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| ZGNX > SEC Filings for ZGNX > Form 10-K on 15-Mar-2013 | All Recent SEC Filings |
15-Mar-2013
Annual Report
July 2012, we initiated our first IND clinical trial for Relday. This Phase 1
clinical trial was a single-center, open-label, safety and pharmacokinetic trial
of 30 patients with chronic, stable schizophrenia or schizoaffective disorder.
We announced positive single-dose pharmacokinetic results from the Phase 1
clinical trial on January 3, 2013. Based on the favorable safety and
pharmacokinetic profile demonstrated with the 25 mg and 50 mg once-monthly doses
tested in the Phase 1 trial, we extended the study to include an additional
cohort of 10 patients at a 100 mg dose of the same formulation. The addition of
this 100 mg dose to the study will enable evaluation of dose proportionality
across the full dose range that would be anticipated to be used in clinical
practice. We expect to complete the extension of the Phase 1 clinical trial
during the second quarter of 2013. The development of Relday will first focus on
its delivery by conventional needle and syringe in order to allow the
administration of different volumes of the same formulation of Relday by a
healthcare professional. We anticipate that the introduction of our DosePro
needle-free technology for administration of Relday can occur later in
development or as part of life cycle management after further work involving
formulation development, technology enhancements, and applicable regulatory
approvals.
We have experienced net losses and negative cash flow from operating activities
since inception, and as of December 31, 2012, had an accumulated deficit of
$329.4 million. We expect to continue to incur net losses and negative cash flow
from operating activities for at least the next several years primarily as a
result of the expenses incurred in connection with our efforts in seeking
marketing approval for Zohydro ER, any additional required clinical testing for
Zohydro ER, the clinical development for Relday and the cost of the sales and
marketing expense associated with Sumavel DosePro, and, if approved, Zohydro ER.
As of December 31, 2012, we had cash and cash equivalents of $41.2 million.
On July 27, 2012, we completed a public offering of common stock and warrants
for net proceeds of approximately $65.4 million (including over-allotment
purchase), after deducting underwriting discounts and commissions of $4.2
million and offering expenses of $0.5 million. We sold a total of 32,500,000
shares of our common stock and warrants to purchase 14,625,000 shares of common
stock (excluding over-allotment purchase) in the offering, at a purchase price
to the public of $1.99 per share of common stock and $0.01 per share underlying
each warrant. The underwriters were granted a 30-day option to cover
over-allotments, to purchase up to an additional 4,875,000 shares of common
stock and warrants to purchase 2,193,750 shares of common stock, of which the
underwriters exercised their option with respect to 2,558,300 shares of common
stock and warrants for 1,159,200 shares of common stock. The warrants will be
exercisable beginning on July 27, 2013 at an exercise price of $2.50 per share
and will expire on July 27, 2017, which is five years from the date of issuance.
Although it is difficult to predict future liquidity requirements, we believe
that our cash and cash equivalents as of December 31, 2012, and our projected
product revenues from Sumavel DosePro, will be sufficient to fund our operations
into the fourth quarter of 2013. We will need to obtain additional capital to
finance our operations beyond that point, or possibly earlier. Further, if we
receive FDA approval of Zohydro ER, we may need to obtain additional capital to
finance the commercial launch of Zohydro ER, possibly prior to the fourth
quarter of 2013. We intend to raise additional capital, if necessary, through
public or private equity offerings, debt financings, receivables financings or
through collaborations or partnerships with other companies. If we are
unsuccessful in raising additional required funds, we may be required to
significantly delay, reduce the scope of or eliminate one or more of our
development programs or our commercialization efforts, or cease operating as a
going concern. We also may be required to relinquish, license or otherwise
dispose of rights to product candidates or products that we would otherwise seek
to develop or commercialize ourselves on terms that are less favorable than
might otherwise be available. In its report on our consolidated financial
statements for the year ended December 31, 2012, our independent registered
public accounting firm included an explanatory paragraph expressing substantial
doubt regarding our ability to continue as a going concern.
Mallinckrodt Co-Promotion Agreement
In June 2012, we entered into a co-promotion agreement with Mallinckrodt. Under
the terms of the co-promotion agreement Mallinckrodt has committed to a minimum
number of sales representatives for the initial term of the agreement, which
runs through June 30, 2014, and can be extended by mutual agreement of the
parties in additional six month increments. We remain responsible for the
manufacture, supply and distribution of commercial product for sale in the
United States. In addition, we will supply product samples to Mallinckrodt at an
agreed upon transfer price and Mallinckrodt will reimburse us for all other
promotional materials used.
In partial consideration of Mallinckrodt's sales efforts, we will pay
Mallinckrodt a service fee on a quarterly basis that represents a specified
fixed percentage of net sales of prescriptions generated from Mallinckrodt's
prescriber audience over a baseline amount of net sales to the same prescriber
audience, or baseline net sales. In addition, upon completion of the
co-promotion term in June 30, 2014 (unless otherwise extended), and only if the
co-promotion agreement is not terminated as a result of certain circumstances,
we will be required to pay Mallinckrodt an additional tail payment calculated as
a fixed percentage of the Mallinckrodt net sales over the baseline net sales
during the first full twelve months following the last day of the term.
For the year ended December 31, 2012, we incurred service fee expenses of $0.2
million under the co-promotion agreement.
Astellas Co-Promotion Agreement
We launched the commercial sale of Sumavel DosePro in the United States in
January 2010 with our co-promotion partner, Astellas Pharma US, Inc., or
Astellas. Under our co-promotion agreement with Astellas that we entered into in
July 2009, or the Astellas co-promotion agreement, Astellas primarily promoted
Sumavel DosePro to primary care physicians (including internal medicine, family
practice and general practice), OB/GYNs, emergency medicine physicians and
urologists, or collectively, the Astellas Segment, in the United States. Our
sales force historically promoted Sumavel DosePro primarily to neurologists and
other key prescribers of migraine medications, including headache clinics and
headache specialists in the United States. We jointly shared in the cost of
advertising, marketing and other promotional activities related to the Sumavel
DosePro brand and were required to provide minimum levels of sales effort to
promote Sumavel DosePro.
In December 2011, we entered into an amendment to the Astellas co-promotion
agreement, whereby the agreement terminated on March 31, 2012. As a result of
the agreement termination, and pursuant to a promotion transition plan,
beginning in the second quarter of 2012, our field sales force then consisting
of approximately 95 representatives assumed full responsibility from
approximately 400 Astellas sales representatives for the continued marketing of
Sumavel DosePro. This promotion transition expanded our focus to include a
portion of the high-prescribing primary care physicians previously covered by
Astellas under the Astellas co-promotion agreement.
At the inception of the Astellas co-promotion agreement and in exchange for the
right to promote Sumavel DosePro, Astellas made a non-refundable up-front
payment of $2.0 million to us and made aggregate additional payments of $18.0
million to us upon the achievement of a series of milestones. These proceeds are
reflected as $8.5 million of deferred revenues on our consolidated balance sheet
at December 31, 2011. Beginning with the launch of Sumavel DosePro in January
2010, we began recognizing these proceeds as contract revenues on a ratable
basis over 42 months (the original term of the agreement). Upon amendment of the
Astellas co-promotion agreement on December 20, 2011, the remaining deferred
proceeds were recognized as contract revenues on a ratable basis over 3.4 months
(the remaining term of the amended agreement). This acceleration in the
recognition of the contract proceeds resulted in the recognition of $8.5 million
of contract revenue during the three months ended March 31, 2012.
Under the terms of the amended Astellas co-promotion agreement, we are required
to make two annual tail payments to Astellas, estimated as a total of
$5.3 million, calculated as decreasing fixed percentages (ranging from a
mid-twenties down to a mid-teen percentage) of net sales in the Astellas Segment
in the last 12 months of its active promotion. The present value of such tail
payments was recorded as a long-term liability on the amendment date and is
payable in July 2013 and July 2014. The fair value of the tail payments will be
accreted through interest expense on a monthly basis through the date of
payment. As of December 31, 2012, the short-term and long-term tail payment
liability was $1.8 million and $1.0 million, respectively (including the service
fee reduction discussed below), and there was $0.6 million of related interest
expense recognized during the year ended December 31, 2012.
In consideration for Astellas' performance of its commercial efforts, we were
required to pay Astellas a service fee on a quarterly basis that represents a
fixed percentage of between 45% and 55% of Sumavel DosePro net sales to the
Astellas Segment through the date of termination. Astellas paid us a fixed fee
for all sample units they ordered for distribution to their sales force. Amounts
received from Astellas for shared marketing costs and sample product are
reflected as a reduction of selling, general and administrative expenses, and
amounts payable to Astellas for shared marketing expenses and service fees are
reflected as selling, general and administrative expenses.
In August 2012, we and Astellas completed a final reconciliation under the terms
of the co-promotion agreement and agreed to adjust the service fees paid to
Astellas over the term of the co-promotion agreement, resulting in a service fee
receivable of $1.5 million, which will offset the two annual tail payments, and
a reduction to the annual tail payment liability of $0.7 million. The present
value of the service fee receivable and tail payment reduction of $1.9 million
was recorded as a reduction in selling, general and administrative expenses
during the twelve months ended December 31, 2012, and an offset to the tail
payment liability. The fair value of the service fee receivable and tail payment
reduction will be accreted through interest income through the dates of the two
tail payments in July 2013 and July 2014.
For the years ended December 31, 2012, 2011 and 2010, we recognized shared
marketing expense of $0.3 million, $1.7 million and $3.9 million, respectively.
For the years ended December 31, 2012, 2011 and 2010, excluding tail payments
recorded as service fee expenses, we recorded $1.8 million, $6.7 million and
$3.7 million in service fee expenses, respectively.
Durect License Agreement
In July 2011, we paid a non-refundable upfront fee to Durect of $2.25 million
under the development and license agreement with Durect, or the Relday license
agreement. We are obligated to pay Durect up to $103.0 million in total future
milestone payments with respect to Relday, subject to, and upon the achievement
of various development, regulatory and sales milestones. We are also required to
pay a mid single-digit to low double-digit percentage patent royalty on annual
net sales of the product determined on a jurisdiction-by-jurisdiction basis.
Further, until an NDA for Relday has been filed in the United States, we are
obligated to spend no less than $1.0 million in external expenses on the
development of Relday in any trailing twelve month period beginning in July
2012. The patent royalty term in any jurisdiction is equal to the later of the
expiration of all Durect technology patents or joint patent rights in a
particular jurisdiction, the expiration of marketing exclusivity rights in such
jurisdiction, or 15 years from first commercial sale in such jurisdiction. After
the patent royalty term, we will continue to pay royalties on annual net sales
of the product at a reduced rate for so long as we continue to sell the product
in the jurisdiction. We are also required to pay to Durect a tiered percentage
of fees received in connection with any sublicense of the licensed rights. In
connection with the license agreement, we incurred $2.1 million and $2.7 million
(excluding the upfront fee of $2.25 million paid in July 2011) of research and
development expenses for the years ended December 31, 2012 and 2011,
respectively.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results
of operations is based on our consolidated financial statements, which have been
prepared in conformity with generally accepted accounting principles in the
United States, or GAAP. The preparation of these consolidated financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, expenses and related disclosures.
Actual results could differ from those estimates.
While our significant accounting policies are more fully described in Note 2 to
our consolidated financial statements appearing elsewhere in this Annual Report
on Form 10-K, we believe the following accounting policies to be critical to the
judgments and estimates used in the preparation of our consolidated financial
statements.
Revenue Recognition
We recognize revenue from the sale of Sumavel DosePro and from license fees and
milestones earned on collaborative arrangements. Revenue is recognized when:
(i) persuasive evidence that an arrangement exists, (ii) delivery has occurred
and title has passed, (iii) the price is fixed or determinable and
(iv) collectability is reasonably assured. Revenue from sales transactions where
the buyer has the right to return the product is recognized at the time of sale
only if (i) our price to the buyer is substantially fixed or determinable at the
date of sale, (ii) the buyer has paid us, or the buyer is obligated to pay us
and the obligation is not contingent on resale of the product, (iii) the buyer's
obligation to us would not be changed in the event of theft or physical
destruction or damage of the product, (iv) the buyer acquiring the product for
resale has economic substance apart from that provided by us, (v) we do not have
significant obligations for future performance to directly bring about resale of
the product by the buyer, and (vi) the amount of future returns can be
reasonably estimated.
Product Revenue, Net
We sell Sumavel DosePro product in the United States to wholesale pharmaceutical
distributors and retail pharmacies, or collectively our customers, subject to
rights of return. We recognize product sales at the time title transfers to our
customer, and we reduce product sales for estimated future product returns and
sales allowances in the same period the related revenue is recognized. Product
sales allowances include wholesaler and retail pharmacy distribution fees,
prompt pay discounts, chargebacks, rebates and patient discount programs, and
are based on amounts owed or to be claimed on the related sales. These estimates
take into consideration the terms of our agreements with customers and
third-party payors and the levels of inventory within the distribution and
retail channels that may result in future rebates or discounts taken. In certain
cases, such as patient support programs, we recognize the cost of patient
discounts as a reduction of revenue based on estimated utilization. If actual
future results vary, we may need to adjust these estimates, which could have an
effect on product revenue in the period of adjustment.
Prior to the third quarter of 2011, Sumavel DosePro had a limited sales history,
and we could not reliably estimate expected returns of the product at the time
of shipment. Accordingly, we deferred recognition of revenue on product
shipments of Sumavel DosePro until the right of return no longer existed, which
occurred at the earlier of the time Sumavel DosePro units were dispensed through
patient prescriptions or expiration of the right of return. Units dispensed are
generally not subject to return, except in the rare cases where the product
malfunctions or the product is damaged in transit. We estimate patient
prescriptions dispensed using an analysis of third-party information, including
third-party market research data.
Product Returns. Our estimated product return allowances for Sumavel DosePro
require a high degree of judgment and are subject to change based on our
experience and certain quantitative and qualitative factors. Sumavel DosePro's
shelf life is
determined by the shorter expiry date of its two subassemblies, which is
currently approximately 30 months from the date of manufacture. Our return
policy allows for the customer to return unused product six months before and up
to one year after its expiration date for a credit at the then-current
wholesaler acquisition cost, or WAC, reduced by a nominal fee for processing the
return.
We have monitored actual return history on an individual product lot basis since
product launch. Actual product return experience in 2012 and 2011 included a
disproportionately high amount of returns from a single retail chain. In
addition, we have also experienced a high level of returned product from our
initial launch stocking initiatives. We considered these factors as well as the
dating of our product at the time of shipment into the distribution channel,
prescription trends and changes in the estimated levels of inventory within the
distribution channel to estimate our exposure for returned product. Because of
the shelf life of Sumavel DosePro and the duration of time under which our
customers may return product to us through our return policy, there may be a
significant period of time between when the product is shipped and when we issue
credits on returned product. Accordingly, we may have to adjust these estimates,
which could have an effect on product sales and earnings in the period of
adjustments. A 1% increase or decrease in our returns reserve as a percentage of
product shipped in the years ended December 31, 2012 and 2011 would have a
financial statement impact of approximately $0.5 million and $0.6 million for
the years ended December 31, 2012 and 2011, respectively.
We permit certain wholesale pharmaceutical distributors to purchase limited
quantities of product after the announcement of an increase to the WAC of our
product and prior to the effectiveness of the increase. In turn, WAC price
increases can result in accelerated purchases by wholesalers relative to
anticipated retail and prescription demand. The timing of purchases made by
wholesale distributors and retail pharmacies are subject to fluctuations for
these reasons among others. Absent accelerated purchasing by wholesalers or
other periodic changes in buying patterns, the wholesale channel has
historically contained approximately three to four weeks of product on hand. As
of December 31, 2012, wholesale distributors reported approximately four weeks
of our product on hand.
Wholesaler and Retail Pharmacy Distribution Fees. We offer distribution fees to
certain wholesale distributors and retail pharmacies based on contractually
determined rates. We accrue the distribution fees on shipment to the respective
wholesale distributors and retail pharmacies and recognize the distribution fees
as a reduction of revenue in the same period the related revenue is recognized.
Prompt Pay Discounts. We offer cash discounts to our customers, generally 2% of
the sales price, as an incentive for prompt payment. We account for cash
discounts by reducing accounts receivable by the full amount and recognizing the
discount as a reduction of revenue in the same period the related revenue is
recognized.
Chargebacks. We provide discounts primarily to authorized users of the Federal
Supply Schedule, or FSS, of the General Services Administration under an FSS
contract negotiated by the Department of Veterans Affairs and various
organizations under Medicaid contracts and regulations. These entities purchase
products from the wholesale distributors at a discounted price, and the
wholesale distributors then charge back to us the difference between the current
retail price and the price the federal entity paid for the product. We estimate
and accrue chargebacks based on estimated wholesaler inventory levels, current
contract prices and historical chargeback activity. Chargebacks are recognized
as a reduction of revenue in the period the related revenue is recognized.
Rebates. We participate in certain rebate programs, which provide discounted
prescriptions to qualified insured patients. Under these rebate programs, we pay
a rebate to the third-party administrator of the program, generally two to three
months after the quarter in which prescriptions subject to the rebate are
filled. We estimate and accrue these rebates based on current contract prices,
historical and estimated future percentages of product sold to qualified
patients and estimated levels of inventory in the distribution channel. Rebates
are recognized as a reduction of revenue in the period the related revenue is
recognized.
Patient Discount Programs. We offer discount card programs to patients for
Sumavel DosePro in which patients receive discounts on their prescriptions that
are reimbursed by us. We estimate the total amount that will be redeemed based
on levels of inventory in the distribution and retail channels and recognize the
discount as a reduction of revenue in the same period the related revenue is
recognized.
Our procedures for estimating amounts accrued for rebates, chargebacks and other
incentive programs at the end of any period are based on available quantitative
data and are supplemented by management's judgment with respect to many factors,
including but not limited to, current market dynamics, changes in contract
terms, impact of new contractual arrangements and changes in sales trends.
Quantitatively, we use historical sales, inventory movement through commercial
channels, product utilization and rebate data and apply forecasting techniques
in order to estimate our liability amounts. Qualitatively, management's judgment
is applied to these items to modify, if appropriate, the estimated liability
amounts. There are inherent risks in this process. For example, patients may not
achieve assumed utilization levels; third parties may misreport their
utilization to us; and discounts determined under federal guidelines, which affect our rebate programs with U.S. federal government agencies, may differ from those estimated. On a quarterly basis, we analyze our estimates against actual rebate, chargeback and incentive program activity and adjust our estimates as necessary. Given our limited history with the commercialization of Sumavel DosePro, we may experience variability in our provisions for these sales allowances as we continue to initiate new sales initiatives and/or managed care programs in connection with the commercialization of our product. An adjustment to our estimated liabilities for rebates, chargebacks and other incentive programs of 1% of product sales, based on operating results for the year ended December 31, 2012, would have resulted in an increase or decrease to net product sales for that period of approximately $0.5 million. The sensitivity of our . . .
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