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CBRX > SEC Filings for CBRX > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for COLUMBIA LABORATORIES INC


9-May-2013

Quarterly Report


Item 2. 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 thereto.
We are in the business of developing, manufacturing and selling to our marketing partners pharmaceutical products that utilize our proprietary bioadhesive drug delivery technologies to treat various medical conditions. Our focus is drug delivery across mucosal membranes, an area where we have a rich heritage and proven capabilities. To date, we have developed and brought to market six products: five bioadhesive vaginal gel products that provide patient friendly solutions for infertility, pregnancy support, amenorrhea, and other women's health conditions, and a bioadhesive buccal system for male hypogonadism. Our primary product is CRINONEŽ progesterone gel which is formulated in a 4% and an 8% solution. We have licensed CRINONE to Merck Serono S.A. ("Merck Serono"), internationally, and to Actavis, Inc. ("Actavis", formerly Watson Pharmaceuticals, Inc.), in the United States.
Currently, we sell CRINONE 8% to Merck Serono at a price determined on a country-by-country basis that is the greater of (i) thirty percent (30%) of the net selling price in the country, or (ii) our direct manufacturing cost plus 20%. Certain quantity discounts apply to annual purchases over 10 million, 20 million, and 30 million units.
On April 4, 2013, 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, extending the expiration date from May 19, 2015, to May 19, 2020. Under the terms of the amended license and supply agreement, we will continue to sell CRINONE to Merck Serono on a country by country basis at the greater of (i) cost plus 20% or (ii) a percentage of Merck Serono's net selling price. From 2014 through 2020, the percentage of net selling price will convert to a tiered structure. Current volumes will be eligible to receive slightly lower rates than in 2013. As volumes reach higher thresholds, incremental sales will earn a lower percentage of net selling price. These thresholds have been agreed in order to incentivize Merck Serono to continue to develop existing markets and to enter new markets. Additionally, the parties will jointly cooperate to evaluate and implement manufacturing cost reduction measures, with both parties sharing any reductions realized from these initiatives. All other material terms remain substantially as before.
We manufacture and sell product to Actavis at our cost plus 10%; these revenues are recorded within product revenues. In addition, we receive royalties equal to a minimum of 10% of annual net sales by Actavis for annual net sales up to $150 million, 15% for sales above $150 million but less than $250 million; and 20% for annual net sales of $250 million and over. Due to a build-up of inventory by Actavis in advance of filing for FDA approval of 8% progesterone gel for use in the prevention of preterm birth in women with premature cervical shortening, and Actavis's decision, in light of the FDA's denial of both Actavis's application and subsequent appeal, not to continue development of the proposed indication, Actavis currently has sufficient inventories of CRINONE. We will continue to receive royalties on net sales of CRINONE by Actavis.
Future recurring revenues will be derived primarily from product sales to 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 our 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.
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, and to us, in the case of the products supplied for resale in the United States. Because our foreign subsidiaries recognize these sales and are reduced only by our product manufacturing costs, we have historically shown a profit from our foreign operations.
Workforce Reduction
On March 1, 2012, we announced a 42% workforce reduction from 24 employees at December 31, 2011, to 14 employees. We recorded a severance charge of approximately $0.5 million in the first quarter of 2012. The reduction impacted R&D and general administrative positions. Our remaining staff focuses its efforts on supporting its customers through existing product supply agreements, assuring compliance with all financial reporting requirements and evaluating strategic options.
During the first quarter of 2013, we announced the relocation of our corporate facilities from Livingston, New Jersey to Boston, Massachusetts. Our current lease for our corporate facilities in Livingston expires in October 2013. On March 15, 2013, we entered into a lease agreement for our new location in Boston and are in the process of hiring employees for the Boston office which will comprise of accounting and finance, operations and other administrative staff. The lease is expected to provide a significant cost saving compared to our existing lease in Livingston. Due to the relocation, we have incurred a charge of $0.2


million in the three months ended March 31, 2013, related to severance costs associated with the elimination of certain positions at the Livingston location. We expect to incur an estimated total of $0.6 million in costs during 2013 associated with relocation and severance costs. The relocation is expected to be completed by the end of the second quarter. Nasdaq Listing
On October 24, 2012, we received a letter from the Nasdaq Stock Market indicating that we no longer meet the minimum bid price requirement for continued listing on the Nasdaq Global Market as set forth in Listing Rule 5450(a)(1) (the "Rule"). The notice stated that the bid price of our Common Stock closed below the required minimum $1.00 per share for the previous 30 consecutive business days. In accordance with Nasdaq rules, we have 180 calendar days to regain compliance with the Rule, but can apply for additional time if necessary.
On April 24, 2013, Nasdaq granted our application to list our Common Stock ("Common Stock") on the Nasdaq Capital Market and granted the Company an additional 180-day period, expiring October 21, 2013, in which to regain compliance with the listing requirements of the Nasdaq Stock Market. The Company's securities were transferred to the Nasdaq Capital Market at the opening of business on April 25, 2013.
To meet the Rule requirements and maintain our listing on the Nasdaq Capital Market, we may have to effect a reverse stock split, which would require the approval of our stockholders. On May 1, 2013, our stockholders approved a proposal authorizing our Board of Directors to amend our Certificate of Incorporation to effect a reverse stock split, if necessary, which will combine a number of outstanding shares of our Common Stock up to ten (10), shares into one (1) share of Common Stock, which ratio is to be designated by our Board of Directors.

Results of Operations - Three Months Ended March 31, 2013 versus Three Months Ended March 31, 2012

                                 NET REVENUES
                                                   Percentage
                                                  Inc./(Dec.)
                                   March 31,          from          March 31,
                                     2013          prior year         2012
Net product revenues             $ 5,372,948         72 %         $ 3,118,632
Royalties                            886,218         30 %             680,377
Other revenues                        56,558         64 %              34,532
Total net revenues               $ 6,315,724         65 %         $ 3,833,541
Cost of product revenues         $ 2,841,739                      $ 2,002,986
Total gross profit               $ 3,473,985                      $ 1,830,555
Total gross profit
as a % of total net revenues              55 %                             48 %
Total product gross profit
as a % of net product revenues            47 %                             36 %

Total net revenues in the three months ended March 31, 2013 were $6.3 million as compared to $3.8 million in the three months ended March 31, 2012. Net revenues include net product revenues (sales of Progesterone Products to Actavis and Merck Serono), royalty revenues (primarily royalty revenues from Actavis on sales of Progesterone Products), and other revenues.
Total net product revenues were $5.4 million in the three months ended March 31, 2013 as compared to $3.1 million in the three months ended March 31, 2012. This increase primarily reflects higher revenues over last year from Merck Serono. Higher revenues from Merck Serono are a result of a 74% increase in volume quarter over quarter, coupled with shipments to countries with higher net selling prices. There were no product revenues from Actavis in the three months ended March 31, 2013 as compared with $0.2 million in the three months ended March 31, 2012.
Royalty revenues were $0.9 million in the three months ended March 31, 2013 as compared with $0.7 million in the three months ended March 31, 2012 as a result of royalties on higher revenues from Actavis on Progesterone Products sold by Actavis.
Gross profit increased by $1.6 million to $3.5 million for the three months ended March 31, 2013 compared to $1.8 million in the three months ended March 31, 2012. This is the result of an increase in net product revenues from Merck Serono and an increase in royalties from Actavis. The increase in net product revenues from Merck Serono was due to both an increase in quantity of product sold and to a continued shift in sales toward markets with higher net selling prices. Gross profit as a percentage of total net revenues was 55% for the three months ended March 31, 2013 compared with 48% in the same period in 2012. Gross profit as a percentage of net product revenues in the three months ended March 31, 2013 was 47% compared with


36% for the same period in 2012. The higher profit margin in the first quarter of 2013 was a result of the higher volumes and favorable product mix of sales to Merck Serono.

                                       General and Administrative

                                                             Percentage
                                                             Inc./(Dec.)
                                                             from Prior
                                          March 31, 2013        Year         March 31, 2012
         General and administrative     $      2,460,563        (4)%       $      2,551,325

Total general and administrative expenses decreased by $0.1 million to $2.5 million for the three months ended March 31, 2013 compared with $2.6 million for the three months ended March 31, 2012. Our ongoing general and administrative expenses decreased by $0.4 million, or 14%, from $2.2 million to $1.8 million. We incurred $0.2 million in severance and retention expenses in the three months ended March 31, 2013 compared with $0.4 million in severance expenses for the three months ended March 31, 2012. This decrease was offset by an increase of $0.5 million in professional fees associated with business development activities.

                                    Research and Development

                                                        Percentage
                                                        Inc./(Dec.)
                                                        from Prior
                                       March 31, 2013      Year       March 31, 2012
        Research and development             $-             N/A          $553,678

There were no research and development expenses in the three months ended March 31, 2013, as compared to $0.6 million in the three months ended March 31, 2012. Research and development expenses in the three months ended March 31, 2012 included costs for product development, clinical development and regulatory fees, which were a combination of internal and third-party costs. There were no research and development expenses in the first quarter of 2013 as we have substantively curtailed our research and development activities.

                                    Other Income and Expense

                                                        Percentage
                                                        Inc./(Dec.)
                                                        from Prior
                                       March 31, 2013      Year       March 31, 2012
        Other income and expense          $231,094         (96)%        $6,231,517

Other income for the three months ended March 31, 2013 consisted primarily of the recognition of the $0.2 million change in fair value of the warrants issued in conjunction with the October 2009 stock issuance resulting from the decrease in stock price from December 31, 2012. Other income for the three months ended March 31, 2012 amounted to $6.2 million, consisting primarily of $6.3 million in income related to the recognition of change in the fair value of the warrants issued in conjunction with the October 2009 stock issuance resulting from the decrease in stock price from December 31, 2011. Liquidity and Capital Resources
We require cash to pay our operating expenses, fund working capital needs and make capital expenditures. We have funded our operations through cash generated from our operations.
At March 31, 2013, our cash, cash equivalents and short-term investments were $29.2 million. Our cash and cash equivalents of $13.8 million are highly liquid investments with maturity of 90 days or less at date of purchase and consist of cash in operating accounts and investments in money market funds. Our short-term investments of $15.5 million consist of short-term duration bond funds.


Our future capital requirements depend on a number of factors, including the rate of market acceptance of our current and future products and the resources we devote to developing and supporting our products. Our capital expenditures decreased for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012, primarily as a result of completing the addition of increased manufacturing capacity to ensure our ability to meet Actavis's forecasts for the anticipated launch of progesterone vaginal gel 8% in preterm birth in women with premature cervical shortening and facility improvements to ensure compliant manufacturing operations. We expect that our capital expenditures during the remainder of 2013 will increase due to our relocation to Boston but will remain significantly less than the 2012 period.
As of March 31, 2013, we had outstanding exercisable options and warrants that, if exercised, would result in approximately $22.6 million of additional capital and would cause the number of shares outstanding to increase; however, the cashless exercise feature of certain warrants may result in no cash to us. Options and warrants outstanding at March 31, 2013 were 3,598,290 and 9,893,455, respectively; however, there can be no assurance that any such options or warrants will be exercised. There was no aggregate intrinsic value of exercisable options and warrants for the periods ended March 31, 2013 and March 31, 2012.
We believe that our current cash, cash equivalents and short-term investments, as well as cash generated from operations, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the foreseeable future.
Cash Flows
Cash provided by (used in) operating, investing and financing activities is summarized as follows:

                                              Three Months Ended
                                                  March 31,
                                            2013             2012
Cash flows:
Operating activities:
Net income                              $ 1,241,640     $  4,954,393
Non-cash charges                              4,342       (5,607,877 )
Net cash income (loss)                    1,245,982         (653,484 )
Change in working capital                  (538,270 )       (960,146 )
Operating activities                        707,712       (1,613,630 )

Investing activities:
Purchase of property and equipment          (17,589 )       (917,479 )
Additions to short-term investments         (51,944 )        (58,803 )
Proceeds from sale of assets                  5,359                -
Investing activities                        (64,174 )       (976,282 )

Financing activities:
All other financing activities               (6,875 )         (7,500 )
Financing activities                         (6,875 )         (7,500 )

Effect of exchange rate changes on cash     (70,220 )         34,644
NET INCREASE (DECREASE) IN CASH         $   566,443     $ (2,562,768 )

Net cash provided by operating activities for the three months ended March 31, 2013 was $0.7 million and resulted primarily from $1.2 million of net income for the period, increased by approximately $0.2 million in depreciation and amortization and stock-based compensation expense, and decreased by $0.2 million for the change in value of stock warrants. Net changes in working capital items reduced cash from operating activities by approximately $0.5 million, primarily relating to a decrease in inventory of $0.4 million associated with increased product shipments. This increase was offset by an increase in accounts receivable due to increased revenues and a decrease in other accrued expenses of $0.8 million primarily related to severance amounts for two executives paid in the first quarter of 2013. Net cash used in investing activities was $0.1 million for the three months ended March 31, 2013, which consisted of income earned from our short-term investments which was reinvested.


Net cash used in operating activities for the three months ended March 31, 2012 was $1.6 million and resulted primarily from $5.0 million of net income for the period, increased by approximately $0.3 million in depreciation and amortization and stock-based compensation expense, and decreased by $6.3 million for the change in value of stock warrants. Net changes in working capital items reduced cash from operating activities by approximately $1.0 million, primarily relating to an increase in inventory of $1.6 million associated with the build-up of inventory to meet Actavis's forecast requirements and a decrease in other accrued expenses of $0.7 million, primarily related to personnel-related expenses paid in the first quarter of 2012. These decreases were partially offset by a decrease in accounts receivable of $1.9 million. Net cash used in investing activities was $1.0 million for the three months ended March 31, 2012, which consisted primarily of purchases of property and equipment of $0.9 million associated with completing the addition of increased manufacturing capacity to ensure our ability to meet Actavis's forecast requirements and for facility improvements to ensure compliant manufacturing operations. Contractual Obligations, Commercial Commitments and Off-Balance Sheet Arrangements
Our contractual obligations, commercial commitments and off-balance sheet arrangements disclosures in the 2012 Annual Report have not materially changed since that report was filed.

Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (FASB) issued ASU 2013-02, "Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" (ASU 2013-02). ASU 2013-02 is an update to existing guidance on the presentation of comprehensive income. This update requires companies to report the effect of significant reclassifications out of accumulated other comprehensive income (AOCI) by component. For significant items reclassified out of AOCI to net income in their entirety during the reporting period, companies must report the effect on the line items in the statement where net income is presented. For significant items not reclassified to net income in their entirety during the period, companies must provide cross references in the notes to other disclosures that already provide information about those amounts. We adopted this update effective January 1, 2013, and it did not have a material impact on our condensed consolidated financial statements.
Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations set forth above are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those described in our Annual Report on Form 10-K for the year ended December 31, 2012. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities, and the reported amounts of revenues and expenses, that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A discussion of our critical accounting policies and the related judgments and estimates affecting the preparation of our consolidated financial statements is included in our Annual Report on Form 10-K for the year ended December 31, 2012. There have been no material changes to our critical accounting policies as of March 31, 2013.
Forward-Looking Information
This Quarterly Report on Form 10-Q contains forward-looking statements, which statements are indicated by the words "may," "will," "plans," "believes," "expects," "intends," "anticipates," "potential," "should," and similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially from those projected in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date on which they are made.
Factors that might cause future results to differ include, but are not limited to, the following: the successful marketing of CRINONE by Actavis and Merck Serono in their respective markets; successful development by Actavis of a next-generation vaginal progesterone product for the U.S. market; difficulties or delays in manufacturing; the availability and pricing of third-party sourced products and materials; successful compliance with FDA and other governmental regulations applicable to manufacturing facilities, products and/or businesses; changes in laws and regulations; the ability to obtain and enforce patents and other intellectual property rights; the impact of patent expiration; the impact of competitive products and pricing; the cost of evaluating potential strategic transactions; the cost of the Company's relocation to Boston; our ability to regain compliance with the Nasdaq listing requirements; the strength of the U.S. dollar relative to international currencies, particularly the euro; competitive economic and regulatory factors in the pharmaceutical and healthcare industry; general economic conditions; and other risks and uncertainties that may be detailed, from time-to-time, in our reports filed with the SEC including our Annual Report on Form 10-K for the year ended December 31, 2012. All forward-looking statements contained herein are neither promises nor guarantees. We do not undertake any responsibility to revise or update any forward-looking statements.


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