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| BRL > SEC Filings for BRL > Form 10-Q on 6-Nov-2008 | All Recent SEC Filings |
6-Nov-2008
Quarterly Report
of alliance and development revenues during the quarter and $9.0 million of
other revenues. Alliance and development revenues are derived mainly from
profit-sharing arrangements, co-promotion agreements, and standby manufacturing
fees and other reimbursements and fees we received from third parties, including
marketing partners. Other revenues primarily are derived from our non-core
operations, which include our diagnostics, disinfectants, dialysis and infusions
("DDD&I") business.
During the nine months ended September 30, 2008, sales of our generic
products were $1,588.2 million, accounting for 82% of our total product sales.
North America accounted for $951.6 million of our generic product sales, or 60%,
while the ROW accounted for $636.6 million, or 40%. Sales of our proprietary
products were $346.6 million, accounting for 18% of our total product sales. In
addition, we recorded $158.4 million of alliance and development revenues and
$30.8 million of other revenues during the nine-month period.
During the nine months ended September 30, 2008, we generated $249 million of
operating cash flows. Our operating cash flows are a significant source of
liquidity, and we expect to utilize a significant portion of these operating
cash flows to service our debt obligations as well as fund our capital needs.
Foreign currency exchange rate fluctuations
Our international revenues and expenses are subject to foreign currency
exchange rate fluctuations. These results are first converted from local
currencies into Croatian Kuna ("HRK"), and then converted from HRK into U.S.
dollars ("USD"). In general, the HRK exchange rate follows the exchange rate
fluctuations between the USD and the Euro. Depending on the direction of change
relative to the USD, foreign currency values can increase or decrease the
reported dollar value of our net assets and results of operations. We cannot
predict with certainty changes in foreign exchange rates or the effect they will
have on us. However, we attempt to mitigate their impact through operational
means and by using various foreign exchange financial instruments. We use
foreign exchange financial instruments to hedge a portion of forecasted
transactions even though none of the instruments are eligible for hedge
accounting. Since our derivatives do not qualify for hedge accounting, the
changes in fair value of these instruments are measured each period and reported
in other income (expense), which has led to volatility of our reported net
earnings in prior periods and may lead to further volatility in the future.
Despite the potential for increased earnings volatility, we still use such
instruments to offset the economic risk from foreign exchange rate fluctuations.
For purposes of discussing results on a comparable basis below, we will refer
to all total increases and decreases in US dollars, and often quantify the
amount of those changes that are due to changes in foreign currency exchange
rate fluctuations.
Generic Products
For many years, we have successfully utilized a strategy of developing the
generic versions of branded products that possess a combination of unique
factors that we believe have the effect of limiting competition for generics.
Such factors include difficult formulation, complex and costly manufacturing
requirements or limited raw material availability. By targeting products with
some combination of these unique factors, we believe that our generic products
will, in general, be less affected by the intense and rapid pricing pressure
often associated with more commodity-type generic products. As a result of this
focused strategy, we have been able to successfully identify, develop and market
generic products that generally have few competitors or that are able to enjoy
longer periods of limited competition, and thus generate profit margins higher
than those often associated with commodity-type generic products. Our extensive
portfolio of generic oral contraceptive products is a prime example of our
generic development strategy.
Until our acquisition of PLIVA, the execution of this strategy was focused
predominantly on developing solid oral dosage forms of products. While we
believe there are more tablet and capsule products that may fit our
"barrier-to-entry" criteria, we have recently expanded our development
activities, both internally through our acquisition of PLIVA and through
collaboration with third parties, to develop non-tablet and non-capsule products
such as injectables, patches, creams, ointments, sterile ophthalmics and nasal
sprays.
We also develop and manufacture active pharmaceutical ingredients ("API"),
primarily for use internally and, to a lesser extent, for sale to third parties.
We manufacture 23 different APIs for use in pharmaceuticals through our
facilities located in Croatia and the Czech Republic. We believe that our
ability to produce API for internal use may provide us with a strategic
advantage over competitors that lack such ability, particularly as to the
timeliness of obtaining API for our products.
Challenging the patents covering certain brand products continues to be an
integral part of our generics business. For many products, the patent provides
the unique barrier that we seek to identify in our product selection process. We
try to be the first company to initiate a patent challenge because, in certain
cases, we may be able to obtain 180 days of exclusivity for selling the generic
version of the product. Upon receiving exclusivity for a product, we often
experience significant revenues and profitability associated with that product
for the 180-day exclusivity period, but, at the end of that period, we
experience significant decreases in our revenues and market share associated
with the product as other generic competitors enter the market. Our record of
successfully resolving patent challenges has made a recurring contribution to
our operating results, but has created periods of revenue and earnings
volatility and will likely continue to do so in the future. While earnings and
cash flow volatility may result from the launch of products subject to patent
challenges, we remain committed to this part of our business.
Proprietary Products
To help diversify our generic product revenue base, we initiated a program in
2001 to develop and market proprietary pharmaceutical products. We formalized
this program through our acquisition of Duramed Pharmaceuticals in October 2001,
and thereafter by establishing Duramed Research as our proprietary research and
development subsidiary. Today, Duramed is recognized as a leader in the area of
women's healthcare. We implement our women's healthcare platform through a
substantial number of employees dedicated to the development and marketing of
our proprietary products, including approximately 355 sales representatives that
promote directly to physicians six of our products - SEASONIQUE®, Enjuvia™,
Mircette®, ParaGard®, Plan B™ and Amniscreen - and two products under our
co-promotion agreement with Abbott Pharmaceuticals - Niaspan® and Advicor®. We
have accomplished significant growth in proprietary product sales over the last
several years through both internally-developed products, such as SEASONALE®,
which was the first and largest selling extended-cycle oral contraceptive in the
U.S., and SEASONIQUE, also an extended-cycle oral contraceptive, and through
product acquisitions. We acquired ParaGard, the only non-drug loaded
intrauterine contraceptive ("IUC") currently on the market in the U.S., in
November 2005; Mircette, a well established 28-day oral contraceptive, in
December 2005; Plan B, an emergency oral contraceptive product in 2004; and
Adderall IR, an immediate-release, mixed salt amphetamine product that is
indicated for the treatment of attention deficit hyperactivity disorder and
narcolepsy, in October 2006.
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2008 and
September 30, 2007
The following table sets forth revenue data for the three and nine months
ended September 30, 2008 and 2007 (dollars in millions):
Three Months Ended September 30, Nine Months Ended September 30,
Change Change
2008 2007 $ % 2008 2007 $ %
Product sales:
Generic products:
Oral contraceptives $ 158.6 $ 112.0 $ 46.6 42 % $ 406.5 $ 341.1 $ 65.4 19 %
Other generics 403.8 322.2 81.6 25 % 1,181.7 1,048.7 133.0 13 %
Total generic products 562.4 434.2 128.2 30 % 1,588.2 1,389.8 198.4 14 %
Proprietary products 132.9 124.7 8.2 7 % 346.6 316.0 30.6 10 %
Total product sales 695.3 558.9 136.4 24 % 1,934.8 1,705.8 229.0 13 %
Alliance and development revenue 33.1 32.5 0.6 2 % 158.4 94.0 64.4 69 %
Other revenue 9.0 10.5 (1.5 ) -14 % 30.8 32.5 (1.7 ) -5 %
Total revenues $ 737.4 $ 601.9 $ 135.5 22 % $ 2,124.0 $ 1,832.3 $ 291.7 16 %
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Product Sales
Generic Oral Contraceptives
During the three months ended September 30, 2008, sales of our generic oral
contraceptives ("Generic OCs") were $158.6 million, up $46.6 million, or 42%
from the prior year period. This increase is primarily due to $51.5 million of
sales from the June 2008 launch of Ocella, our generic version of Bayer's
Yasmin, and $3.2 million from Trilegest, launched in October 2007. This overall
increase was partially offset by lower sales across most of our other Generic
OCs due to a decline in market share resulting from changes in customer mix
since the end of 2007, as well as lower pricing of most of our Generic OCs. The
most significant declines in Generic OCs were lower sales of Apri, Errin and
Balziva, which declined $7.1 million in total.
During the nine months ended September 30, 2008, sales of our Generic OCs
were $406.5 million, up $65.4 million, or 19% from the prior year period. This
increase is due primarily to the launches of Ocella and Trilegest, as discussed
above. The Ocella and Trilegest contributions of $103.8 million more than offset
declines in several other Generic OC products due to lower demand resulting from
the change in customer mix and lower pricing. These factors resulted in lower
sales of several products in our portfolio, including declines of Apri of
$9.4 million, Sprintec of $8.3 million, and Aviane of $7.5 million.
In October 2008, our patent on Mircette expired. As a result, we expect that
competition on Kariva, our generic version of Mircette, will increase during the
fourth quarter as other generics enter the market. We expect the competition for
our Kariva product will contribute to a sequential decline in sales of Generic
OCs as compared to the current period.
Other Generic Products
During the three months ended September 30, 2008, sales of our other generic
products ("Other Generics") were $403.8 million, up $81.6 million, or 25% from
the prior year period, reflecting higher sales across our North American,
European and other ROW markets. During the current quarter in our North American
market, sales of
our Dextroamphetamine family of products increased by $7.6 million and sales of
Claravis increased by $6.5 million, in each case principally from higher market
share as competitors exited the markets for these products. In addition, sales
of Vitamin D increased by $6.2 million due to greater demand, we recorded
$5.1 million in sales of Alendronate, which we launched earlier in 2008, and we
recorded $2.5 million in sales of Galantamine from its August 2008 launch. In
our European and other ROW markets, in addition to gains in foreign currency
exchange rates of $22.0 million, we experienced higher sales in most markets,
including increases of $7.8 million in Poland, $5.0 million in Russia and
$3.9 million in Germany as product shortages in the prior year period have been
resolved. In particular, sales of Azithromycin increased $6.3 million due
primarily to continued strong growth in the Russian market.
During the nine months ended September 30, 2008, sales of Other Generics were
$1,181.7 million, up $133.0 million, or 13% from the prior year period. During
the current nine-month period in our North American markets, we recorded
$16.0 million in sales of Alendronate, which we launched in July 2008, and
recorded higher sales of $39.9 million from Claravis, Vitamin D and Fentanyl
primarily due to higher volumes and pricing. These increases were partially
offset by lower sales of Ondansetron of $15.0 million, Desmopressin of
$13.9 million and Warfarin of $7.8 million, in each case due to lower volume and
lower prices resulting from increased competition. In our European and other ROW
markets, in addition to gains in foreign currency exchange rates of
$81.4 million, we experienced strong sales increases in several countries,
including $21.6 million in Russia, $9.0 million in Germany and $8.5 million in
Poland. On a product basis, sales of Azithromycin increased by $16.7 million,
driven by the continued strength of the product in our Russian market as well as
growth in Croatia, and sales of Katadolon, our largest product in Germany, which
increased by $6.6 million, driven by strong market share. Offsetting these
increases was an overall decline in sales within Croatia of $9.6 million.
Proprietary Products
During the three months ended September 30, 2008, sales of our proprietary
products were $132.9 million, an increase of $8.2 million, or 7%, from the prior
year period. This increase was partially due to a $5.4 million increase in sales
of SEASONIQUE, due in part to the timing of customer purchases in the current
period, and a $4.7 million increase in sales of Plan B OTC/Rx, both due to an
increase in demand sales and pricing. In addition, we recorded a $3.6 million
increase in sales of Diamox benefiting from higher pricing and a year-over-year
increase in unit sales due to supply issues in the prior year which depressed
last year's sales. These increases, combined with other increases of our
proprietary products, more than offset a $4.3 million decrease in sales of
SEASONALE due to continued generic erosion, and a $3.9 million decrease in sales
of Cenestin due to a declining market for this product.
During the nine months ended September 30, 2008, sales of our proprietary
products were $346.6 million, an increase of $30.6 million, or 10%, from the
prior year period. This increase was primarily due to a $22.5 million increase
in sales of SEASONIQUE, a $12.5 million increase in sales of Diamox, a
$10.0 million increase in sales of ParaGard and a $9.7 million increase in sales
of Plan B OTC/Rx, all due to higher prices and volume. These increases more than
offset a $16.6 million decrease in sales of SEASONALE due to the impact from
generic competition and a $7.2 million decrease in sales of Loestrin due to
lower volume.
Alliance and Development Revenue
During the three months ended September 30, 2008, we recorded $33.1 million
of alliance and development revenue, up slightly from $32.5 million in the prior
year period. Our revenue from Shire plc increased by $6.1 million, while
revenues from our profit-sharing arrangement with Teva on generic Allegra
decreased by $3.8 million and revenues associated with the development of the
Adenovirus vaccine for the U.S. Department of Defense decreased by $1.2 million.
During the nine months ended September 30, 2008, we recorded $158.4 million
of alliance and development revenue, up from $94.0 million in the prior year
period. This increase of $64.4 million was principally due to the $53.0 million
one-time payment from Allergan we recorded during the six months ended June 30,
2008. Period-over-period, our revenue from Shire increased by $18.5 million,
while revenues from our profit-sharing arrangement with Teva on generic Allegra
decreased by $5.1 million and revenues associated with the development of the
Adenovirus vaccine for the U.S. Department of Defense decreased by $2.5 million.
Other Revenue
We recorded $9.0 million and $10.5 million of other revenue during the three
months ended September 30, 2008 and 2007, respectively, and $30.8 million and
$32.5 million of other revenue during the nine months ended September 30, 2008
and 2007, respectively. This revenue is primarily attributable to non-core
operations, which includes our diagnostics, disinfectants, dialysis and
infusions business.
Cost of Sales
The following table sets forth cost of sales data, in dollars, as well as the
resulting gross margins expressed as a percentage of product sales (except
''other'', which is expressed as a percentage of our other revenue line item),
for the three and nine months ended September 30, 2008 and 2007 (dollars in
millions):
Three Months Ended September 30, Nine Months Ended September 30,
Change Change
2008 2007 $ % 2008 2007 $ %
Generic products $ 303.6 $ 230.7 $ 72.9 32 % $ 847.3 $ 739.1 $ 108.2 15 %
Gross margin 46.0 % 46.9 % 46.7 % 46.8 %
Proprietary products $ 32.2 $ 30.0 $ 2.2 7 % $ 98.9 $ 84.2 $ 14.7 17 %
Gross margin 75.8 % 76.0 % 71.5 % 73.3 %
Other revenue $ 6.4 $ 6.2 $ 0.2 3 % $ 24.3 $ 17.9 $ 6.4 36 %
Gross margin 30.9 % 40.9 % 22.1 % 44.7 %
Total cost of sales $ 342.2 $ 266.9 $ 75.3 28 % $ 970.5 $ 841.2 $ 129.3 15 %
Gross margin 51.4 % 53.1 % 50.6 % 51.6 %
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Cost of sales components include the following:
• our manufacturing and packaging costs for products we manufacture;
• amortization expense;
• the write-off of the step-up in inventory arising from acquisitions, including PLIVA;
• profit-sharing or royalty payments we make to third parties, including raw material suppliers;
• the cost of products we purchase from third parties;
• net realizable value adjustments to our inventories; and
• stock-based compensation expense relating to employees within certain departments that we allocate to cost of sales.
Generics: Generic cost of sales for the three months ended September 30, 2008
were $72.9 million higher than in the prior period due to increases in unit
sales and $17.6 million of additional foreign currency expense. During the three
months ended September 30, 2008, our generics gross margins decreased from 46.9%
to 46.0% reflecting increased sales of lower margin products including Ocella,
one of our highest selling generic products, which currently carries a margin
well below the margins we earn on our other Generic OC products. In addition,
our gross margins were negatively impacted by the weakness of the U.S. Dollar
compared to its value in the prior year.
Generic cost of sales for the nine months ended September 30, 2008 were
$108.2 million higher than the prior period due to increases in unit sales and
$61.0 million of additional foreign currency expense. During the nine months
ended September 30, 2008, our generics gross margins decreased slightly to 46.7%
from 46.8% when compared to the prior year period. Our gross margins during the
current period were negatively impacted by the lower margin earned from Ocella,
as discussed above. In addition, gross margins were negatively impacted by the
weakness of the U.S. Dollar compared its value in the prior year.
. . .
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