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| AUXL > SEC Filings for AUXL > Form 10-K on 10-Mar-2008 | All Recent SEC Filings |
10-Mar-2008
Annual Report
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing at the end of this Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the "Risk Factors" section of this Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
As used herein, the terms "Company," "Auxilium," "we," "us," or "our" refer to Auxilium Pharmaceuticals, Inc. and its subsidiaries.
Overview
We are a specialty biopharmaceutical company with a focus on developing and marketing products to urologists, endocrinologists, orthopedists and select primary care physicians. We currently have approximately 300 employees. Our only marketed product, Testimฎ, is a proprietary, topical 1% testosterone once-a-day gel indicated for the treatment of hypogonadism. Hypogonadism is defined as reduced or absent secretion of testosterone which can lead to symptoms such as low energy, loss of libido, adverse changes in body composition, irritability and poor concentration.
Our current product pipeline includes:
Phase III:
- XIAFLEX (clostridial collagenase for injection), formerly referred to as AA4500, for the treatment of Dupuytren's contracture
Phase II:
- XIAFLEX for the treatment of Peyronie's disease
- XIAFLEX for the treatment of Frozen Shoulder syndrome, or Adhesive Capsulitis
Phase I:
- AA4010, treatment for overactive bladder using our transmucosal film delivery system
Preclinical:
- one pain products using our transmucosal film delivery system.
In addition to the above, we have the rights to develop seven other compounds for the treatment of pain using our transmucosal film technology and other products using our transmucosal film technology for treatment of urological disease and for hormone replacement therapy. We also have the option to license other indications for XIAFLEX other than dermal products for topical administration.
In December 2006, we suspended our phase III trials for XIAFLEX for the treatment of Dupuytren's contracture because of a manufacturing issue. After implementing corrective actions and following batches of product manufactured earlier this year for stability, we determined that the product exhibited an appropriate, consistent stability profile over a reasonable time period and submitted the data to the FDA. As a result, the FDA lifted the clinical hold in August 2007. In September 2007, we began dosing patients in the phase III trials in the U.S. and in Australia. In December 2007, we completed patient enrollment in the phase III trials in the U.S. and in Australia.
With regard to the development of XIAFLEX for the treatment of Peyronie's disease, which also had been placed on clinical hold by FDA and then released from clinical hold in August 2007, the FDA is requiring that we conduct an animal study in order to evaluate the potential impact of XIAFLEX on normal penile tissue, in case the injection misses the targeted Peyronie's plaque, prior to commencing phase IIb studies. In late 2006, we conducted several pilot studies in dogs, the results of which were used to design the protocol for the definitive study. The definitive dog study protocol was approved by the FDA in June 2007, at which time it was initiated. Based on current project plans, including communications with the FDA on their expectations for the animal studies, we expect to submit the results of these studies to the FDA during the first half of 2008 and, pending FDA approval, commence a phase IIb study in the second quarter of 2008. We anticipate that this phase IIb study will test different regimens and further validate a patient-reported outcomes questionnaire that we have developed for Peyronie's disease.
We have never been profitable and have incurred an accumulated deficit of $224.2 million as of December 31, 2007. We expect to incur significant operating losses for the foreseeable future. We anticipate that commercialization expenses, development costs, and in-licensing milestone payments related to existing and new product candidates and to enhance our core technologies will continue to increase in the near term. In particular, we expect to incur increased costs for selling and marketing as we continue to market Testim, additional development and pre-commercialization costs for:
existing and new product opportunities;
acquisition costs for new product opportunities; and
increased general and administration expense to support the infrastructure required to grow and operate as a public company.
We will need to generate significant revenues to achieve profitability.
We expect that quarterly and annual results of operations will fluctuate for the foreseeable future due to several factors including:
the overall growth of the androgen market;
the timing and extent of research and development efforts; and
the outcome and extent of clinical trial activities.
Our limited operating history makes accurate prediction of future operating results difficult.
Net revenues. To date, all of our net revenues have been generated by the sales and out-licensing of Testim. For the near term, we expect Testim to continue to be the primary source of our net revenues. We sell Testim to pharmaceutical wholesalers, who have the right to return Testim prior to the units being dispensed through patient prescriptions. Prior to 2006, we recognized revenue based on prescription units dispensed to patients, since they are not subject to return and we did not have sufficient historical experience to reasonably estimate product returns. Based on the product return history gathered through the end of the first quarter of 2006, we determined we had the information to reasonably estimate customer returns. Therefore, in the first quarter of 2006, we began recognizing revenue for Testim sales at the time of shipment of the product to customers, net of appropriate allowances for cash discounts, rebates, patient coupons and product returns. We do not anticipate that sales of Testim outside of the U.S., pursuant to our current agreements for international distribution rights of Testim, will have a material impact on our revenues or profitability. In addition to the up-front and milestone payments these international agreements afford us, we believe they also benefit us by providing opportunities for manufacturing efficiencies through increased sales of Testim, as well as, making us an attractive partner to future licensors by providing us with global development and commercialization capabilities. We are a relatively new company and our sales prospects are uncertain. We expect our revenues to fluctuate due to:
market acceptance and pricing for Testim, including any change in wholesaler purchasing patterns;
commercialization of and market acceptance of our future products, if any;
government or private healthcare reimbursement policies, particularly with respect to Testim and our other product candidates; and
promotional efforts of our competitors and the impact on sales.
We use a third-party distributor, ICS, a division of AmerisourceBergen Corporation, or ABC, for commercial distribution activities. The majority of our sales in the U.S. are to pharmaceutical wholesalers that, in turn, distribute product to chain and other retail pharmacies, hospitals, mail-order providers and other institutional customers. Over 90% of Testim purchases are from three customers: ABC, Cardinal Health, Inc. and McKesson Corporation. Outside of the U.S., we currently rely on third parties to market, sell and distribute Testim and any of our product candidates for which we receive marketing approval from any foreign jurisdictions. For Canada, we have an agreement with Paladin Labs, Inc. to market and distribute Testim. We have entered into an agreement, as amended, with Ipsen Pharma GmbH for the rest of the world, excluding Canada, China, Japan, Mexico, Poland, Russia, South Korea, and the U.S.
Under contractual agreements with our three largest wholesalers, we provide a fee for service to the wholesalers based on shipment activity. The agreements also provide for targeted levels of required distributor inventory. Otherwise, distributors independently manage their inventories with no intervention by us. Aside from the service fees required under these agreements, we do not offer incentives for wholesalers to take shipment of product.
We record sales of Testim net of allowances for prompt payment discounts, fees to wholesalers based on shipment activity under the terms of wholesaler service agreements, managed care contract rebates and government health plan charge backs, product coupons and, commencing in the first quarter of 2006 with the change to the wholesaler method of revenue recognition, product returns. In connection with the change in revenue recognition policy, we established a reserve totaling $1,019,000 for estimated product returns and allowances. Excluding the impact of the change in revenue recognition, total product sales allowances have amounted to 18.3%, 17.4% and 16.0% of total gross revenue for the years ended December 31, 2007, 2006 and 2005, respectively. The year-over-year growth of this percentage results primarily from our entry into additional pricing contracts with managed care providers, additional distributor service agreements and new product coupon programs designed to increase revenue growth.
Cost of goods sold. All of our cost of goods sold currently relate to the sale of Testim and consists of:
raw materials;
fees paid to our contract manufacturers and related costs;
royalty payments, which currently consist solely of payments due to Bentley;
personnel costs associated with quality assurance and manufacturing oversight; and
distribution costs, including warehousing, freight and product liability insurance.
We do not anticipate any material changes in our gross margin rate in the U.S. We anticipate our gross margins for sales outside the U.S. will continue to be significantly lower than those seen in the U.S. This is due to a combination of factors which include the terms of our distribution agreements and the royalty payments due to our licensor.
Research and development. Our research and development expenses consist of:
salaries and expenses for our development personnel;
payments to consultants, investigators, contract research organizations and manufacturers in connection with our preclinical and clinical trials;
costs of developing and obtaining regulatory approvals; and
product license and milestone fees paid prior to regulatory approval.
Due to the significant risks and uncertainties inherent in the clinical development and regulatory approval processes, the cost to complete projects in development cannot be reasonably estimated. Currently, Testim is our only marketed product. XIAFLEX is in phase III of development for the treatment of Dupuytren's contracture. XIAFLEX is in phase II of development for the treatment of Peyronie's disease and Frozen Shoulder syndrome. AA4010 is in phase I of development. Results from clinical trials may not be favorable. Further, data from clinical trials is subject to varying interpretation, and may be deemed insufficient by the regulatory bodies reviewing applications for marketing approvals. As such, clinical development and regulatory programs are subject to risks and changes that may significantly impact cost projections and timelines. We expect our research and development expenses for our current products to increase as a result of further development of XIAFLEX for Dupuytren's contracture, Peyronie's disease and Frozen Shoulder syndrome. In addition, the current regulatory and political environment at the FDA, could lead to increased data requirements which could impact regulatory timelines and costs. We expect further significant increases in our expenditures to develop any other potential new product candidates that we would in-license or acquire. Expenditures will increase to develop any other product candidates that we in-license or acquire.
Selling, general and administrative. Selling, general and administrative expenses consist primarily of salaries and other related costs for personnel, marketing and promotion costs, professional fees and facilities costs. We anticipate increases in selling, general and administrative expenses due to sales and marketing costs associated with Testim, hiring of additional personnel, XIAFLEX pre-launch investment, stock compensation expense, investment in information technology, investor relations and other activities associated with operating as a publicly traded company.
Results of Operation
Accounting changes
As discussed in Note 2(e) to the Company's consolidated financial statements contained herein and under the heading "Critical Accounting Policies and Significant Judgments and Estimates" set forth below, in the first quarter of 2006 the Company began recognizing revenue for Testim sales at the time of shipment of the product to customers. Prior to 2006, the recognition of revenue on shipments of Testim units to customers was deferred until the units were dispensed through patient prescriptions. As a result of this change in revenue recognition, net revenues for year ended December 31, 2006 include a one-time benefit of $1.2 million and the net loss for the year ended December 31, 2006 includes a one-time benefit of $0.7 million, or $0.02 per share.
In addition, as discussed in Note 2(o) to the Company's consolidated financial statements contained herein, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R effective January 1, 2006 using the modified prospective transition method, which requires the application of SFAS No. 123R as of January 1, 2006, the first day of the Company's calendar year. The Company's consolidated financial statements as of and for the year ended December 31, 2006 reflect the application of SFAS No.123R. This accounting standard requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. In accordance with the modified prospective method, the Company's consolidated financial statements for periods prior to 2006 have not been restated and do not include the effect of SFAS 123R. Prior to 2006, the Company recognized the compensation expense related to stock-based awards measured by the intrinsic value of the award at grant date in accordance with APB No. 25. As a result of this change, the Company's net loss for the year ended December 31, 2006 was $2.6 million (or $0.08 per share) higher than if the Company had continued to account for share-based compensation under APB No. 25.
Years Ended December 31, 2007 and 2006
Net revenues. For fiscal year 2007, net revenues totaled $95.7 million compared to net revenues of $68.5 million for the year 2006, an increase of 40%. This increase in net revenues resulted primarily from substantial growth in Testim demand resulting from increased prescriptions and increases in pricing, net of discounts, rebates and coupons. According to National Prescription Audit (NPA) data from IMS Health (IMS), a pharmaceutical market research firm, Testim total prescriptions for 2007 grew 35.2% compared to 2006. We believe that Testim prescription growth in the 2007 period over the 2006 period was driven by physician and patient acceptance that Testim provides better patient outcomes, the shift in prescriptions away from the testosterone patch product and the other gel product to Testim, and the continued focus of our sales force on the promotion of Testim to urologists, endocrinologists and select primary care physicians. Net revenues for 2007 benefited from price increases having a
cumulative impact of 11% over the comparable 2006 period, which was partially offset by increases in wholesaler discounts due to increased distribution costs, product rebates as Testim became more widely prescribed by managed care providers and increased coupon usage. Net revenues in 2007 and 2006 include $2.3 million and $0.6 million, respectively, of international product shipments and $0.7 million, in each year, of revenues related to up-front and milestone payments. Net revenues for 2006 include one-time benefits of $1.2 million recorded upon adoption of the wholesaler method of revenue recognition and of $0.6 million representing previously received non-refundable payments that were forfeited upon the mutual termination of an international distribution agreement.
Cost of goods sold. Cost of goods sold were $24.6 million and $17.7 million for the years ended December 31, 2007 and 2006, respectively. The increase in cost of goods sold in 2007 over 2006 was directly attributable to the increase in Testim revenue. Gross margin on net revenues was 74.3% in 2007 compared to 74.2% for 2006. The improvement in gross margin in 2007 over 2006 reflects the impact on year-over-year price increases which was substantially offset by a lower margin rate on international shipments, increased coupon usage and costs related to Testim manufacturing and quality improvement programs. The cost of goods sold for international product shipments in 2007 and 2006 amounted to $1.9 million and $0.6 million, respectively. Gross margin for U.S. revenues was 75.5% in 2007 compared to 74.6%, excluding the impact of the change in revenue recognition discussed above, for 2006.
Research and development expenses. Research and development expenses were $42.8 million and $37.9 million for the years ended December 31, 2007 and 2006, respectively. The increase in 2007 over 2006 was primarily due to the increased spending for development and manufacturing scale-up associated with XIAFLEX and additional stock-based compensation expense attributable to research and development. These increases were offset by a $5.3 million decrease in costs associated with the discontinuance of TestoFilm development.
Selling, general and administrative expenses. Selling, general and administrative expenses were $72.8 million and $61.3 million for the years ended December 31, 2007 and 2006, respectively. The increase in 2007 over 2006 was due primarily to selling and marketing expenses increasing by $8.4 million resulting from the increases in our Testim sales force made in late 2006 and pre-launch marketing for XIAFLEX, offset by the decrease in costs resulting from the termination in 2006 of a co-promotion agreement with Oscient. General and administrative expenses increased by $3.1 million as a result of the additional stock-based compensation expense and increases in administrative headcount.
Interest income (expense), net. Interest income (expense), net was $3.7 million and $2.4 million for the years ended 2007 and 2006, respectively. Net interest income in 2007 and 2006 relates primarily to interest earned on the invested proceeds from our registered direct offerings in June 2007 and September 2006.
Income Taxes. At December 31, 2007, we had federal net operating loss carryforwards of approximately $194.6 million, which will expire in 2019 through 2027, if not utilized. In addition, we had state net operating loss carryforwards of approximately $165.8 million, of which $77.7 million relate to Pennsylvania, which will expire 2010 through 2027 if not utilized. Future utilization of Pennsylvania net operating losses is limited to the greater of 12.5% of Pennsylvania taxable income or $3.0 million per year. At December 31, 2007, we had federal research and development credits of approximately $4.3 million that will expire in 2020 through 2027, if not utilized.
The Internal Revenue Code provides for a limitation on the annual use of net operating loss and research and development tax credit carryforwards following certain ownership changes that could limit our ability to utilize these carryforwards. We may have experienced various ownership changes, as a result of past financings. Accordingly, our ability to utilize the aforementioned carryforwards may be limited. Additionally, U.S. tax laws limit the time during which these carryforwards may be applied against future taxes; therefore, we may not be able to take full advantage of these carryforwards for federal income tax purposes.
On January 1, 2007 the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109", which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation did not have any material impact on the Company's results of operation or financial position.
Years Ended December 31, 2006 and 2005
Net revenues. For fiscal year 2006, net revenues totaled $68.5 million compared to net revenues of $42.8 million for the year 2005, an increase of 60%. This increase in net revenues resulted primarily from substantial growth in Testim demand resulting from increased prescriptions and increases in pricing, net of discounts, rebates and coupons. According to NPA data from IMS, a pharmaceutical market research firm, Testim total prescriptions for 2006 grew 37.7% compared to 2005. We believe that Testim prescription growth in the 2006 period over the 2005 period was driven by physician and patient acceptance that Testim provides better patient outcomes, the shift in prescriptions away from the testosterone patch product and the other gel product to Testim, the continued focus of our sales force on the promotion of Testim to urologists, endocrinologists and select primary care physicians, and our co-promotion agreement with Oscient Pharmaceuticals, Inc., or Oscient. Net revenues for 2006 benefited from price increases having a cumulative impact of 10% over the comparable 2005 period, which was partially offset by increases in wholesaler discounts due to increased distribution costs and product rebates as Testim became more widely prescribed by managed care providers. Net revenues for 2006 include one-time benefits of $1.2 million recorded in the first quarter upon adoption of the wholesaler method of revenue recognition and of $0.6 million recorded in the fourth quarter representing previously received non-refundable payments that were forfeited upon the mutual termination of the distribution agreement with Bayer, Inc., or Bayer. Net revenues in 2006 and 2005 also include $0.6 million and $1.0 million, respectively, of product shipped to Ipsen and $0.7 million and $0.6 million, respectively, of revenues related to up-front and milestone payments.
Cost of goods sold. Cost of goods sold were $17.7 million and $13.1 million for the years ended December 31, 2006 and 2005, respectively. The increase in cost of goods sold in 2006 over 2005 was directly attributable to the increase in Testim revenue. Gross margin on net revenues was 74.2% in 2006 compared to 69.4% for 2005. The improvement in gross margin in 2006 over 2005 principally reflects the year-over-year price increases, a reduction in the royalty rate paid to the Company's licensor, and manufacturing cost reductions, as well as the one-time revenue benefits discussed above. The cost of goods sold for product shipped to Ipsen in 2006 and 2005 amounted to $0.6 million and $0.9 million, respectively. Excluding the impact of the change in revenue recognition discussed above, gross margin for U.S. revenues was 74.6% in 2006 compared to 70.4% for 2005.
Research and development expenses. Research and development expenses were $37.9 million and $24.3 million for the years ended December 31, 2006 and 2005, respectively. The increase in 2006 over 2005 was primarily due to $9.0 million increase in cost associated with XIAFLEX due to the increased spending for development and manufacturing scale and the $1.1 million payment to Cobra Biologics Ltd., or Cobra, upon amendment of the manufacturing agreement with Cobra, a $2.4 million increase in development spending for TestoFilm prior to discontinuance of its development in October 2006 and a $1.7 million increase in administrative costs due primarily to an increase in headcount. These increases were offset by a $1.1 million decrease in costs associated with phase IV clinical trials for Testim.
Selling, general and administrative expenses. Selling, general and administrative expenses were $61.3 million and $43.9 million for the years ended December 31, 2006 and 2005, respectively. The increase in 2006 over 2005 was due primarily to selling and marketing expenses increasing by $13.7 million resulting from higher marketing costs and co-promotion and termination fees associated with the terminated co-promotion agreement with Oscient, the increases in our Testim sales force made in late 2006, and pre-launch marketing for XIAFLEX. General and administrative expenses increased by $3.6 million as a result of the additional stock-based compensation expense resulting from the adoption of SFAS 123R and the costs associated with compliance with Section 404 of the Sarbanes-Oxley Act of 2002.
Interest income (expense), net. Interest income (expense), net was $2.4 million and $1.5 million for the years ended 2006 and 2005, respectively. Net interest income in 2006 and 2005 relates primarily to interest earned on the invested proceeds from our registered direct offering in September of 2006 and our private placement in June of 2005.
Other Income (expense), net. Other income (expense), net was $0 and $(1.2) million for the years ended December 31, 2006 and 2005, respectively. Other income (expense), net in 2005 relates to $0.2 million of placement agent fees and transaction costs associated with our private placement in June of 2005 which were allocated to the financing-related liability and the non-cash change in the fair value of the financing-related liability of $1.0 million during 2005. On December 30, 2005, the financing related liability of $7.2 million was reclassified to permanent equity as a result of amendments to the Securities Purchase Agreements. There were no such costs incurred in 2006.
Sources and Uses of Cash
Cash used in operations was $30.5 million, $43.6 million and $28.8 million for 2007, 2006 and 2005, respectively. Negative operating cash flows during 2007, 2006 and 2005 were caused primarily by operating losses.
Cash provided by (used in) investing activities was $(0.4) million, $11.8 million and $(12.5) million for 2007, 2006 and 2005, respectively. Cash provided by (used in) investing activities relates primarily to the net effect of purchases of short-term investments with part of the proceeds from our equity offerings in each of these years and redemptions of short-term investments for operational cash needs, together with our investments in property and equipment and, in 2006, the investment of $1.9 million to secure the lease of a . . .
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