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| ENZN > SEC Filings for ENZN > Form 10-Q on 3-Nov-2009 | All Recent SEC Filings |
3-Nov-2009
Quarterly Report
Overview
We are a biopharmaceutical company dedicated to developing, manufacturing and commercializing important medicines for patients with cancer and other life-threatening conditions. We operate in three business segments: Products, Royalties and Contract Manufacturing. We have a portfolio of four marketed products, Oncaspar, our oncology product for the first-line treatment of patients with acute lymphoblastic leukemia (ALL); DepoCyt, for the treatment of lymphomatous meningitis; Abelcet, for the treatment of invasive fungal infections; and Adagen, for the treatment of severe combined immunodeficiency disease. Our drug development programs utilize several cutting-edge technologies, including our industry-leading PEGylation technology platform and the Locked Nucleic Acid (LNA) technology. Our PEGylation technology was used to develop two of our products, Oncaspar and Adagen, and has created a royalty revenue stream from licensing partnerships for other products developed using the technology. We also engage in contract manufacturing for other pharmaceutical companies to broaden our revenue base.
Results of Operations
Three-Month and Nine-Month Periods Ended September 30, 2009 and 2008
Overview
For the three months ended September 30, 2009, the Products and Royalties segments were profitable whereas the Contract Manufacturing segment experienced a loss. Corporate and other expenses declined in comparison with the three months ended September 30, 2008. This resulted in a pretax operating loss of $0.7 million for the third quarter of 2009 compared to a $1.9 million loss for the three months ended September 30, 2008. In the Products segment, revenues were relatively flat compared to the prior year three-month period primarily as a result of an accrual for prior-period chargebacks claimed by certain wholesalers which are currently under dispute by the Company. Improvements in both cost of sales and selling and marketing expenses served to generate the majority of the Products segment profit for the quarter. Royalty revenues in the third quarter of 2009 were lower when compared to the same quarter of 2008 primarily due to lower sales of PEGINTRON. Contract manufacturing revenues and earnings were negatively affected primarily by our MVI processing operations. Because of the customer rejection of a number of batches, no shipments were made during the third quarter of 2009 and a write-down of finished goods and raw material inventories related to the product was recorded.
On a nine-month year-to-date basis, we recognized a pretax operating income of $0.5 million in 2009 compared to a loss of $1.8 million in 2008. Products segment profit rose during 2009 compared to the corresponding nine-month period of 2008 due to a 3 percent growth in sales and combined reductions in cost of sales and selling and marketing expense partially offset by higher spending on research and development. Lower royalties in the first nine months of 2009 than in the first nine months of 2008 and a loss in contract manufacturing profitability offset the rise in Products segment profits. Lower corporate and other expenses in the nine-month comparison contributed to the overall improvement in pretax earnings. A net gain of $4.5 million on the repurchase of notes payable during the first quarter of 2009 favorably affected the results while spending on corporate research and development rose.
Greater analysis of operating results on a segment-by-segment basis follows. Percentage changes below and throughout this Management's Discussion and Analysis are based on thousands of dollars and not the rounded millions of dollars reflected throughout this section.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
2009 2008 2009 2008
---------- -------- ---------- -------
Products segment profit $ 9.3 $ 5.9 $ 22.1 $ 13.2
Royalties segment profit 13.6 14.6 41.1 44.3
Contract manufacturing segment (loss) profit (3.0 ) 1.3 (0.1 ) 6.1
Corporate and other expenses* (20.6 ) (23.7 ) (62.6 ) (65.4 )
-- ------- -- ----- -- ------- - -----
(Loss) income before income tax $ (0.7 ) $ (1.9 ) $ 0.5 $ (1.8 )
-- ------- -- ----- -- ------- - -----
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* We do not allocate certain corporate income and expenses not directly identifiable with the respective segments, including general and administrative expenses, treasury activities and exploratory and preclinical research and development expenses. Research and development expense is considered a corporate expense unless it relates to an existing marketed product or a product candidate enters Phase III clinical trials at which time related costs would be chargeable to our operating segments.
Products Segment
Products segment profitability (millions of dollars):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
% %
2009 Change 2008 2009 Change 2008
------ ------ ------ ------ ------ ------
Revenues $ 28.7 (1 ) $ 28.9 $ 88.3 3 $ 85.5
Cost of sales 8.9 (16 ) 10.4 27.1 (24 ) 35.6
Research and development 4.4 (3 ) 4.5 19.5 67 11.7
Selling and marketing 5.9 (21 ) 7.6 18.8 (15 ) 22.1
Amortization 0.2 - 0.2 0.5 - 0.5
Restructuring charge - (100 ) 0.3 0.3 (83 ) 2.4
- ---- - ---- - ---- - ----
Segment profit $ 9.3 55 $ 5.9 $ 22.1 67 $ 13.2
- ---- - ---- - ---- - ----
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Revenues
Sales performance of individual products is provided below (millions of
dollars):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
% %
Product 2009 Change 2008 2009 Change 2008
------- ------ ------ ------ ------ ------ ------
Oncaspar $ 12.5 - $ 12.5 $ 40.6 7 $ 38.0
DepoCyt 2.1 (4 ) 2.2 7.2 10 6.5
Abelcet 5.7 (15 ) 6.6 17.1 (16 ) 20.3
Adagen 8.4 10 7.6 23.4 13 20.7
- ---- - ---- - ---- - ----
Totals $ 28.7 (1 ) $ 28.9 $ 88.3 3 $ 85.5
- ---- - ---- - ---- - ----
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On a year-to-date basis, total net product sales grew by 3 percent, led by Oncaspar which rose 7 percent compared to the same period of 2008 and Adagen which rose 13 percent. The overall 2009 year-to-date growth in sales of Oncaspar is reflective of its continuing expansion in the pediatric ALL market and adoption in adult and young adult populations. Sales of DepoCyt and Adagen tend to fluctuate from period-to-period given their very small targeted patient populations, although both products benefited from a January 2009 price increase. Abelcet continues to experience both competitive and pricing pressures in the marketplace from other therapeutics. Abelcet sales were down 7 percent due to volume declines and approximately 9 percent due to lower average selling price in 2009 year to date compared to the same period of 2008.
Legislation related to government-allowed pricing may have an adverse effect on our future sales although we cannot estimate what the effect may be at this time.
Cost of sales
Cost of sales of marketed products declined to $8.9 million, or 31 percent of sales for the three months ended September 30, 2009 compared to $10.4 million, or 36 percent of sales, for the comparable three-month period of 2008. Adversely affecting the 2008 margins was the write-off of certain batches of Oncaspar during the third quarter of 2008 amounting to approximately $2.0 million related to the transfer of technology and consolidation of activities at our Indianapolis, Indiana facility (see Restructuring). Cost of sales of marketed products for the first nine months of 2009 was 31 percent of sales compared to 41 percent in the first nine months of 2008. The improvements in gross margin period-over-period, reflect in large part efficiencies derived across all products from the consolidation of our manufacturing facilities. There was also a favorable effect on gross margins attributable to product mix. In addition, during the first nine months of 2009, we wrote off certain Adagen inventory due to the identification of some batches trending to go out of specification prior to expiration of their shelf life and provided replacement product to customers. These events amounted to approximately $0.5 million and negatively affected margins. The first nine months of 2008 amounts included $1.9 million immediate amortization of a $5.0 million licensing intangible milestone payment that was triggered during that period.
Research and development
Research and development spending on marketed products, primarily Oncaspar and Adagen, was lower in the third quarter of 2009 than in the prior-year third quarter by $0.1 million. On a year-to-date basis, research and development rose $7.8 million to $19.5 million in 2009 from $11.7 million the previous year. We continue our programs to improve the manufacturing processes and pharmaceutical properties of both Oncaspar and Adagen and are now working towards commercial approval. As previously reported, we have transferred the cell line and will complete the transfer of manufacturing of L-asparaginase to our own subcontractor by the beginning of 2010. We will continue to invest in programs to enhance and secure the supply of Oncaspar and Adagen.
Selling and marketing expenses
Selling and marketing expenses consist primarily of sales and marketing personnel, other commercial expense and marketing programs to support our sales force as well as medical affairs activities. Selling and marketing expenses for the three months ended September 30, 2009 were $5.9 million, down 21 percent from $7.6 million in the third quarter of 2008. Year-to-date, selling and marketing expenses decreased 15 percent to $18.8 million in 2009 from $22.1 million in 2008. The decreases resulted from our continued selective spending in the selling and marketing programs and, in part, from the first-quarter 2009 restructuring, discussed below.
As part of our continued efforts to streamline operations, we undertook a reduction in our Products segment workforce during the first quarter of 2009. The $0.3 million cost of the restructuring will be fully paid out by the end of 2009.
During 2008, manufacturing operations were consolidated in the Company's Indianapolis location and its South Plainfield, New Jersey location was decommissioned. Restructuring costs associated with the manufacturing consolidation program were fully accrued as of December 31, 2008. As of September 30, 2009, the balance of the accrued expenses for unpaid employee separation and related benefits related to this program was fully paid out. There were no adjustments made during the first nine months of 2009.
The Company incurred the following costs in the Products Segment in connection with its restructuring programs during the three months and nine months ended September 30, 2009 and September 30, 2008 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -----------------------
2009 2008 2009 2008
--------- ------------ -------- -----------
Employee termination costs - 2009 program $ - $ - $ 283 $ -
Employee termination costs - manufacturing
consolidation - 46 - 1,524
Write-down of manufacturing assets - 203 - 810
Other - - - 58
--- ----- --- -------- -- ----- -- --------
Restructuring $ - $ 249 $ 283 $ 2,392
--- ----- --- -------- -- ----- -- --------
Royalties Segment
(millions of dollars)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
% %
2009 Change 2008 2009 Change 2008
--------- ------- ------ -------- ------- ------
Royalty revenue $ 13.6 (6) $ 14.6 $ 41.1 (7) $ 44.3
-- ------ - ---- -- ----- - ----
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Royalty revenue declined 6 percent due primarily to PEGINTRON royalties which declined 8 percent during the three months ended September 30, 2009 compared to the third quarter of 2008. As reported by Schering-Plough Corporation, the decline in PEGINTRON sales was primarily attributable to a 6 percent unfavorable impact of foreign exchange. For the nine months ended September 30, 2009, the year-over-year decline in royalty revenues was 7 percent. In addition to declining royalty revenues from PEGINTRON sales, royalties from Pegasys and Macugen decreased in the nine months ended September 30, 2009 compared first nine months of 2008; Pegasys due to timing of shipments and Macugen as a result of competition. PEGINTRON, on a year-to-date basis has been affected by both adverse effects of foreign exchange and lower sales in the U.S. Our royalties from Pegasys, which amounted to $1.4 million during the nine months ended September 30, 2009 ended in October 2009.
PEGINTRON received a recommendation for approval as a treatment in addition to surgery in patients with metastatic melanoma from the U.S. Food and Drug Administration (FDA) Advisory Committee. In October 2009, Schering-Plough received a complete response letter from the FDA to the company's supplemental Biologics License Application regarding PEGINTRON for this indication. Schering-Plough will work closely with the FDA to respond to outstanding concerns related to the PEGINTRON melanoma filing.
Costs and expenses
Royalty revenues do not require any material specific maintenance costs. At some point in the future, costs associated with initiation of new out-licensing agreements that could result in our receipt of a royalty stream and, if necessary, costs necessary to maintain the underlying technology may be charged to the Royalties segment.
Contract Manufacturing Segment
Contract manufacturing segment profitability (millions of dollars):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
% %
2009 Change 2008 2009 Change 2008
------- ------ ----- ------ ------ ------
Revenues $ 2.3 (56 ) $ 5.3 $ 11.0 (41 ) $ 18.7
Cost of sales 4.7 18 4.0 10.3 (17 ) 12.4
General and administrative - - - 0.2 - 0.2
Restructuring 0.6 n.m. - 0.6 n.m. -
-- ---- - --- - ---- - ----
Segment (loss) profit $ (3.0 ) (361 ) $ 1.3 $ (0.1 ) (102 ) $ 6.1
-- ---- - --- - ---- - ----
n.m. - not meaningful
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Contract manufacturing revenue for the three months ended September 30, 2009 was $2.3 million, a decrease of 56 percent from the $5.3 million generated in the comparable three-month period of 2008. There were no shipments of the injectable vitamin, MVI, during the current quarter as a result of the customer's rejection of a number of prior batches. This accounted for essentially the entire decline in contract manufacturing revenues for the period when compared to the prior year. For the nine months ended September 30, 2009, contract manufacturing revenues were down 41 percent to $11.0 million. The year-to-date reduction in contract manufacturing revenues was largely attributable to the third-quarter absence of sales of MVI, but other customer revenues were down as well. Abelcet for export and Myocet both experienced lower volumes during the current year nine-month period compared to the first nine months of 2008. The comparative decrease in year-to-date contract manufacturing revenue also was partly attributable to revenue recognized in the first quarter of 2008 for non-routine services for design work for existing customers.
Our contract for MVI is scheduled to terminate effective April 30, 2010, however, we have ceased processing of the product due to a dispute with the customer. Further revenues from our processing of MVI are unlikely. Our agreements with Cephalon France SAS regarding the manufacture of MYOCET and Abelcet were due to expire in January 2010 and November 2011, respectively. In August 2009, however, these agreements were amended for a term through July 2014.
Cost of sales
Cost of sales for contract manufacturing for the three months ended September 30, 2009 was $4.7 million, in excess of total net sales for the period. Cost of sales for contract manufacturing for the comparable three-month period of 2008 was $4.0 million or 76 percent of sales. We provided reserves of approximately $1.4 million and $1.3 million against raw materials and finished goods inventories, respectively, of MVI during the third quarter of 2009 as a result of the cancellations of MVI shipments discussed above. In addition, unfavorable variances related to the lack of processing of MVI adversely affected third-quarter 2009 margins. For the nine months ended September 30, 2009, cost of sales as a percent of sales was approximately 93 percent, significantly higher than the 67 percent of sales experienced for the nine months ended September 30, 2008 primarily as a result of the cancellations of the MVI shipments. Offsetting this adverse effect somewhat, cost of sales for the first nine months of 2008, as a percentage of sales, was favorably affected by the above-referenced non-routine services which contributed $0.9 million of revenues. These services were performed in 2007 but recognition was delayed until all criteria for revenue recognition were met.
As a result of declining revenues in the contract manufacturing business and the imminent termination of the MVI contract (see above), we have taken a number of actions to control costs including, among other things, the elimination of temporary workers and a reduction in our manufacturing-related workforce. In connection with the reduction in manufacturing-related workforce, we recorded a restructuring charge of $0.6 million in the third quarter of 2009. No additional charges are expected in connection with this reduction in force. The charge represents separation payments, taxes and related benefits. The full amount was in accrued expenses as of September 30, 2009 and is expected to be fully expended by the end of the third quarter of 2010.
During the three months ended September 30, 2009, we had export sales and royalties on export sales of $18.4 million, of which $11.5 million were in Europe. This compares to $17.5 million of export sales in the comparable three-month period of 2008, of which $11.4 million were in Europe.
We had export sales and royalties on export sales of $54.4 million and $58.2 million, of which $32.9 million and $39.2 million were in Europe, for the nine months ended September 30, 2009 and 2008, respectively.
Corporate and Other Expense
(millions of dollars)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
% %
2009 Change 2008 2009 Change 2008
------ ------ ------ ------ ------ ------
Research and development $ 11.4 3 $ 11.2 $ 34.3 11 $ 30.8
- ---- - ---- - ---- - ----
General and administrative 7.7 (28 ) 10.7 27.1 (9 ) 29.8
- ---- - ---- - ---- - ----
Restructuring - - - 0.7 n.m. -
- ---- - ---- - ---- - ----
Other (income) expense:
Investment income, net (1.2 ) (9 ) (1.3 ) (3.3 ) (28 ) (4.6 )
Interest expense 2.8 (9 ) 3.0 8.8 (9 ) 9.6
Other, net (0.1 ) n.m. 0.1 (5.0 ) n.m. (0.2 )
- ---- - ---- - ---- - ----
1.5 (23 ) 1.8 0.5 (91 ) 4.8
- ---- - ---- - ---- - ----
Corporate and other expenses $ 20.6 (13 ) $ 23.7 $ 62.6 (4 ) $ 65.4
- ---- - ---- - ---- - ----
n.m. - not meaningful
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Research and development.
For the three months ended September 30, 2009, research and development expenses increased 3 percent to $11.4 million as compared to $11.2 million for the three months ended September 30, 2008. For the nine-month period ended September 30, 2009, research and development expenses increased 11 percent to $34.3 million. We initiated a Phase II study for our PEG-SN38 in metastatic colorectal cancer patients that opened for enrollment in June. We also continue to evaluate dosage in our Phase I studies for the HIF-1 alpha antagonist and Survivin antagonist. The second quarter of 2008 spending included $2.0 million in milestone payments related to the LNA platform. We continue to advance our research and development programs in areas such as PEG-SN38, the HIF-1 alpha antagonist and other LNA- and PEGylation- based programs. We anticipate increased levels of research and development expenses for the full year 2009 when compared to 2008 due in part to the recognition of a $2.0 million milestone payment which is expected to become payable as well as increased clinical activities during the fourth quarter of 2009.
General and administrative.
General and administrative expense decreased to $7.7 million for the three months ended September 30, 2009 from $10.7 million in the three months ended September 30, 2008. The third-quarter 2008 amounts were higher than usual due to approximately $2.7 million of expenses related to strategic initiatives being pursued at that time. This included the then considered spin-off of our biotechnology business and sale of our specialty pharmaceuticals business, including our manufacturing facility. Benefiting 2009, we are experiencing some efficiencies from our recent restructuring initiatives. For the nine months ended September 30, 2009, general and administrative spending decreased to $27.1 million from $29.8 million in the comparable prior-year period. The nine-month 2008 cost of strategic initiatives amounted to approximately $3.8 million. These strategic initiative costs were not experienced during the nine months ended September 30, 2009, thus improving the period-over-period comparison. There were, however, some partially offsetting legal costs incurred
Corporate restructuring costs associated with the 2009 workforce reduction . . .
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