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| KG > SEC Filings for KG > Form 10-Q on 7-Aug-2008 | All Recent SEC Filings |
7-Aug-2008
Quarterly Report
The following discussion contains certain forward-looking statements that reflect management's 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, 2007, which are supplemented by the discussion which follows; (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, 2007; 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" for a discussion of the uncertainties, risks and assumptions associated with these statements.
I. OVERVIEW
Our Business
We are a vertically integrated pharmaceutical company that performs basic research and develops, manufactures, markets and sells branded prescription pharmaceutical products. To capitalize on opportunities in the pharmaceutical industry, we seek to develop, in-license, acquire or obtain commercialization rights to novel branded prescription pharmaceutical products in attractive markets.
Our corporate strategy is focused on specialty-driven markets, particularly neuroscience, hospital and acute care. We believe each of our targeted markets has significant market potential and our organization is aligned accordingly. We work to achieve organic growth by maximizing the potential of our currently marketed products through sales and marketing and product life-cycle management. We also work to achieve organic growth through the successful development of new branded pharmaceutical products. Additionally, we seek to achieve growth through the acquisition or in-licensing of novel branded pharmaceutical products in various stages of development and technologies that have significant market potential that complement our neuroscience, hospital and acute care medicine platforms. We may also seek company acquisitions which add products or products in development, technologies or sales and marketing capabilities in our target markets or that otherwise complement our operations.
Utilizing our internal resources and a disciplined business development process, we strive to be a leader and partner of choice in developing and commercializing innovative, clinically-differentiated therapies and technologies in our target, specialty-driven markets.
Our business consists of five segments: branded pharmaceuticals, Meridian Auto-Injector, royalties, contract manufacturing and other. Our branded pharmaceutical products are divided into the following categories:
• neuroscience (including Skelaxin®, Avinza® and Sonata®),
• hospital (including Thrombin-JMI® and Synercid®),
• acute care (including Bicillin® and Intal®), and
• legacy products (including Altace®, Levoxyl® and Cytomel®).
Our Meridian Auto-Injector segment includes EpiPen®, a commercial product, and nerve gas antidotes which we provide to the U.S. Military. Our royalties segment relates to revenues we derive from successfully developed products that we have licensed to third parties.
Recent Developments
On June 9, 2008, we, together with Pain Therapeutics, Inc., submitted a New Drug Application ("NDA") for Remoxy® to the U.S. Food and Drug Administration ("FDA"). Remoxy®, a unique long-acting formulation of oral oxycodone for moderate to severe chronic pain, uses extraction-resistant technology ("XRTtm"), a unique physical barrier that is designed to provide controlled pain relief and resist common methods used to extract the opioid more rapidly than intended as seen with currently available products. Common methods used to cause a rapid extraction of the opioid include crushing, chewing, or 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. The NDA includes animal and human data from extractability, pharmacokinetic, toxicology and several clinical studies, including the pivotal Phase III study conducted under a Special Protocol Assessment ("SPA"). Pursuant to Prescription Drug User Fee Act ("PDUFA") guidelines, the FDA is expected to determine whether to accept the NDA for filing within 60 days from the date of submission. At that time, we also expect to learn if the NDA filing is granted Priority Review, a designation given to drugs that offer real advances in treatment, or provide a treatment where no adequate therapy exists. A Priority Review means that the expected time it takes the FDA to review a NDA is reduced from 10 months to 6 months.
Purdue Pharma L.P. ("Purdue") has submitted an NDA for a reformulated version of its long-acting oxycodone product. Purdue claims that the reformulated product is less susceptible to some common methods of abuse than its currently marketed formulation. If approved, this product would compete with Remoxy®, as would a number of other products. An FDA advisory committee considered some aspects of Purdue's NDA at a public meeting in early May 2008 and expressed a variety of concerns. We are uncertain as to whether or when the FDA will approve Purdue's reformulated product. On June 23, 2008, Purdue submitted a Citizen Petition with the FDA in an apparent effort to challenge the Remoxy® NDA filing.
In June 2008, we, together with Acura Pharmaceuticals, Inc., reported positive top-line results from the pivotal Phase III clinical trial evaluating Acuroxtm Tablets. The Phase III study met its primary endpoint, pain relief compared to placebo, as prospectively defined by the FDA during the SPA process. We and Acura expect to submit a New Drug Application for Acuroxtm Tablets to the FDA by the end of 2008. Acuroxtm Tablets, an immediate-release tablet, is a composition of oxycodone HCl, niacin and functional inactive ingredients and is intended to relieve moderate to severe pain while resisting or deterring common methods of prescription drug misuse and abuse, including intravenous injection of dissolved tablets, nasal snorting of crushed tablets and intentional swallowing of excessive numbers of tablets. The properties that potentially enable the product to resist or deter common methods of misuse and abuse are provided by Acura's proprietary Aversion® Technology.
In May 2008, we exercised an option to license a third immediate-release opioid analgesic product utilizing Acura's Aversion® Technology. As a result, we and Acura are now jointly developing three immediate-release opioid analgesics, including Acuroxtm Tablets, which are designed to resist or deter common methods of prescription drug misuse and abuse.
II. RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 2008 and 2007
The following table summarizes total revenues and cost of revenues by operating
segment, excluding intercompany transactions:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2008 2007 2008 2007
(In thousands) (In thousands)
Total Revenues
Branded pharmaceuticals $ 315,715 $ 466,931 $ 685,087 $ 916,018
Meridian Auto-Injector 55,260 50,896 98,172 93,911
Royalties 23,678 20,396 42,801 40,720
Contract manufacturing 103 3,450 416 6,658
Other 2,095 1,053 2,408 1,449
Total revenues $ 396,851 $ 542,726 $ 828,884 $ 1,058,756
Cost of Revenues, exclusive of depreciation,
amortization and impairments
Branded pharmaceuticals $ 78,709 $ 95,759 $ 151,078 $ 182,633
Meridian Auto-Injector 20,507 20,748 37,114 39,188
Royalties 2,886 2,627 5,204 5,070
Contract manufacturing 76 3,285 238 6,289
Other 7 3,111 12 3,804
Total cost of revenues $ 102,185 $ 125,530 $ 193,646 $ 236,984
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The following table summarizes our deductions from gross sales:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2008 2007 2008 2007
(In thousands) (In thousands)
Gross Sales $ 474,958 $ 667,423 $ 1,024,377 $ 1,302,262
Commercial Rebates 15,332 45,124 57,008 94,062
Medicare Part D Rebates 5,433 14,670 21,630 29,636
Medicaid Rebates 9,042 12,179 21,306 20,897
Chargebacks 25,574 22,582 45,786 46,227
Returns 3,975 6,490 8,425 5,236
Trade Discounts/Other 18,751 23,766 41,338 47,784
396,851 542,612 828,884 1,058,420
Discontinued Operations - (114 ) - (336 )
Net Sales $ 396,851 $ 542,726 $ 828,884 $ 1,058,756
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Gross sales were lower in the second quarter of 2008 compared to the second quarter of 2007 and in the first six months of 2008 compared to the first six months of 2007 primarily due to a decrease in gross sales of Altace®, partially offset by an increase in gross sales of Avinza®, which we acquired on February 26, 2007. During December 2007 a competitor entered the market with a generic substitute for Altace® and additional generic competitors entered the market in June 2008.
Based on inventory data provided to us by our customers, we believe that wholesale inventory levels of our key products, Skelaxin®, Thrombin-JMI®, Altace®, Avinza®, and Levoxyl® are at or below normalized
levels as of June 30, 2008. We estimate that wholesale and retail inventories of our products as of June 30, 2008 represent gross sales of approximately $125.0 million to $135.0 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):
2008 2007
Balance at January 1, net of prepaid amounts $ 65,301 $ 53,765
Current provision related to sales made in current period 67,155 72,088
Current provision related to sales made in prior periods 2,982 534
Rebates paid (83,660 ) (67,255 )
Balance at March 31, net of prepaid amounts $ 51,778 $ 59,132
Current provision related to sales made in current period 36,297 72,822
Current provision related to sales made in prior periods (6,490 ) (849 )
Rebates paid (55,692 ) (72,924 )
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Balance at June 30, net of prepaid amounts $ 25,893 $ 58,181
Rebates include commercial rebates and 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 decreased in the first and second quarters of 2008. The significant decrease in utilization of Altace® by rebate-eligible customers has significantly decreased the "current provision related to sales made in the current period" 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 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.
Accrual for Returns (in thousands):
2008 2007
Balance at January 1 $ 32,860 $ 42,001
Current provision 4,450 (1,254 )
Actual returns (4,135 ) (6,295 )
Ending balance at March 31 $ 33,175 $ 34,452
Current provision 3,975 6,490
Actual returns (6,845 ) (4,767 )
Ending balance at June 30 $ 30,305 $ 36,175
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Our calculation for product returns reserves is based on historical sales and return rates over the period during which customers have a right of return. We also consider current wholesale inventory levels of our products. Because actual returns related to sales in prior periods were lower than our original estimates, we recorded a decrease in our reserve for returns in the first quarter of 2007. During the first quarter of 2007, we decreased our reserve for returns by approximately $8.0 million and increased our net sales from branded pharmaceuticals, excluding the adjustment to sales classified as discontinued operations, by the same amount. The effect of the change in estimate on first quarter 2007 operating income was an increase of approximately $5.0 million.
Accrual for Chargebacks (in thousands):
2008 2007
Balance at January 1 $ 11,120 $ 13,939
Current provision 20,212 23,645
Actual chargebacks (21,080 ) (26,557 )
Ending balance at March 31 $ 10,252 $ 11,027
Current provision 25,574 22,582
Actual chargebacks (25,286 ) (22,962 )
Ending balance at June 30 $ 10,540 $ 10,647
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Branded Pharmaceuticals Segment
Change Change
For the Three Months Ended June 30, 2008 vs. 2007 For the Six Months Ended June 30, 2008 vs. 2007
2008 2007 $ % 2008 2007 $ %
(In thousands) (In thousands)
Branded Pharmaceutical revenue:
Skelaxin® $ 107,221 $ 108,007 $ (786 ) (0.7 )% $ 223,105 $ 220,125 $ 2,980 1.4 %
Thrombin-JMI® 63,621 65,156 (1,535 ) (2.4 ) 130,772 129,131 1,641 1.3
Altace® 44,447 163,296 (118,849 ) (72.8 ) 124,258 319,916 (195,658 ) (61.2 )
Avinza® 34,990 34,850 140 0.4 67,013 44,249 22,764 51.4
Levoxyl® 20,196 25,584 (5,388 ) (21.1 ) 35,854 47,641 (11,787 ) (24.7 )
Other 45,240 70,038 (24,798 ) (35.4 ) 104,085 154,956 (50,871 ) (32.8 )
Total revenue $ 315,715 $ 466,931 $ (151,216 ) (32.4 )% $ 685,087 $ 916,018 $ (230,931 ) (25.2 )%
Cost of revenues, exclusive of depreciation,
amortization and impairments $ 78,709 $ 95,759 $ (17,050 ) (17.8 )% $ 151,078 $ 182,633 $ (31,555 ) (17.3 )%
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Sales of Key Products
Skelaxin®
Net sales of Skelaxin® in the second quarter and first six months of 2008 were similar to that experienced during the second quarter and first six months of 2007. A price increase taken in the fourth quarter of 2007 was offset by a decrease in prescriptions. During the first six months of 2007, net sales of Skelaxin® benefited from a favorable change in estimate during the first quarter of 2007 in the product's reserve for returns as discussed above. Due to increased competition, total prescriptions for Skelaxin® decreased approximately 11.6% and 10.0% in the second quarter of 2008 and the first six months of 2008, respectively, compared to the same periods of the prior year according to IMS Health Incorporated ("IMS") monthly prescription data. We believe Skelaxin® net sales may decrease further during the second half of 2008.
For a discussion regarding the risk of potential generic competition for Skelaxin®, please see Note 8, "Commitments and Contingencies," in Part I, Item 1, "Financial Statements."
Thrombin-JMI®
Net sales of Thrombin-JMI® decreased in the second quarter of 2008 compared to the second quarter of 2007 primarily due to price concessions. A 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 Thrombin-JMI® may decrease as a result of the entry of these competing products.
Altace®
Net sales of Altace® decreased significantly in the second quarter and first six months of 2008 from the second quarter and first six months of 2007 primarily due to a competitor entering the market in December 2007 and additional competitors entering the market in June 2008 with generic substitutes for Altace® capsules. As a result of the entry of generic competition, we expect net sales of Altace® to continue declining in the future. Total prescriptions for Altace® decreased approximately 72.8% and 60.2% in the second quarter of 2008 and the first six months of 2008, respectively, compared to the same periods of the prior year, according to IMS monthly prescription data.
For a discussion regarding generic competition for Altace®, please see Note 8, "Commitments and Contingencies" in Part I, Item 1, "Financial Statements."
Avinza®
We acquired all rights to Avinza® in the United States, its territories and Canada on February 26, 2007. Net sales of Avinza® in the second quarter of 2008 were similar to that experienced during the second quarter of 2007. Net sales of Avinza® in the first six months of 2007 reflect sales occurring from February 26, 2007 through June 30, 2007. Total prescriptions for Avinza® increased approximately 5.2% and decreased 0.2% in the second quarter of 2008 and the first six months of 2008, respectively, compared to the same periods of the prior year according to IMS monthly prescription data.
On March 24, 2008, we received a letter from the United States Food and Drug Administration, Division of Drug Marketing, Advertising, and Communications ("DDMAC") regarding promotional material for Avinza® that was created and submitted to the DDMAC by Ligand Pharmaceuticals (the company from which we acquired Avinza®). 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. Although the Company does not currently use promotional materials created by Ligand, including the specific material referred to in the letter, we have requested a meeting with the DDMAC to discuss this matter. We plan to address the points raised in the letter as well as the applicability of those points to the marketing materials we currently use, in an effort to fully and expeditiously resolve this matter.
For a discussion regarding the risk of potential generic competition for Avinza®, please see Note 8, "Commitments and Contingencies" in Part I, Item 1, "Financial Statements."
Levoxyl®
Net sales of Levoxyl® decreased in the second quarter of 2008 and first six months of 2008 compared to the same periods in the prior year primarily due to a decrease in prescriptions in 2008 as a result of generic competition. In addition, net sales of Levoxyl® decreased in the first six months of 2008 compared to the first six months of 2007 as a result of decreases in the wholesale inventory levels in the first quarter 2008. Total prescriptions for Levoxyl® decreased approximately 5.5% and 2.7% in the second quarter of 2008 and the first six months of 2008, respectively, compared to the same periods of the prior year according to IMS monthly prescription data.
Other
Our other branded 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 second quarter and first six months of 2008 compared to the second quarter and first six months of 2007 primarily due to the sale of several of our other branded pharmaceutical products to JHP Pharmaceuticals LLC ("JHP"), and lower net sales of Sonata® and Bicillin®.
Net sales of Sonata® were lower in the second quarter and the first six months of 2008 compared to the same periods in the prior year 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. In advance of the patent expiration, CorePharma LLC ("Core") began selling an authorized generic of Sonata® in May 2008 pursuant to a license we granted. We will receive a royalty on all net sales of Core's authorized generic of Sonata®. We expect net sales of Sonata® to decline even more significantly during the last half of 2008 than it has in the first six months of 2008 as a result of these generic substitutes entering the market.
We completed construction of facilities to produce Bicillin® at our Rochester, Michigan location, began commercial production in the fourth quarter of 2006 and replenished wholesale inventories of the product during the first quarter of 2007. Prior to the first quarter of 2007, Bicillin® was in short supply. Accordingly, we believe that net sales of Bicillin® during the first six months of 2008 are more indicative of demand for the product than net sales during the first six months of 2007.
Cost of Revenues
Cost of revenues from branded pharmaceutical products decreased in the second quarter and first six months of 2008 compared to the second quarter and first six months of 2007 primarily due to lower unit sales of Altace® and the sale of several of our other branded pharmaceutical products to JHP on October 1, 2007, partially offset by an increase in unit sales of Avinza® due to the acquisition of this product on February 26, 2007.
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.
Special items affecting cost of revenues from branded pharmaceutical products included the following:
• A charge of $2.6 million in the second quarter of 2008 primarily associated with minimum purchase requirements under a supply agreement to purchase raw materials associated with Altace®.
• A charge of $3.8 million in the second quarter of 2007 related to the termination of certain contracts.
Meridian Auto-Injector . . . |
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