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SVNT > SEC Filings for SVNT > Form 10-Q on 8-Nov-2011All Recent SEC Filings

Show all filings for SAVIENT PHARMACEUTICALS INC

Form 10-Q for SAVIENT PHARMACEUTICALS INC


8-Nov-2011

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our management's discussion and analysis of financial condition and results of operations contains statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements that set forth anticipated results based on management's plans and assumptions. From time to time, we also provide forward-looking statements in other materials we release to the public as well as oral forward-looking statements. Such statements discuss our strategy, expected future financial position, results of operations, cash flows, financing plans, development of products, strategic alliances, intellectual property, competitive position, plans and objectives of management. We often use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "will" and similar expressions to identify forward-looking statements. In particular, any statements about our ability to obtain necessary foreign regulatory approvals for KRYSTEXXA® (pegloticase), our ability to complete the development of and execute upon our commercial strategy for KRYSTEXXA, our ability to achieve profitability and raise additional capital needed to achieve our business objectives, our financing needs and liquidity, and the market size for KRYSTEXXA and its expected degree of market acceptance are forward-looking statements. Additionally, forward-looking statements include those relating to future actions, future performance, sales efforts, expenses, interest rates, and the outcome of contingencies, such as legal proceedings, and financial results.

We cannot guarantee that any forward-looking statement will be realized. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements.

We undertake no obligation to publicly update forward-looking statements. You are advised, however, to consult any further disclosures we make on related subjects in our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

Overview

We are a specialty biopharmaceutical company focused on commercializing KRYSTEXXA in the United States and completing the development and seeking regulatory approval for the product outside of the United States, particularly in the European Union. Additionally, we are also investigating the expansion of the clinical utility for KRYSTEXXA. KRYSTEXXA was approved for marketing by the U.S. Food and Drug Administration, or FDA, on September 14, 2010 and became commercially available in the United States by prescription on December 1, 2010, when we commenced sales and shipments to our network of specialty and wholesale distributors.

The active pharmaceutical ingredient, or API, in KRYSTEXXA is a PEGylated enzyme that converts uric acid to allantoin. KRYSTEXXA is indicated for the treatment of chronic gout in adult patients refractory to conventional therapy. Chronic gout that is refractory to conventional therapy occurs in patients who have failed to normalize serum uric acid and whose signs and symptoms are inadequately controlled with xanthine oxidase inhibitors at the maximum medically appropriate dose or for whom these drugs are contraindicated. KRYSTEXXA is not recommended for the treatment of an elevation of blood concentration of uric acid that is not accompanied by signs or symptoms of gout. This condition is referred to as asymptomatic hyperuricemia.

Gout develops when urate accumulates in the tissues and joints as a result of elevation of blood concentration of uric acid. Gout is usually associated with bouts of severe joint pain and disability, or gout flares, and tissue deposits of urate, which may occur in concentrated forms, or gout tophi. Patients with severe gout have an associated increased risk of kidney failure and increased risk of cardiovascular disease. Uricase, an enzyme not naturally expressed in humans but present in other mammals, eliminates uric acid from the body by converting uric acid to allantoin, which is easily excreted by the kidney. We believe that treatment with KRYSTEXXA eliminates hyperuricemia and provides clinical benefits by eliminating uric acid in the blood and tissue deposits of urate.

During the first quarter of 2011, we worked together with a leading independent life science consulting firm to conduct a comprehensive market research study to determine the number of patients in the United States who are refractory to conventional therapy, thereby suffering from Refractory Chronic Gout, or RCG. This study was conducted using both secondary data sources and primary market research. The secondary data was used to quantify the diagnosed prevalent gout population and the treated gout population. This included a review of all available published literature, NHANES, the nationally representative survey sponsored by the United States Centers for Disease Control and Prevention, Medicare claims data and commercial claims data. The study was completed in July 2011 and indicated that there are approximately 120,000 RCG patients in the United States, which represents approximately 4.2% of the overall annual treated gout population in the United States. The total available market opportunity for KRYSTEXXA will ultimately depend on, among other things, our marketing and sales efforts, reimbursement and market acceptance by physicians, infusion site personnel, healthcare payors and others in the medical community.

The FDA granted KRYSTEXXA an orphan drug designation in 2001, which we expect will provide the drug with orphan drug marketing exclusivity in the United States until September 2017, seven years from the date of its approval. The composition, manufacture and methods of use and administration of KRYSTEXXA are also the subject of a broad portfolio of patents and patent applications, which we expect will provide patent protection through 2026, assuming issuance of patents from currently pending patent applications.


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We completed a full promotional launch of KRYSTEXXA in the United States during the first quarter of 2011 with our sales force commencing field promotion to physicians on February 28, 2011. To support the commercial launch of KRYSTEXXA, we have hired a 62-person sales force, all with biologics drug experience, six regional business directors, 12 regional medical scientists, six managed care executives, 12 nurse educators and 12 field reimbursement specialists. As we proceed forward through the promotional launch, we may increase the number of sales force professionals in the future, if deemed necessary. This sales force will allow us to target the rheumatologists and nephrologists with access to infusion centers and healthcare institutions, each of which treat adult patients suffering from chronic gout refractory to conventional therapy. To date, our sales force has reached over 90% of our key rheumatologists, and 57% of key nephrologists. On June 20, 2011, the Company implemented the KRYSTEXXA Patient Initiation Program, or KPIP, which provided patients with RCG with two free doses of KRYSTEXXA for a short-term period through September 30, 2011. We believe that this initiative was a way for patients to begin therapy and have the opportunity to experience the potential benefits of KRYSTEXXA. We may re-introduce the KPIP at a future date based upon market conditions.

During August 2011, data from our two pivotal KRYSTEXXA phase 3 clinical trials in patients with RCG was published in the Journal of the American Medical Association, or JAMA. The data that were published in JAMA demonstrated that treatment with KRYSTEXXA resulted in significant and sustained reductions in uric acid levels along with clinical improvements in a substantial proportion of RCG patients for six months, a timeframe for demonstrating clinical improvement that is unique in randomized controlled studies of urate-lowering therapies. In addition, 40% of patients with tophi receiving KRYSTEXXA every two weeks experience complete resolution of one or more tophi, which are deposits of crystalline urate in joints, skin or cartilage, by the final study visit, compared to 7% of patients on placebo. The data published also included a summary of adverse events that occurred in at least 5% of the patients in the trial, including gout flare, infusion reactions, nausea, contusion or ecchymosis, nasopharyngitis, constipation, chest pain, anaphylaxis and vomiting.

We have built an inventory of finished KRYSTEXXA product as of September 30, 2011, that is packaged and labeled for distribution and additional supplies of bulk API drug substance that are scheduled to be packaged and labeled as part of our ongoing FDA approved commercial manufacturing process. We believe our inventory of finished KRYSTEXXA product, excluding the bulk API drug substance currently included in work-in-process inventory, will be sufficient for us to meet internal estimates of market demand at least through the first quarter of 2013. To date, several large private managed care organizations have added KRYSTEXXA as a covered medical benefit and other managed care organizations are actively evaluating medical benefits coverage. In December 2010, we filed for a temporary "C" code and a permanent "J" code application with the U.S. Centers for Medicare & Medicaid Services, or CMS, for reimbursement of the cost of treatment with KRYSTEXXA. On April 1, 2011, we received a notice from CMS that a temporary "C" code was assigned to KRYSTEXXA. Additionally, in November 2011, we received a notice from CMS that a permanent "J" code was assigned for KRYSTEXXA, effective on January 1, 2012. The "J" code should facilitate reimbursement to providers who treat patients suffering with RCG and who rely on Medicare and Medicaid. We also were awarded a contract from the U.S. Department of Veterans Affairs, or the VA, for KRYSTEXXA to be covered for reimbursement for VA member patients. We received this contract award from the VA in March 2011 with the contract effective as of April 1, 2011. The contract calls for us to sell KRYSTEXXA to the VA at an approximate 24% discount to our list selling price.

In support of our efforts to obtain regulatory approval for KRYSTEXXA outside of the United States, in May 2011 we submitted a Marketing Authorization Application, or MAA, for centralized review in the European Union. We received validation of the MAA that was filed with the European Medicines Agency, or EMA, for KRYSTEXXA for the treatment of chronic gout in adult patients refractory to conventional therapy, which resulted in the initiation of the EMA's regulatory review process. In December 2010, the Pediatric Committee of the European Medicines Agency approved our pediatric investigation plan for the treatment and prevention of hyperuricemia in pediatric patients undergoing chemotherapy for hematologic malignancies, which is a condition to filing for marketing approval in the European Union.

We also sell and distribute branded and generic versions of oxandrolone, a drug used to promote weight gain following involuntary weight loss. We launched our authorized generic version of oxandrolone in December 2006 in response to the approval and launch of generic competition to our branded product, Oxandrin®. The introduction of oxandrolone generics has led to significant decreases in demand for Oxandrin and our authorized generic version of oxandrolone. We believe that revenues from Oxandrin and our authorized generic version of oxandrolone will continue to decrease in future periods primarily as a result of the expiration of our contract agreement with our third-party manufacturer. We do not plan on seeking a new third-party manufacturer of Oxandrin or oxandrolone.

We currently operate within one "Specialty Pharmaceutical" segment, which includes sales of Oxandrin and oxandrolone and the sales and research and development activities of KRYSTEXXA. Total revenues from continuing operations were $5.9 million for the nine months ended September 30, 2011, an increase of $2.8 million, or 91%, from $3.1 million for the same period in the prior year.


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Recent Changes in Our Senior Management

On September 12, 2011, Kenneth J. Zuerblis was appointed as our Executive Vice President, Chief Financial Officer & Treasurer and principal financial and accounting officer. Mr. Zuerblis replaced David G. Gionco as Chief Financial Officer & Treasurer of the Company. Mr. Gionco remains with the Company as Group Vice President of Finance. Mr. Zuerblis served as Chief Financial Officer and Senior Vice President of ImClone Systems, which develops targeted biologic cancer treatments, from March 2008 through 2009. Prior to joining ImClone, Mr. Zuerblis served as Chief Financial Officer of Enzon Pharmaceuticals Inc., a biotechnology company, from 1994 through 2005, and as Enzon's Corporate Controller from 1991 through 1994. Mr. Zuerblis currently serves as a director of Immunomedics Inc., a biopharmaceutical company, and sits on its Audit and Compensation Committees, and as a director of Resverlogix Corporation, a biotechnology company, and is chair of its Audit Committee.

On August 1, 2011, we appointed Dr. Kenneth M. Bahrt as our Senior Vice President and Chief Medical Officer. Dr. Bahrt leads the overall management of Savient's clinical development, drug safety and medical affairs teams. Dr. Bahrt previously served as Therapeutic Area Head for US Medical Affairs (Immunology) at Genentech, a biotechnology company. He also previously served as Global Medical Director (Inflammation and Immunology) for F. Hoffmann - La Roche, Inc, a pharmaceutical and diagnostics company. Additionally, Dr. Bahrt worked in leadership positions of increasing breadth and responsibility at Bristol Meyers Squibb Co., a global biopharmaceutical company, where he was the Executive Director of Global Medical Affairs (Immunology), and Pfizer, a biopharmaceutical company, where he served as Medical Director and Team Leader for rheumatology portfolio products. Prior to joining the pharmaceutical industry, Dr. Bahrt had a rheumatology practice for 15 years. Dr. Bahrt is board certified rheumatologist.

On May 30, 2011, we entered into an agreement with Paul Hamelin, our former President, providing for the termination of his employment on mutually agreed terms. Mr. Hamelin's termination is deemed an "involuntary termination by us without cause" (as defined in the Employment Agreement dated as of May 23, 2006 between Mr. Hamelin and us, as amended on February 15, 2008 and on December 19, 2008 (as so amended, the "Employment Agreement")), and as a result, Mr. Hamelin is entitled to receive the compensation and benefits required under the Employment Agreement in the event of an involuntary termination by us without cause. Mr. Hamelin is not entitled to any payments or benefits, except those required by the terms of the Employment Agreement. Mr. Hamelin's options to purchase shares of our common stock will be exercisable until November 30, 2011, after which their exercisability will terminate. In addition, the vesting of 37,500 stock options previously granted to Mr. Hamelin and scheduled to vest on December 19, 2011 was accelerated and such options vested immediately on May 30, 2011. In consideration for receiving accelerated stock option vesting and extended exercisability, Mr. Hamelin has released us from all claims and causes of action that he may have had against us.


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Results of Operations

During 2010 and the nine months ended September 30, 2011, our operating results were driven by substantial expenses relating to the commercialization of KRYSTEXXA resulting in net operating losses for the periods. We anticipate continued substantial expenses relating to the commercialization and further development of KRYSTEXXA for the remainder of 2011 and into 2012. Our expenses relating to the commercialization and development of KRYSTEXXA will depend on many factors, including:

• the cost of commercialization activities, including product marketing, sales and distribution.

• the cost of manufacturing activities,

• the cost of our post-approval commitments to the FDA, including an observational study and a risk evaluation and mitigation strategy, or REMS, program, and

• the timing of, and the costs involved in, obtaining regulatory approvals for KRYSTEXXA in countries other than the United States,

During the three and nine months ended September 30, 2011 and 2010, the expenses associated with our regulatory, clinical, manufacturing and commercial development of KRYSTEXXA were the most significant factors affecting our results of operations. The following table summarizes our costs and expenses and indicates the significance of selling, general and administrative costs related to our commercialization of KRYSTEXXA, as well as percentage of total cost of expenses for the periods indicated:

                                          Three Months Ended September 30,                   Nine Months Ended September 30,
                                            2011                     2010                     2011                     2010
                                                                            (In thousands)
Cost of goods sold                  $  4,584        14.0 %   $    421         2.5 %   $  6,008         7.0 %   $    998         2.5 %
Research and development               5,858        17.9 %      8,958        53.8 %     17,315        20.1 %     22,521        55.9 %
Selling, general & administrative     22,268        68.1 %      7,265        43.7 %     62,761        72.9 %     16,764        41.6 %


Total costs and expenses            $ 32,710       100.0 %   $ 16,644       100.0 %   $ 86,084       100.0 %   $ 40,283       100.0 %

Our revenues for the three and nine months ended September 30, 2011 were derived primarily from product sales of KRYSTEXXA and to a lesser extent, sales of Oxandrin and oxandrolone, our authorized generic version of Oxandrin. Following the full commercial launch of KRYSTEXXA in February 2011, we expect sales from KRYSTEXXA to increase for the remainder of 2011 and in future periods. As a result of increased competition from generics and the expiration of our contract agreement with our third-party manufacturer of Oxandrin and oxandrolone, we expect our Oxandrin and oxandrolone revenues to decrease in future periods and diminish in proportion to our total revenues and in significance to our overall results of operations.

Our future revenues depend on our success in the commercialization of KRYSTEXXA. The commercial success of KRYSTEXXA will depend on many factors including:

• whether we are successful in marketing and selling KRYSTEXXA after the full commercial launch of the product,

• market acceptance of KRYSTEXXA by physicians and patients in this largely previously untreated patient population,

• market acceptance of the price that we charge for KRYSTEXXA and under what conditions private and public payors will reimburse patients for KRYSTEXXA,

• whether and to what extent our label expansion activities for KRYSTEXXA are successful,

• whether and when we face generic or other competition with respect to KRYSTEXXA,

• the timing and costs of regulatory approval for KRYSTEXXA in any countries other than the United States, and

• our ability to maintain a sufficient inventory of KRYSTEXXA to meet commercial demand.


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The following table summarizes net product sales of our commercialized products and their percentage of total net product sales for the periods indicated:

                            Three Months Ended                              Nine Months Ended
                               September 30,                                  September 30,
                        2011                   2010                   2011                    2010
                                                      (In thousands)
   KRYSTEXXA     $ 1,850        71.6 %   $  -           -      $ 3,200        54.7 %   $    -           -
   Oxandrolone       771        29.9 %     632        64.0 %     2,583        44.1 %     1,933        63.0 %
   Oxandrin          (40 )      -1.5 %     356        36.0 %        72         1.2 %     1,135        37.0 %


                 $ 2,581       100.0 %   $ 988       100.0 %   $ 5,855       100.0 %   $ 3,068       100.0 %

Results of Operations for the Three Months Ended September 30, 2011 and September 30, 2010

Revenues

Total revenues increased $1.6 million, or 161%, to $2.6 million for the three months ended September 30, 2011, from $1.0 million for the three months ended September 30, 2010. The increase is primarily due to incremental KRYSTEXXA sales of $1.9 million resulting from the full commercial launch of KRYSTEXXA in February of 2011. We expect sales of KRYSTEXXA to continue to increase in future periods as a result of our investments in marketing related to the product.

Sales of oxandrolone, our authorized generic version of Oxandrin, increased $0.1 million for the three months ended September 30, 2011 as compared to the three months ended September 30, 2010 offset by a $0.4 million decrease in net sales of our branded product, Oxandrin, for the three months ended September 30, 2011 as compared to the three months ended September 30, 2010. While gross sales of Oxandrin remained consistent from period-to-period, net sales in the prior year quarter benefited from recoveries in our sales allowances resulting in lower sales allowances for the three months ended September 30, 2010 as compared to the three months ended September 30, 2011. We expect that sales of Oxandrin and oxandrolone will decrease in future periods depending on various factors, including the pricing and number of competing products, overall demand in the marketplace and due to the expiration of our contract agreement with our third-party manufacturer which has manufactured both products on our behalf.

Cost of goods sold

Cost of goods sold increased by $4.2 million to $4.6 million for the three months ended September 30, 2011, from $0.4 million for the three months ended September 30, 2010. During the three months ended September 30, 2011, we recorded a $3.4 million charge against income to reserve for excess KRYSTEXXA inventory that had expiration dates such that the product was unlikely to be sold. In addition, royalty payments on commercialized products are recorded as a component of cost of goods sold and these costs increased by $0.4 million as a result of the commencement of sales of KRYSTEXXA.

Research and development expenses

Research and development expenses decreased by $3.1 million, or 35%, to $5.9 million for the three months ended September 30, 2011, from $9.0 million for the three months ended September 30, 2010. The decrease was primarily due to costs related to the manufacture of KRYSTEXXA commercial batches that were included in research and development expenses prior to FDA approval of the product on September 14, 2010.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $15.0 million to $22.3 million for the three months ended September 30, 2011, from $7.3 million for the three months ended September 30, 2010. The increase was primarily due to higher selling and marketing expenses associated with the full commercial launch of KRYSTEXXA as we continue to ramp up our marketing efforts for KRYSTEXXA, and increased headcount as a result of the hiring of our KRYSTEXXA sales force and reimbursement specialists.

Interest expense on convertible notes

Interest expense was $3.4 million for the three months ended September 30, 2011, consisting of $2.9 million of interest expense from the 4.75% coupon on our 2018 Convertible Notes issued in February 2011 and $0.5 million of non-cash accretion of the debt discount, also associated with our 2018 Convertible Notes.


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Other (expense) income, net

Other expense, net decreased by $43.6 million to $0.1 million for the three months ended September 30, 2011 from $43.7 million for the three months ended September 30, 2010. The $0.1 million expense in the current period represents the amortization of deferred financing costs on our 2018 Convertible Notes. The expense for the three months ended September 30, 2010 reflects the mark-to-market adjustment on our previous warrant liability which was settled in its entirety during the fourth quarter of 2010.

Income tax benefit

We recorded an income tax benefit of $6.2 million for the three months ended September 30, 2011, as compared to a zero income tax benefit for the three months ended September 30, 2010. This income tax benefit resulted from the allocation of a tax benefit to continuing operations pursuant to ASC 740-30-45, Income Taxes. As discussed in Note 14 - Convertible Notes, the 2018 Convertible Notes were bifurcated into debt and equity components for accounting purposes. As a result, we recorded a credit to the capital in excess of par value account of $34.4 million, which caused the allocation of the $6.2 million tax benefit to continuing operations. The $6.2 million tax benefit for the three months ended September 30, 2011 does not result in additional cash flow for us.

Results of Operations for the Nine months ended September 30, 2011 and September 30, 2010

Revenues

Total revenues increased $2.8 million, or 91%, to $5.9 million for the nine months ended September 30, 2011, from $3.1 million for the nine months ended September 30, 2010. The increase is primarily due to incremental KRYSTEXXA sales of $3.2 million resulting from the full commercial launch of KRYSTEXXA in February of 2011.

Sales of oxandrolone, our authorized generic version of Oxandrin, increased $0.6 million to $2.6 million for the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010. These higher sales were offset by a $1.0 million decrease in net sales of our branded product Oxandrin as compared to the three months ended September 30, 2010, primarily due to increased generic competition.

Cost of goods sold

Cost of goods sold increased by $5.0 million to $6.0 million for the nine months ended September 30, 2011, from $1.0 million for the nine months ended September 30, 2010, as the current period includes a $3.4 million charge against income to reserve for excess KRYSTEXXA inventory that had expiration dates such that it was unlikely the product will be sold. In addition, royalty payments on commercialized products are recorded as a component of cost of goods sold and these costs increased by $0.8 million as a result of the commercialization of KRYSTEXXA.

Research and development expenses

Research and development expenses decreased by $5.2 million, or 23%, to $17.3 million for the nine months ended September 30, 2011, from $22.5 million for the nine months ended September 30, 2010. The decrease is primarily due to $2.5 million in costs incurred in the prior year related to commercial batches of KRYSTEXXA manufactured prior to the FDA approval of the product on September 14, 2010. Additionally, the lower costs are due to $1.7 million in prior year expenses associated with our conformance batch campaign at our potential . . .

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