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CBRX > SEC Filings for CBRX > Form 10-K on 14-Mar-2013All Recent SEC Filings

Show all filings for COLUMBIA LABORATORIES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-K for COLUMBIA LABORATORIES INC


14-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations Overview The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand the Company's financial condition and results of operations. The MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes ("Notes").
Historically, we received revenues domestically from our Progesterone Products (CRINONE and PROCHIEVE) that we either promoted through our own sales force and sold to wholesalers and specialty pharmacies or sold to licensees. As of July 2, 2010 and the close of the Actavis Transactions , we supply Actavis with Progesterone Products which Actavis promotes and sells to wholesalers and specialty pharmacies in the United States, and we receive royalties on those sales. We also continue to supply Merck Serono with CRINONE 8% for resale outside the United States.
Effective May 19, 2010, our license and supply agreement with Merck Serono for the sale of CRINONE 8% outside the U.S. was renewed for an additional five year term.
On July 2, 2010, we sold substantially all of our progesterone related assets and 11.2 million shares of Common Stock to Actavis for a $47 million upfront payment, the forgiveness of $15 million in debt plus royalties on certain Progesterone Products and potential milestone payments. In June 2011, Columbia earned a $5 million milestone payment from Actavis based on the FDA's acceptance for filing of NDA 22-139. The Company remains eligible for $32.5 million in potential milestone payments related to receipt of regulatory approvals and product launches. However, all of these potential milestones relate to the preterm birth indication. Given that Actavis has discontinued the development of progesterone vaginal gel 8% for the preterm birth indication, we do not expect to receive these milestone payments. Additionally, Actavis is funding the development of a next-generation vaginal progesterone product as part of a comprehensive life-cycle management strategy.
In 2010, we periodically sold Replens Vaginal Moisturizer and RepHresh Vaginal Gel to Lil' Drug Store for resale; the supply agreement for these products expired on October 31, 2009.
On April 20, 2011, we sold the U.S. rights to STRIANT to Actient Pharmaceuticals, LLC, for a combination of cash upfront and royalties on annual sales of STRIANT above $10 million. The Company also licensed to Actient certain intellectual property related to the underlying progressive hydration technology for use in the treatment of hypogonadism and other indications related to low testosterone levels in men.
Columbia's business now consists of our CRINONE manufacturing revenues and royalties, our collaboration with Actavis on the development of next-generation progesterone products, and our novel bioadhesive drug delivery technologies and other products.
With the closing of the Actavis Transactions on July 2, 2010, CRINONE 8% and CRINONE 4% are marketed and sold in the U.S. by Actavis. We manufacture and sell product to Actavis at our cost plus 10%: these revenues are recorded within Product Revenues. In addition, we receive royalty payments of 10% of annual net sales of these products for annual net sales up to $150.0 million, 15% for sales above $150.0 million but less than $250.0 million; and 20% for annual net sales of $250.0 million and over. During 2012, we repackaged batches previously meant for the anticipated launch of the preterm birth into CRINONE. This provides Actavis with sufficient volumes such that we do not expect any material orders from Actavis during 2013.
Outside the U.S., we supply Merck Serono with CRINONE 8% for resale at the greater of 30% of net sales or direct costs plus 20%.
Future recurring revenues will be derived primarily from product and royalty streams from our partners, Actavis and Merck Serono. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause operating results to vary significantly from quarter to quarter. Because products shipped to the Company's two customers occur only in full batches, quarterly sales can vary widely and affect quarter to quarter comparisons and may not correlate to customers' in-market sales. Future, non-recurring milestone payments will be recognized when and if the milestones are achieved. Operating expenses attributable to product selling, marketing and distribution activities have been eliminated. Research and development expenses should remain low for the foreseeable future.
On March 1, 2012, the Company announced a 42% workforce reduction from 24 employees at December 31, 2011, to 14 employees. The Company recorded a severance charge of approximately $0.6 million in the first quarter of 2012, and expects to realize annual savings of over $1.5 million. The reduction primarily impacted research and development and general administrative positions. The Company's vice president, clinical research, resigned in October 2012; there were no charges related to his departure. In December 2012 the Company recorded approximately $0.9 million in severance related to the departure of two executive officers. Columbia's remaining staff continues to focus on the future course of Columbia's business, executing its public reporting obligations, and management of its supply chain. In January, 2013, the Company


has announced plans to relocate its Corporate headquarters to the area of Boston, Massachusetts.Severance and retention expense of approximately $0.5 million will be recorded over the first half of 2013.
All of our products are manufactured in Europe by third parties on behalf of our foreign subsidiaries who sell the products to our worldwide licensees. Because our European revenues reflect these sales and are reduced only by our product manufacturing costs, we have historically shown a profit from our foreign operations.
From July 2010 through June 2011, the Company recorded and charged to U.S. operations the amortization of the deferred revenue recognized as a result of the completion of the Actavis Transactions, which amount totaled approximately $34 million. The Company historically charged to our United States operations all selling and distribution expenses that supported our marketing, sales and distribution efforts. From the fourth quarter of 2010 until the sale of STRIANT to Actient in April 2011, only distribution costs related to STRIANT were included in selling and distribution costs; since then, there have been and going forward, there will be no such costs. The Company historically charged to our United States operations research and development expenses for product development which principally supported new products and new label indications for products to be sold in this country. In addition, the majority of our general and administrative expenses represent the Company's management activities as a public company and are charged to our United States operations. The amortization of the repurchase of the U.S. rights to CRINONE was charged to our United States operations; amortization on these rights ceased with the closing of the Actavis Transactions in July 2010. As a result, we have historically shown a loss from our United States operations that has been significantly greater than, and offsets, the profits from our foreign operations.
In connection with the Actavis Transactions until the second anniversary of the date on which the Company and Actavis terminate their relationship with respect to the joint development of Progesterone Products, the Company agreed not to manufacture, develop or commercialize products containing progesterone or any other products for the preterm birth indication, subject to certain exceptions. The joint development collaboration can be terminated by either party five years after the closing of the Actavis Transactions (i.e., July 2, 2015). Effective May 19, 2010, the Company's wholly owned subsidiary, Columbia Laboratories (Bermuda) Ltd., renewed its license and supply agreement with Merck Serono under which Merck Serono is granted an exclusive license to our CRINONE products outside the United States. Our relationship with Merck Serono dates from 1999, and, unless further renewed, the supply agreement expires on May 19, 2015. Also, with the 2010 renewal, the Company agreed to assign its CRINONE trademark registrations outside the United States to Merck Serono. The Company owns and remains responsible for all proceedings relating to the patents on CRINONE outside the United States. Merck Serono holds marketing authorizations for CRINONE in over 60 countries outside the United States. With respect to those countries in which sales of CRINONE are material, we hold patents on the delivery system for the product in the following countries in which sales of CRINONE are material: Australia, Canada, Ireland, Italy, Russia, and the United Kingdom, which patents expire in September 2014. We do not hold patents on the delivery system for the product in the following countries in which sales of CRINONE are material: Brazil, China, India, South Korea, Taiwan, Thailand, Turkey, and Vietnam.
Under the agreement, the Company is the exclusive supplier of CRINONE to Merck Serono. There is a forecasting and ordering procedure under which Merck Serono must provide the Company with a rolling 18-month forecast of Merck Serono's requirements of product for each country in which the product is marketed. The first four months of each forecast are firm orders. The Company is required to supply to Merck Serono all of its requirements of the product before supplying the Company's own requirements or that of any licensee of the Company in the United States, including Actavis.
The purchase price to Merck Serono for CRINONE is determined on a country-by-country basis and is the greater of (i) thirty percent (30%) of the net selling price in the country, or (ii) Columbia's direct manufacturing cost plus 20%. Certain quantity discounts apply to annual purchases over 10 million, 20 million, and 30 million units. The Company supplies promotional samples at the Company's direct manufacturing cost. If, at the end of the supply term, the parties cannot agree upon mutually acceptable terms for renewal of the supply arrangement, Merck Serono may elect to retain a license to the product and be entitled to manufacture the product. In such event Merck Serono is obligated to pay the Company royalties, on a country-by-country basis, of fifteen percent (15%) of net sales, which royalty rate is reduced to seven percent (7%) of net sales if the licensed patents in such country have expired or a third-party vaginally-administered progesterone product approved in such country captures fifteen percent (15%) or more of the sales of the product in such country until May 21, 2015, and thereafter a royalty of two percent (2%) of net sales in such country until May 21, 2020. Thereafter Merck Serono will have an irrevocable fully paid up license to the product in such country.
Under the agreement, each party is responsible for new clinical trials and government registrations in its territory and the parties are obligated to consult from time to time regarding the studies. Each party agrees to promptly provide the other party the data from its studies free-of-charge. During the term of the agreement, the Company has agreed not to develop, license, manufacture or sell to another party outside the United States any product for the vaginal delivery of progesterone


or progestational agents for hormone replacement therapy or other indications where progesterone or progestational agents are commonly used.
The agreement can be terminated prior to expiration of the term by either party upon breach or an insolvency event of the other party.
Clinical Development of Progesterone Vaginal Gel 8% for Prevention of Preterm Birth in Women with Premature Cervical Shortening.
In 2010 and, to a lesser extent, 2011 and 2012, we invested significant resources in the development program for progesterone vaginal gel 8% to reduce the risk of preterm birth in women with a short cervix as measured by transvaginal ultrasound at mid-pregnancy. This program included a Phase III clinical trial in pregnant women (the "PREGNANT study"), a randomized, double-blind, placebo-controlled clinical trial designed to evaluate the ability of progesterone vaginal gel 8% to reduce the risk of preterm birth in women with a short cervix of between 1.0 and 2.0 centimeters as measured by transvaginal ultrasound at mid-pregnancy. The primary endpoint of this clinical trial was a reduction in preterm births at less than or equal to 32 6/7 weeks versus placebo. We initiated the PREGNANT study in early 2008 and in October 2008 we announced a collaboration with the Perinatology Research Branch (the "PRB") of the Eunice Kennedy Shriver National Institutes of Child Health and Human Development, part of the NIH.
In December 2010, we announced positive top-line results from the PREGNANT Study and in April 2011 the study was published in the peer-reviewed journal Ultrasound in Obstetrics & Gynecology in a manuscript entitled Vaginal progesterone reduces the rate of preterm birth in women with a sonographic short cervix: a multicenter, randomized, double-blind, placebo-controlled trial. (Hassan SS, Romero R, et al., Ultrasound Obstet Gynecol 2011;38:18-31). The published results indicate that the administration of progesterone vaginal gel 8% vaginal progesterone gel from mid-pregnancy until term in women with a premature cervical shortening as confirmed by transvaginal ultrasound was associated with a statistically significant reduction in the rate of preterm birth at less than or equal to 32 6/7 weeks gestation, the primary endpoint of the study, compared to placebo gel. Use of progesterone vaginal gel 8% was associated with: a 44% reduction in the incidence of preterm birth before 33 weeks gestation (p=0.022) and a 39% reduction in preterm births before 35 weeks gestation (p=0.012). Improvement in infant outcome was noted with progesterone vaginal gel 8%. The incidence and profile of adverse events in patients receiving progesterone vaginal gel 8% were comparable to placebo. In April 2011, we filed a New Drug Application (NDA 22-139) for progesterone vaginal gel 8% for use in the reduction of risk of preterm birth in women with a singleton gestation and a short uterine cervical length in the mid-trimester of pregnancy. The NDA was reviewed by the FDA's Advisory Committee for Reproductive Health Drugs in January 2012. While Committee members generally agreed that PROCHIEVE 8% is safe, the Committee stated that more information is needed to support approval. On February 10, 2012, we transferred to Actavis NDA 22-139 pursuant to the second closing of the sale of assets under the Purchase Agreement. On February 24, 2012, Actavis received a Complete Response Letter ("CRL") from the FDA indicating that the NDA review cycle is complete and the application is not ready for approval in its present form. The CRL stated that the effect of treatment with progesterone vaginal gel 8% in reducing the risk of preterm birth in women with a short uterine cervical length at ? 32 6/7 weeks gestation (p=0.022) did not meet the level of statistical significance generally expected to support the approval of the product in the U.S. market from a single trial. In the CRL, the FDA stated that additional clinical work would be required to support the approval. Actavis held an "End-of-Review" meeting with the FDA to discuss the issues outlined in the CRL and in August 2012 filed a Formal Dispute Resolution Request ("FDRR") related to this application. The FDA denied Actavis's FDRR in October 2012.
In 2012, both the Society for Maternal-Fetal Medicine ("SMFM") and the American College of Obstetricians and Gynecologists ("ACOG") issued guidelines on the use of vaginal progesterone to reduce the risk of preterm birth in women with a singleton gestation without a prior preterm birth with a cervical length of ? 20mm before or at 24 weeks of gestation. The SMFM Clinical Guideline, issued March 2012, notes that "in women with singleton gestations, no prior PTB, and short CL ?20mm at ?24 weeks, vaginal progesterone, either 90-mg gel or 200-mg suppository, is associated with reduction in PTB and perinatal morbidity and mortality, and can be offered in these cases." The ACOG Practice Bulletin 130, issued October 2012, states, "Vaginal progesterone is recommended as a management option to reduce the risk of preterm birth in asymptomatic women with a singleton gestation without a prior preterm birth with an incidentally identified very short cervical length less than or equal to 20 mm before or at 24 weeks of gestation." Publication of these guidelines make it extremely difficult if not impossible to conduct another placebo-controlled clinical trial in the U.S. to obtain FDA approval of a progesterone product for the proposed preterm birth indication.
As a result, Actavis has decided not to continue to develop progesterone vaginal gel 8% to prevent preterm birth in women with a short cervix. Therefore, we can give no assurance that progesterone vaginal gel 8% will ever be approved by the FDA for this proposed indication. Given that Actavis has discontinued the development of progesterone vaginal gel 8% for the preterm birth indication, we do not expect to receive these milestone payments. Actavis continues funding the development of a next-generation vaginal progesterone product as part of a comprehensive life-cycle management strategy.


                             Results of Operations
                                    Summary
                                                Net Revenues

                                             Percentage                       Percentage
                                              Inc./Dec.                        Inc./Dec.
                                                from                             from
                                2012         prior year          2011         prior year          2010
Net product revenues       $ 22,230,473           24  %     $ 17,977,608          (34 )%     $ 27,046,730
Royalties                     3,459,852           16  %        2,970,980          137  %        1,252,382
Other revenues                  138,052          (99 )%       22,113,433           27  %       17,377,185
      Net revenues         $ 25,828,377          (40 )%     $ 43,062,021           (6 )%     $ 45,676,297
Cost of net product          12,788,264                       11,691,365                        9,020,901
revenues
Total gross profit         $ 13,040,113                     $ 31,370,656                     $ 36,655,396
Total gross profit
   as a % of net                     50 %                             73 %                             80 %
revenues
Total net product gross
profit                               42 %                             35 %                             67 %
   as a % of net product
revenues

Total net revenues decreased 40% in 2012 to $25.8 million as compared to $43.1 million in 2011. The decrease in net revenues is due to the recognition in 2011 of the amortization of $17.0 million in revenue related to the gain on the sale of the progesterone assets to Actavis and the $5.0 million milestone payment from Actavis for the filing of NDA 22-139 by the FDA, which more than offset the higher net revenue from product sales and royalties in 2012. Total net revenues decreased 6% in 2011 to $43.1 million as compared to $45.7 million in 2010. The decrease in net revenues was in part due to Actavis's assumption of domestic progesterone product sales for the second half of 2010 with direct sales by Columbia in the first half of 2010, offset by the recognition of the $5.0 million milestone payment from Actavis for the filing of NDA 22-139 by the FDA in the second quarter of 2011.
Net revenues include net product revenues (sales of progesterone products to Actavis and Merck Serono and, in 2010, to wholesalers and specialty pharmacies in the U.S., sales of STRIANT in 2010 and 2011, and sales of Replens and RepHresh to Lil' Drug Store in 2010), royalty revenues (primarily royalty revenues from Actavis on sales of progesterone products) and other revenues (primarily amortization of the deferred revenue and milestone payments from the Actavis Transactions in 2011 and 2010). Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause operating results to vary significantly from quarter to quarter. Because products shipped to the Company's two major customers occur only in full batches, quarterly sales can vary widely and affect quarter to quarter comparisons and may not correlate to customers' in-market sales. In 2012, total net product revenues increased by 24% to $22.2 million as compared to $18.0 million in 2011. For 2012, net product revenues from Merck Serono for international sales of CRINONE 8% increased by 17% primarily due to sales to countries with higher in-market sales prices. Net product revenues from Actavis for domestic sales of CRINONE increased by 35% over 2011 levels. Higher revenues for Actavis reflect higher pricing related to the inclusion of the cost of repackaging batches previously meant for the anticipated launch of the preterm birth indication offset by a 7% decrease in volume. In addition, net product revenues includes a reversal of the sales return reserve in the amount of $0.6 million for expired products that can no longer be returned. For 2011, total net product revenues decreased by 34% to $18.0 million as compared to $27.0 million in 2010. This decrease takes into account the transfer in 2010 of CRINONE and PROCHIEVE assets, including responsibility for product sales in the U.S., to Actavis, the absence of sales in 2011 to Lil' Drug Store Products for Replens and RepHresh as a result of the contract expiration and, to a smaller extent, the transfer in 2011 of STRIANT product sales in the U.S. to Actient Pharmaceuticals, LLC. For 2011, net product revenues from Merck Serono for international sales of CRINONE 8% increased by


40% primarily due to higher volume. STRIANT net product revenues were $0.4 million lower than in the 2010 period as a result of the sale to Actient Pharmaceuticals, LLC.
Total royalty revenues increased to $3.5 million in 2012 as compared to $3.0 million in 2011, as a result of the higher royalty revenues from Actavis on CRINONE due to increased sales. Total royalty revenues increased to $3.0 million in 2011 as compared to $1.3 million in 2010, partially as a result of the inclusion of a full year of royalty revenues from Actavis on CRINONE and PROCHIEVE after the closing of the Actavis Transactions compared with a half year in 2010, coupled with higher royalties from Actavis when comparing the second half of 2011 to the second half of 2010.
Total other revenues were $0.1 million in 2012 as compared to $22.1 million in 2011. The decrease is due to the recognition in 2011 of $17.0 million in revenue related to the gain on the sale of the progesterone assets to Actavis and the $5.0 million milestone payment from Actavis for the acceptance for filing of NDA 22-139 by the FDA. Total other revenues were $17.4 million in 2010, due to the recognition in 2010 of $17.0 million in revenue related to the gain on the sale of the progesterone assets to Actavis. The major component of other revenues in 2010 and 2011 was the amortization of the $34 million in deferred gains from the sale of the progesterone assets to Actavis, at an average rate of $8.5 million over four quarters (two in 2010 and two in 2011), representing the estimated remaining development period for PROCHIEVE 8%.
Gross profit decreased by 58% from $31.4 million in 2011 to $13.0 million in 2012, primarily as a result of the amortization of $17.0 million in revenue related to the gain on the sale of the progesterone assets to Actavis in the first half of 2011 and the $5.0 million milestone payment from Actavis for the acceptance for filing of NDA 22-139 by the FDA. Excluding this $22 million profit, gross profit increased $3.6 million in 2012 over the same period in 2011, This higher profit margin in 2012 as compared with 2011 was a result of a favorable product mix offset and a reversal of the sales return reserve in the amount of $0.6 million for expired products that can no longer be returned in part offset by a reserve for inventory which did not meet specifications in 2012 in the amount of $1.0 million. Gross profit decreased by 14% from $36.7 million in 2010 to $31.4 million in 2011 as a result of the product sales to Actavis in the entire 2011 period at cost-plus-10%, versus direct sales to wholesalers and specialty pharmacies in the U.S. in the first half of 2010 at wholesale prices. Gross profit as a percentage of total net revenues was 50% in 2012 as compared with 73% in 2011, which is a result of the absence of the amortization revenues and the milestone payment . Gross profit as a percentage of total net revenues was 73% in 2011 as compared with 80% in 2010. Excluding royalties, the deferred gain recognition and the milestone payment, the gross profit margin for 2012 would have been 42%, as compared with, 35% in 2011; the 8% point increase in margin is primarily due to of the higher margin from sales to countries with higher in-market sales prices. Excluding royalties and the deferred gain recognition, the gross profit margin for 2011 would have been 35%, as compared with, 67% in 2010, as a result of the product sales to Actavis in the entire 2011 period at cost-plus-10%, versus direct sales to wholesalers and specialty pharmacies in the U.S. in the first half of 2010 at wholesale prices. During 2011 and into 2012, the Company invested in a capacity expansion project at its contract manufacturing site at Maropack in Switzerland to support the anticipated volumes related to the launch and subsequent higher volumes for PROCHIEVE. At the end of December 2012, the Company determined that the capacity was no longer needed and determined these assets were impaired. The Company recorded a one-time charge of $0.9 million in the fourth quarter of 2012 which was recognized within operating expenses.
The Company recorded a one-time gain of $2.5 million on the U.S. sale of STRIANT to Actient in the second quarter of 2011 which was recognized within operating expenses.

                            Selling and Distribution

                                               Percentage                         Percentage
                               2012          Inc./Dec. from         2011         Inc./Dec.from         2010
                                               prior year                         prior year
Selling and distribution   $         -              - %         $   87,669            (99 )%       $ 9,661,026

Historically, selling and distribution expenses have included payroll, employee benefits, equity compensation and other personnel-related costs associated with sales and marketing personnel, and advertising, market research, market data capture, promotions, tradeshows, seminars, other marketing related programs and distribution costs. Selling and distribution expenses were approximately $0.0 million, $0.1 million and $9.7 million in 2012, 2011 and 2010, respectively. As a result of the elimination of Columbia's sales and marketing organization following the closing of the Actavis transaction in 2010 and the sale of STRIANT to Actient in April 2011, there were no selling and distribution costs in 2012. In 2011, these expenses represented selling and distribution costs related to STRIANT. Selling and distribution expenses decreased by approximately 99% in 2011 compared to 2010 as a result of the elimination of Columbia's sales and marketing organization following the close of the Actavis Transactions on July 2, 2010. Major expenses during 2010 included the settlement in the amount of $1.8 million for a patent ligation with the

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