|
|
|
$
|
39,315
|
|
|
$
|
92,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining amortization periods for significant products are
as follows:
|
|
|
|
|
Remaining Life at
|
|
|
September 30, 2009
|
|
Skelaxin®
|
|
9 months
|
Avinza®
|
|
8 years 2 months
|
Flector®
Patch
|
|
10 years 3 months
|
Synercid®
|
|
4 years 3 months
|
Bicillin®
|
|
15 years 9 months
|
|
|
|
|
|
Inventories. Our inventories are valued at the
lower of cost or market value. We evaluate our entire inventory
for short-dated or slow-moving product and inventory commitments
under supply agreements based on projections of future demand
and market conditions. For those units in inventory that are so
identified, we estimate their market value or net sales value
based on current realization trends. If the projected net
realizable value is less than cost, on a product basis, we make
a provision to reflect the lower value of that inventory. This
methodology recognizes projected inventory losses at the time
such losses are evident rather than at the time goods are
actually sold. We maintain supply agreements with some of our
vendors which contain minimum purchase requirements. We estimate
future inventory requirements based on current facts and trends.
Should our minimum purchase requirements under supply
agreements, or if our estimated future inventory requirements
exceed actual inventory quantities that we will be able to sell
to our customers, we record a charge in costs of revenues.
|
|
|
|
Accruals for rebates, returns and
chargebacks. We establish accruals for returns,
chargebacks and Medicaid, Medicare and commercial rebates in the
same period we recognize the related sales. The
|
67
|
|
|
|
|
accruals reduce revenues and are included in accrued expenses.
At the time a rebate or chargeback payment is made or a product
return is received, which occurs with a delay after the related
sale, we record a reduction to accrued expenses and, at the end
of each quarter, adjust accrued expenses for differences between
estimated and actual payments. Due to estimates and assumptions
inherent in determining the amount of returns, chargebacks and
rebates, the actual amount of product returns and claims for
chargebacks and rebates may be different from our estimates.
|
Our product returns accrual is primarily based on estimates of
future product returns over the period during which customers
have a right of return which is in turn based in part on
estimates of the remaining shelf life of our products when sold
to customers. Future product returns are estimated primarily on
historical sales and return rates. We also consider the level of
inventory of our products in the distribution channel. We base
our estimate of our Medicaid rebate, Medicare rebate, and
commercial rebate accruals on estimates of usage by
rebate-eligible customers, estimates of the level of inventory
of our products in the distribution channel that remain
potentially subject to those rebates, and the terms of our
commercial and regulatory rebate obligations. We base our
estimate of our chargeback accrual on our estimates of the level
of inventory of our products in the distribution channel that
remain subject to chargebacks, and specific contractual and
historical chargeback rates. The estimate of the level of our
products in the distribution channel is based on data provided
by our three key wholesalers under inventory management
agreements.
Our accruals for returns, chargebacks and rebates are adjusted
as appropriate for specific known developments that may result
in a change in our product returns or our rebate and chargeback
obligations. In the case of product returns, we monitor demand
levels for our products and the effects of the introduction of
competing products and other factors on this demand. When we
identify decreases in demand for products or experience higher
than historical rates of returns caused by unexpected discrete
events, we further analyze these products for potential
additional supplemental reserves.
|
|
|
|
|
Revenue recognition. Revenue is recognized
when title and risk of loss are transferred to customers,
collection of sales is reasonably assured and we have no further
performance obligations. This is generally at the time products
are received by the customer. Accruals for estimated returns,
rebates and chargebacks, determined based on historical
experience, reduce revenues at the time of sale and are included
in accrued expenses. Medicaid and certain other governmental
pricing programs involve particularly difficult interpretations
of relevant statutes and regulatory guidance, which are complex
and, in certain respects, ambiguous. Moreover, prevailing
interpretations of these statutes and guidance can change over
time. We launched
Embedatm
in late September 2009. We have recognized revenue on
Embedatm
in a manner consistent with our other products, as described
above, which is generally at the time the product is received by
the customer. We believe
Embedatm
has similar characteristics of certain of our other
pharmaceutical products such that we can reliably estimate
expected returns of the product. Royalty revenue is recognized
based on a percentage of sales (namely, contractually
agreed-upon
royalty rates) reported by third parties.
|
A WARNING
ABOUT FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
These statements relate to analyses and other information which
are based on forecasts of future results and estimates of
amounts that are not yet determinable. These statements also
relate to our future prospects, developments and business
strategies.
These forward-looking statements are identified by their use of
terms and phrases, such as anticipate,
believe, could, estimate,
expect, intend, may,
plan, predict, project,
will and other similar terms and phrases, including
references to assumptions. These statements are contained in the
Risk Factors and Managements Discussion
and Analysis of Financial Condition and Results of
Operations sections, as well as other sections of this
report. You should not unduly rely on our forward-looking
statements.
68
Forward-looking statements in this report include, but are not
limited to, those regarding:
|
|
|
|
|
the potential of, including anticipated net sales and
prescription trends for, our branded prescription pharmaceutical
products, particularly
Skelaxin®,
Avinza®,
Thrombin-JMI®,
Flector®
Patch,
Embedatm,
Levoxyl®,
Altace®,
Cytomel®
and
Synercid®;
|
|
|
|
expectations regarding the enforceability and effectiveness of
product-related patents, including, in particular, patents
related to
Skelaxin®,
Avinza®
and
Adenoscan®;
|
|
|
|
expected trends and projections with respect to particular
products, reportable segment and income and expense line items;
|
|
|
|
the adequacy of our liquidity and capital resources;
|
|
|
|
anticipated capital expenditures;
|
|
|
|
the development, approval and successful commercialization of
Remoxy®,
Acurox®
Tablets,
CorVuetm
and other products;
|
|
|
|
the cost of and the successful execution of our growth and
restructuring strategies;
|
|
|
|
anticipated developments and expansions of our business;
|
|
|
|
our plans for the manufacture of some of our products, including
products manufactured by third parties;
|
|
|
|
the potential costs, outcomes and timing of research, clinical
trials and other development activities involving pharmaceutical
products, including, but not limited to, the magnitude and
timing of potential payments to third parties in connection with
development activities;
|
|
|
|
the development of product line extensions;
|
|
|
|
the expected timing of the initial marketing of certain products;
|
|
|
|
products developed, acquired or in-licensed that may be
commercialized;
|
|
|
|
our intent, beliefs or current expectations, primarily with
respect to our future operating performance;
|
|
|
|
expectations regarding sales growth, gross margins,
manufacturing productivity, capital expenditures and effective
tax rates;
|
|
|
|
expectations regarding the outcome and potential financial
effects of various pending legal proceedings, including the
Skelaxin®,
Avinza®
and
EpiPen®
patent challenges, litigation, and other legal proceedings
described in this report;
|
|
|
|
expectations regarding our financial condition and liquidity as
well as future cash flows and earnings; and
|
|
|
|
expectations regarding our ability to liquidate our holdings of
auction rate securities and the temporary nature of unrealized
losses recorded in connection with some of those securities.
|
These forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause actual
results to be materially different from those contemplated by
our forward-looking statements. We do not undertake any
obligation to update any forward-looking statements or other
information in this report until the effective date of our
future reports required by applicable laws.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
We are exposed to market risk for changes in the market values
of some of our investments, the effect of interest rate changes
and the effect of changes in foreign currency exchange rates. We
have derivative financial instruments associated with utility
contracts which qualify as normal purchase and sales and
derivatives associated with the Convertible Senior Notes.
We are subject to interest rate risk on our variable rate debt
as changes in interest rates could adversely affect earnings and
cash flows.
69
We have marketable securities which are carried at fair value
based on the quoted price for identical securities in an active
market. Gains and losses on securities are based on the specific
identification method.
The fair market value of long-term fixed interest rate debt is
subject to interest rate risk. Generally, the fair market value
of fixed interest rate debt will decrease as interest rates rise
and increase as interest rates fall. In addition, the fair value
of our convertible debentures is affected by our stock price.
Foreign currency exchange rate movements create fluctuations in
U.S. Dollar reported amounts of foreign subsidiaries whose
local currencies are their respective functional currencies.
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Item 4.
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Controls
and Procedures
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As of the end of the period covered by this Quarterly Report on
Form 10-Q,
we carried out an evaluation, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as such term is defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934 (the Exchange
Act)). Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective to reasonably
ensure that information required to be disclosed and filed under
the Exchange Act is recorded, processed, summarized and reported
within the time periods specified, and that management will be
timely alerted to material information required to be included
in our periodic reports filed with the SEC.
On December 29, 2008, we completed our acquisition of
Alpharma. As permitted by the rules and regulations of the SEC,
we excluded Alpharma from our evaluation of our internal control
over financial reporting as of December 31, 2008. Total
assets of Alpharma represented approximately 39.7% of, and were
included in, our consolidated total assets as of
December 31, 2008. Since we acquired Alpharma at the end of
December 2008, the financial results of Alpharma were not
included in our financial results for the year ended
December 31, 2008.
The accompanying financial statements for the quarter ended
September 30, 2009 include the results of operations,
financial position, and cash flows of Alpharma. The operations
of Alpharmas pharmaceutical business have been integrated
into our branded prescription pharmaceuticals segment and
therefore were subject to internal controls over financial
reporting established by our management prior to the acquisition.
However, the assets, liabilities, results of operations and cash
flows of the Alpharma Animal Health segment included in the
accompanying 2009 financial statements were principally subject,
during the quarter ended September 30, 2009, to internal
controls over financial reporting established by Alpharma
management prior to the acquisition. We are in the process of
evaluating the effectiveness of the acquired Alpharma controls
together with our legacy internal controls over financial
reporting and will report the results of our assessment of
effectiveness as of December 31, 2009.
Except as described above, there were no changes in our internal
control over financial reporting that occurred during the
quarter ended September 30, 2009 that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II
OTHER INFORMATION
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Item 1.
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Legal
Proceedings
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The information required by this Item is incorporated by
reference to Note 10, Commitments and
Contingencies, in Part I, Item 1,
Financial Statements.
We have disclosed a number of material risks under Item 1A
of our annual report on
Form 10-K
for the year ended December 31, 2008, which we filed with
the Securities and Exchange Commission on March 2, 2009.
The following risk factor has changed materially since we filed
that report.
70
An
expansion of restrictions on, or bans of, the use of antibiotics
used in food-producing animals could result in a decrease in our
sales.
The issue of the potential transfer of increased bacterial
resistance to human pathogens due to the use of certain
antibiotics in certain food-producing animals is the subject of
discussions on a worldwide basis and, in certain instances, has
led to government restrictions on the use of antibiotics in
these food-producing animals. The sales of our animal health
segment are principally antibiotic-based products for use with
food-producing animals; therefore, future limitations in major
markets, including the U.S., or negative publicity regarding
this use of antibiotic-based products, could have a negative
impact on our business, financial condition, results of
operations and cash flows.
While most of the government activity in this area has involved
products other than those that we offer for sale, the European
Union (EU) and a number of non-EU countries,
including Norway and Turkey, banned the use of zinc bacitracin,
a feed antibiotic growth promoter manufactured by us and others
that has been used in livestock feeds for over 40 years, as
a feed additive growth promoter. We have not sold this product
as a feed additive growth promoter in these countries since the
bans took effect (initially in the EU in July 1999; in Turkey,
Bulgaria and Romania (the latter two now part of the EU) in
2000; and in Norway in January 2006). The EU ban is based upon
the Precautionary Principle, which states that a
product may be withdrawn from the market based upon a finding of
a potential threat of serious or irreversible damage even if
such finding is not supported by scientific certainty.
Taiwan, South Korea and Brazil have implemented, or are expected
to implement shortly, restrictions on the use of antibiotics in
animal feed. We have marketed antibiotics for use in
food-producing animals in these countries but will be required
to curtail or discontinue those practices. The actions by these
countries may negatively impact our business as a result of
reduced sales. It is not yet known whether this reduction will
be material to our financial position or results of operations.
Discussions of the antibiotic resistance issue continue actively
in the U.S. Various sources have published reports
concerning possible adverse human effects from the use of
antibiotics in food animals. Some of these reports have asserted
that major animal producers, some of whom are our customers or
the end-users of our products, are reducing the use of
antibiotics.
In July 2009, FDA officials expressed support for a phase-out of
growth promotion/feed efficiency uses of antibiotics in
food-producing animals. Legislation pending before Congress
would, if it were to become law, require the FDA to withdraw the
approval of such nontherapeutic uses of antibiotics unless the
FDA determines, within two years of enactment, that there
is a reasonable certainty of no harm to human health due to the
development of antimicrobial resistance that is attributable in
whole or in part to the nontherapeutic use of the drug in
food-producing animals. Under the proposed legislation, this
finding may be based on evidence submitted by the holder of the
approved product application or developed by the FDA on its own
initiative. We cannot predict whether this legislation will
become law or, if it does, whether the FDA would agree that this
standard has been satisfied for bacitracin-based products.
In July 2005, the FDA withdrew the approval of an antibiotic
poultry water medication due to concerns regarding antibiotic
resistance in humans. While we do not market this drug, this
ruling could be significant if its conclusions were expanded to
the medicated feed additives sold by us. In the absence of new
legislation, it is uncertain what additional actions, if any,
the FDA may take for approved animal drug products. However, the
FDA has established a rating system to be used to compare the
risks associated with the use of specific antibiotic products in
food producing animals, including those sold by us. While we do
not believe that the presently proposed risk assessment system
would be materially adverse to our business, it is subject to
change prior to adoption or to later amendment.
We cannot predict whether the present ban of zinc bacitracin
products may be expanded or whether other antibiotic
restrictions will be introduced. If any one of the following
events occurs, the resultant loss of sales could be material to
our financial condition, cash flows and results of operations:
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additional countries, such as the U.S., where we have material
sales of bacitracin-based products, restrict or ban the use of
zinc bacitracin or other antibiotic feed additives;
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71
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countries which are significant importers of meat act to prevent
the importation of products from countries that allow the use of
bacitracin-based or other antibiotic-containing products;
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there is an increase in public pressure to discontinue the use
of antibiotic feed additives; or
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consumers or retailers decide to purchase fewer meat products
from animals fed antibiotics.
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Item 5.
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Other
Information
|
On September 4, 2007, Alpharma Ireland Limited
(Alpharma Ireland), now our wholly-owned subsidiary,
entered into an Exclusive License Agreement (License
Agreement) with IDEA AG, a privately-held
biopharmaceutical company headquartered in Munich, Germany
(IDEA), through which Alpharma Ireland obtained the
exclusive U.S. license and distribution rights from IDEA to
market ketoprofen in
Transfersome®
gel, a prescription topical NSAID (non-steroidal
anti-inflammatory drug).
Transfersome®
gel is IDEAs proprietary technology platform for
delivering drugs to targeted areas through the skin barrier. The
License Agreement was amended on March 31, 2008. We
acquired Alpharma Irelands parent company, Alpharma Inc.,
on December 29, 2008.
Based upon a review of the progress of the licensed
products development and our view of its commercial
potential, on August 18, 2009, pursuant to provisions in
the License Agreement, Alpharma Ireland provided
90 days written notice to IDEA of its intention to
terminate the License Agreement, including the automatic
termination of certain warrants, described below, and a related
registration rights agreement. The agreement was terminated in
October 2009, which was earlier than the end of the
original
90-day
notice period. The financial terms of the License Agreement
included a $60 million license fee payment from Alpharma
Ireland to IDEA, made at the time that the parties entered into
the License Agreement, as well as: the issuance of two warrants
for the purchase of Class A Common Stock of Alpharma Inc.,
exercisable upon the occurrence of certain regulatory-related
events; milestone payments based upon development and regulatory
events, patent issuance and the results of a certain
Phase III clinical trial; and specified royalties to IDEA
on net product sales. IDEA was to have paid the costs of
specified studies, including two Phase III clinical trials
with Alpharma Ireland paying additional amounts if it used
certain data from one of the Phase III clinical trials for
specified promotional purposes. Prior to U.S. product
approval, Alpharma Ireland was obligated to make certain market
development expenditures. During the 50 months commencing
two months prior to the commercial launch of the licensed
product in the U.S., Alpharma Ireland would have also been
responsible for substantial sales, marketing and medical
education expenses.
By its terms, the License Agreement was to expire upon the later
of the expiration of all U.S. patent rights licensed by
IDEA to Alpharma Ireland or 2029; however, prior to a commercial
launch of the licensed product in the U.S., Alpharma Ireland had
the right to terminate the License Agreement upon
90 days prior written notice to IDEA.
For purposes of this report, Carla M. Shumate, Senior Vice
President Finance, Controller, is acting as principal financial
officer.
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Exhibit
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Number
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|
Description
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3
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.1(1)
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Second Amended and Restated By laws of King Pharmaceuticals, Inc.
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31
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.1
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Certificate of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
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31
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.2
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Certificate of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
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32
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.1
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Certificate of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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32
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.2
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Certificate of Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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(1) |
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Incorporated by reference to Kings Current Report on
Form 8-K
filed on September 17, 2009. |
72
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.
KING PHARMACEUTICALS, INC.
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By:
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/s/ Brian
A. Markison
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Brian A. Markison
President and Chief Executive Officer
Date: November 5, 2009
Carla M. Shumate
Senior Vice President Finance, Controller
Date: November 5, 2009
73