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| WPI > SEC Filings for WPI > Form 10-Q on 31-Oct-2008 | All Recent SEC Filings |
31-Oct-2008
Quarterly Report
Three Months Ended September 30, 2008 Compared to Three Months Ended
September 30, 2007
Three Months Ended September 30, 2008 Three Months Ended September 30, 2007
Generic Brand Distribution Total Generic Brand Distribution Total
Product sales $ 352,190 $ 94,298 $ 170,933 $ 617,421 $ 326,231 $ 93,534 $ 129,875 $ 549,640
Other 11,593 11,677 - 23,270 31,489 13,577 - 45,066
Net revenues 363,783 105,975 170,933 640,691 357,720 107,111 129,875 594,706
Cost of sales(1) 212,367 30,224 144,064 386,655 210,931 22,089 113,400 346,420
Gross profit(1) 151,416 75,751 26,869 254,036 146,789 85,022 16,475 248,286
Gross margin(1) 41.6 % 71.5 % 15.7 % 39.7 % 41.0 % 79.4 % 12.7 % 41.7 %
Research and
development 31,736 13,586 - 45,322 26,555 9,102 - 35,657
Selling and
marketing 13,990 29,024 15,558 58,572 14,018 26,613 12,716 53,347
Contribution $ 105,690 $ 33,141 $ 11,311 150,142 $ 106,216 $ 49,307 $ 3,759 159,282
Contibution margin 29.1 % 31.3 % 6.6 % 23.4 % 29.7 % 46.0 % 2.9 % 26.8 %
General and
administrative 42,697 59,144
Amortization 20,200 44,159
Loss (gain) on asset
sales and
impairments 303 (6,118 )
Operating income $ 86,942 $ 62,097
Operating margin 13.6 % 10.4 %
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(1) Excludes amortization of acquired intangibles including product rights.
Generic Segment
Net Revenues
Our Generic segment develops, manufactures, markets, sells and distributes
generic products that are the therapeutic equivalent to their brand name
counterparts and are generally sold at prices significantly less than the brand
product. As such, generic products provide an effective and cost-efficient
alternative to brand products. When patents or other regulatory exclusivity no
longer protect a brand product, opportunities exist to introduce off-patent or
generic counterparts to the brand product. Additionally, we distribute generic
versions of third parties' brand products (sometimes known as "Authorized
Generics") to the extent such arrangements are complementary to our core
business. Our portfolio of generic products includes products we have internally
developed, products we have licensed from third parties, and products we
distribute for third parties.
Net revenues in our Generic segment include product sales and other revenue.
Our Generic segment product line includes a variety of products and dosage
forms. Indications for this line include pregnancy prevention, pain management,
depression, hypertension and smoking cessation. Dosage forms include oral
solids, transdermals, injectables and transmucosals.
Other revenue consists primarily of royalties and commission revenue.
Net revenues from our Generic segment for the three months ended
September 30, 2008 increased 1.7% or $6.1 million to $363.8 million compared to
net revenues of $357.7 million from the prior year period. This increase in net
revenues was mainly attributable to new product launches ($42.0 million),
including fentanyl transdermal patch (launched at the end of the third quarter
of 2007), omeprazole delayed-release capsules 40 mg (launched in the third
quarter of 2008) and clarithromycin extended-release tablets (launched in the
first quarter of 2008) as well as net revenues from recently launched Authorized
Generics ($19.0 million) in the three months ended September 30, 2008, including
TiliaTM Fe and balsalazide disodium (both launched in the fourth quarter of
2007), alendronate sodium tablets (launched in the first quarter of 2008) and
dronabinol (launched in the second quarter of 2008). Increases in net revenues
from new product launches were partially offset by a decrease in other revenue
($19.9 million), a decrease in net revenues from the sale of oral contraceptives
and price erosion within our base business.
The decrease in other revenue in the three months ended September 30, 2008
compared to the prior year period for the Generic segment was primarily related
to reduced royalties on sales by Sandoz, Inc. of metoprolol succinate 50 mg
extended release tablets (which commenced during the third quarter of 2007) and
reduced royalties on sales by GlaxoSmithkline of Wellbutrin XL® 150 mg due to
increased competition. Both items combined resulted in a reduction in royalties
in the quarter totaling $18.9 million.
Gross Profit
Gross profit represents net revenues less cost of sales. Cost of sales
includes production and packaging costs for the products we manufacture, third
party acquisition costs for products manufactured by others, profit-sharing or
royalty payments for products sold pursuant to licensing agreements, inventory
reserve charges and excess capacity utilization charges, where applicable. Cost
of sales does not include amortization costs for acquired product rights or
other acquired intangibles.
Gross profit for our Generic segment increased $4.6 million to $151.4 million
in the three months ended September 30, 2008 compared to $146.8 million in the
prior year period. The increase in gross profit was primarily due to gross
profit contribution from new product launches and recently launched Authorized
Generics ($35.9 million) partially offset by a decrease in other revenue
($19.9 million), a decrease in gross profit from the sale of oral contraceptives
and costs associated with our Global Supply Chain Initiative ($4.4 million).
Research and Development Expenses
Generic segment R&D expenses consist predominantly of personnel-related
costs, active pharmaceutical ingredient costs, contract research, biostudy and
facilities costs associated with the development of our products.
Generic segment R&D expenses increased 19.5% or $5.2 million to $31.7 million
in the three months ended September 30, 2008 compared to $26.6 million in the
prior year period primarily due to higher biostudy and test chemical costs
($2.0 million) and increased R&D expenditures in India ($2.0 million).
Selling and Marketing Expenses
Selling and marketing expenses consist mainly of personnel costs, facilities
costs, insurance and professional services costs.
Generic segment selling and marketing expenses were $14.0 million in the
three months ended September 30, 2008 compared to $14.0 million in the prior
year period.
Brand Segment
Net Revenues
Our Brand segment develops, manufactures, markets, sells and distributes
products within two sales and marketing groups: Specialty Products and
Nephrology.
Our Specialty Products product line includes urology products such as
Trelstar® and Oxytrol®and a number of non-promoted products.
Our Nephrology product line consists of products for the treatment of iron
deficiency anemia and is generally marketed to nephrologists and dialysis
centers. The major products of the Nephrology group are Ferrlecit® and INFeD®,
which are used to treat low iron levels in patients undergoing hemodialysis in
conjunction with erythropoietin therapy.
Other revenue in the Brand segment consists primarily of co-promotion
revenue, royalties and the recognition of deferred revenue relating to our
obligation to manufacture and supply brand products to third parties. Other
revenue also includes revenue recognized from R&D and licensing agreements.
Net revenues from our Brand segment for the three months ended September 30,
2008 decreased 1.1% or $1.1 million to $106.0 million compared to net revenues
of $107.1 million in the prior year period. The decrease was primarily
attributable to a decrease in product revenue, royalties and deferred revenue
relating to our obligation to manufacture and supply certain brand products to
third parties ($3.8 million) which was partially offset by higher sales within
the Specialty Products group.
Gross Profit (Gross Margin)
Gross profit for our Brand segment decreased $9.3 million to $75.8 million in
the three months ended September 30, 2008 compared to $85.0 million in the prior
year period. Gross margin decreased to 71.5% during the three months ended
September 30, 2008 compared to 79.4% in the prior year period. The decrease in
gross profit and gross margin was primarily due to the recording of a $7.7
million reserve against inventory for INFeD® pending the resolution of potential
quality issues with certain batches of active pharmaceutical ingredient received
from a supplier.
Research and Development Expenses
Brand segment R&D expenses consist predominantly of personnel-related costs,
contract research, clinical costs and facilities costs associated with the
development of our products.
Brand segment R&D expenses increased 49.3% or $4.5 million to $13.6 million
in the three months ended September 30, 2008 compared to $9.1 million in the
prior year period primarily due to higher license and filing fees ($2.3 million)
and increased clinical study costs ($0.7 million) related to the development of
RAPAFLOTM (silodosin) and oxybutynin topical gel and higher labor costs.
Selling and Marketing Expenses
Brand segment selling and marketing expenses consist mainly of
personnel-related costs, product promotion costs, distribution costs,
professional services costs, insurance and depreciation.
Brand segment selling and marketing expenses increased 9.1% or $2.4 million
to $29.0 million in the three months ended September 30, 2008 as compared to
$26.6 million in the prior year period primarily related to expenditures to
support pre-launch activities related to RAPAFLOTMand oxybutynin topical gel.
Distribution Segment
Net Revenues
Our Distribution segment mainly distributes generic pharmaceutical products
manufactured by third parties, as well as by Watson, primarily to independent
pharmacies, pharmacy chains, pharmacy buying groups and physicians' offices.
Sales are principally generated through an in-house telemarketing staff and
through internally developed ordering systems. The Distribution segment
operating results exclude Watson products, which are included in their
respective Generic and Brand segment results.
Net revenues from our Distribution segment for the three months ended
September 30, 2008 increased 31.6% or $41.1 million to $170.9 million compared
to net revenues of $129.9 million in the prior year period primarily due to an
increase in net revenues from new products launched since the third quarter of
2007 ($56.4 million) which was partially offset by lower levels of sales in the
current period from 2007 product launches ($5.8 million) and reduced net
revenues due to price erosion.
Gross Profit (Gross Margin)
Gross profit for our Distribution segment increased $10.4 million to
$26.9 million in the three months ended September 30, 2008 compared to
$16.5 million in the prior year period primarily due to higher product sales.
Gross margin increased to 15.7% during the three months ended September 30, 2008
compared to 12.7% in the prior year period primarily due to lower product
acquisition costs.
Selling and Marketing Expenses
Selling and marketing expenses consist mainly of personnel costs, facilities
costs, insurance and freight costs, which support the Distribution segment sales
and marketing functions.
Distribution segment selling and marketing expenses increased 22.3% or
$2.8 million to $15.6 million in the three months ended September 30, 2008 as
compared to $12.7 million in the prior year period primarily due to higher
freight costs related to the increased level of net revenues and higher fuel
surcharges ($1.6 million) and higher commissions ($0.6 million) on the increased
level of net revenues.
Segment Contribution
Three Months Ended September 30, Change
($ in thousands): 2008 2007 Dollars %
Segment contribution
Generic $ 105,690 $ 106,216 $ (526 ) (0.5 )%
Brand 33,141 49,307 (16,166 ) (32.8 )%
Distribution 11,311 3,759 7,552 200.9 %
$ 150,142 $ 159,282 $ (9,140 ) (5.7 )%
as a % of net revenues 23.4 % 26.8 %
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For more information on segment contribution, refer to above "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Corporate General and Administrative Expenses
Three Months Ended September 30, Change
($ in thousands): 2008 2007 Dollars %
Corporate general and administrative expenses $ 42,697 $ 59,144 $ (16,447 ) (27.8 )%
as a % of net revenues 6.7 % 9.9 %
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Corporate general and administrative expenses consist mainly of personnel
costs, facilities costs, insurance and professional services costs, which are
general in nature and not directly related to specific segment operations.
Corporate general and administrative expenses decreased during the three
months ended September 30, 2008 as compared to the same period of the prior year
as a result of a favorable settlement of a tax-related liability due to the
resolution of the Internal Revenue Service ("IRS") audit for the Company's 2000
to 2003 tax years ($5.9 million) in the current year period. In addition, the
prior year period was negatively impacted by higher levels of legal accruals
($8.5 million) and severance accruals ($4.5 million).
Amortization
Three Months Ended September 30, Change
($ in thousands): 2008 2007 Dollars %
Amortization $ 20,200 $ 44,159 $ (23,959 ) (54.3 )%
as a % of net revenues 3.2 % 7.4 %
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The Company's amortizable assets consist primarily of acquired product
rights. For the three months ended September 30, 2008 amortization expense
decreased 54.3% or $24.0 million as our Ferrlecit® product rights were fully
amortized as of December 2007.
Loss (Gain) on Asset Sales and Impairments
Three Months Ended September 30, Change
($ in thousands): 2008 2007 Dollars %
Loss (gain) on asset sales and impairments $ 303 $ (6,118 ) $ 6,421 (105.0 )%
as a % of net revenues 0.0 % (1.0 )%
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For the three months ended September 30, 2007, we recorded a gain on sale of our Phoenix facility in the amount of $10.6 million and also recorded an additional impairment of our Puerto Rico facility in the amount of $4.5 million. For the three months ended September 30, 2008, we recorded a loss on disposal of idle property, plant and equipment related to our current and former manufacturing facilities in Florida and Puerto Rico.
Interest Income
Three Months Ended September 30, Change
($ in thousands): 2008 2007 Dollars %
Interest income $ 2,157 $ 1,964 $ 193 9.8 %
as a % of net revenues 0.3 % 0.3 %
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Interest income increased for the three months ended September 30, 2008 due to an increase in invested cash balances over the prior year period.
Interest Expense
Three Months Ended September 30, Change
($ in thousands): 2008 2007 Dollars %
Interest expense - 2006 Credit Facility $ 3,709 $ 6,889 $ (3,180 )
Interest expense - convertible
contingent senior debentures due 2023
("CODES") 3,151 3,151 -
Change in derivative value - (103 ) 103
Interest expense - other 145 188 (43 )
$ 7,005 $ 10,125 $ (3,120 ) (30.8 )%
as a % of net revenues 1.1 % 1.7 %
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Interest expense decreased for the three months ended September 30, 2008
primarily due to reduced levels of debt on the 2006 Credit Facility from
prepayments made during the fourth quarter of 2007 and the first quarter of
2008.
Other Income
Three Months Ended September 30, Change
($ in thousands): 2008 2007 Dollars %
Earnings on equity method investments $ 3,733 $ 1,686 $ 2,047 121.4 %
Gain on sale of securities 8,250 - 8,250 N/A
Other expense (41 ) (237 ) 196 (82.7 )%
$ 11,942 $ 1,449 $ 10,493 724.2 %
as a % of net revenues 1.9 % 0.2 %
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Earnings on Equity Method Investments
The Company's equity investments are accounted for under the equity method
when the Company's ownership does not exceed 50% and when the Company can exert
significant influence over the management of the investee.
Earnings on equity method investments during the three months ended
September 30, 2008 primarily represents our share of equity earnings in
Scinopharm Taiwan, Ltd. ("Scinopharm"). Earnings on equity method investments
for the three months ended September 30, 2007 primarily represented our share of
earnings in Somerset Pharmaceuticals, Inc. ("Somerset"), our joint venture with
Mylan Inc. ("Mylan").
Gain on Sale of Securities
On July 28, 2008 the Company sold its fifty percent interest in Somerset to
Mylan.
Provision for Income Taxes
Three Months Ended September 30, Change
($ in thousands): 2008 2007 Dollars %
Provision for income taxes $ 22,975 $ 20,779 $ 2,196 10.6 %
Effective tax rate 24.4 % 37.5 %
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The lower effective tax rate for the three months ended September 30, 2008,
as compared to the same period of the prior year, is primarily due to the
resolution of the Company's federal income tax return examination (the"Exam")
with the IRS for the years ended December 31, 2000 to 2003 (8.8%) and a tax
benefit related to the sale of Somerset (4.3%).
Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
2007
Nine Months Ended September 30, 2008 Nine Months Ended September 30, 2007
Generic Brand Distribution Total Generic Brand Distribution Total
Product sales $ 1,038,938 $ 294,756 $ 443,822 $ 1,777,516 $ 1,065,152 $ 281,096 $ 421,946 $ 1,768,194
Other 68,249 44,511 - 112,760 62,834 38,288 - 101,122
Net revenues 1,107,187 339,267 443,822 1,890,276 1,127,986 319,384 421,946 1,869,316
Cost of sales(1) 669,676 82,167 374,812 1,126,655 693,896 74,099 363,583 1,131,578
Gross profit(1) 437,511 257,100 69,010 763,621 434,090 245,285 58,363 737,738
Gross margin(1) 39.5 % 75.8 % 15.5 % 40.4 % 38.5 % 76.8 % 13.8 % 39.5 %
Research and
development 83,458 39,095 - 122,553 77,036 31,932 - 108,968
Selling and marketing 41,868 86,593 43,695 172,156 41,764 79,397 39,246 160,407
Contribution $ 312,185 $ 131,412 $ 25,315 468,912 $ 315,290 $ 133,956 $ 19,117 468,363
Contibution margin 28.2 % 38.7 % 5.7 % 24.8 % 28.0 % 41.9 % 4.5 % 25.1 %
General and
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