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SCMP > SEC Filings for SCMP > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for SUCAMPO PHARMACEUTICALS, INC.

Form 10-Q for SUCAMPO PHARMACEUTICALS, INC.


8-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This Quarterly Report on Form 10-Q contains forward-looking statements regarding Sucampo Pharmaceuticals, Inc., or the Company, we, us, or our, and our business, financial condition, results of operations and prospects within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties known and unknown that could cause actual results and developments to differ materially from those expressed or implied in such statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included elsewhere in this Quarterly Report Form 10-Q and in our other Securities Exchange Commission, or SEC, filings, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, which we filed with the SEC on March 18, 2013. You should also read the following discussion and analysis of our financial condition and results of operations in conjunction with our Consolidated Financial Statements as of and for the year ended December 31, 2012 included in our Annual Report on Form 10-K.

Overview

We are a global biopharmaceutical company focused on innovative research, discovery, development and commercialization of proprietary drugs based on ion channel activators known as prostones. The therapeutic potential of prostones was first discovered by our co-founder, Dr. Ryuji Ueno, and under his leadership we have pioneered the field of prostones. Prostones are naturally occurring fatty acid metabolites. Originally thought to be biologically inert, prostones have emerged as a promising compound class with unique physiological activities which can be targeted for the treatment of unmet or underserved medical needs.

We are focused on developing and/or commercializing prostone-based drugs to treat gastrointestinal, ophthalmic, neurologic, and oncology-based inflammatory disorders, and are also considering other potential therapeutic applications of our drug technologies.

We currently generate revenue mainly from product royalties, development milestone payments, clinical development activities and product sales. We expect to continue to incur significant expenses for the next several years as we continue our research and development activities, seek additional regulatory approvals and additional indications for AMITIZA® (lubiprostone), RESCULA® (unoprostone isopropyl) and other compounds, and commercialize our approved products (as discussed below) on a global basis.

Our operations are conducted through subsidiaries based in Japan, the United States, Switzerland, the United Kingdom and Luxembourg. Our reportable geographic segments are Asia, the Americas and Europe and we evaluate the performance of these segments based primarily on income (loss) from operations, as well as other factors that depend on the growth of these subsidiaries. Such measures include the progress of research and development activities, collaboration and licensing efforts, commercialization activities and other factors.

Drs. Ryuji Ueno and Sachiko Kuno are our controlling stockholders and are married to each other. Dr. Ueno is our Chief Executive Officer, Chairman of our Board of Directors and Chief Scientific Officer. Dr. Kuno was a member of our Board of Directors and our executive advisor on international business development through September 30, 2012. Drs. Ueno and Kuno, together, directly or indirectly, own a majority of the stock of R-Tech Ueno, Ltd., or R-Tech, a pharmaceutical research, development and manufacturing company in Japan. R-Tech is responsible for the manufacture and supply of all of our prostone products for commercial use or clinical development.

Our Prostone Products, Approved and in Clinical Development

We are developing prostone compounds for the treatment of a broad range of diseases. The most advanced of these programs are:

AMITIZA (lubiprostone) in the United States and Canada

In April 2013, we received approval for a supplemental new drug application, or sNDA, for AMITIZA at dosage strength of 24 micrograms twice daily as the first and only oral medication for the treatment of opioid-induced constipation, or OIC, in adult patients with chronic, non-cancer pain. Upon the first commercial sale of AMITIZA for OIC, we recognized a $10.0 million milestone payment from Takeda Pharmaceutical Company Limited, or Takeda, as revenue, which we received in the second quarter of 2013.


We and Takeda are currently exploring the commercialization of AMITIZA in Canada and we are planning to meet with Health Canada to discuss the best ways to proceed with AMITIZA registration in this market in the near future. The Company announced in November, 2013 that it is exercising its co-promotion option and will begin co-promoting AMITIZA for OIC in adults with chronic, non-cancer pain in the first quarter of 2014.

AMITIZA (lubiprostone) in Japan

In Japan, AMITIZA is currently marketed under a license, commercialization and supply agreement, or the Abbott Agreement, with Abbott Japan Co. Ltd., or Abbott, for the gastrointestinal indication of chronic constipation, or CC, excluding constipation caused by organic diseases. Abbott initiated commercial sales of AMITIZA in Japan for the treatment of CC in November 2012. AMITIZA is Japan's only prescription medicine for CC. In early December 2013, the two-week limitation on prescriptions, generally applied to all new approvals of products for the first year after approval, will be removed.

AMITIZA (lubiprostone) in Other Territories

In the United Kingdom, AMITIZA was approved for chronic idiopathic constipation, or CIC, in July 2012. The Company will make AMITIZA available in the United Kingdom in the fourth quarter and is currently working to achieve National Institute for Health and Care Excellence endorsement for CIC and OIC. In Switzerland, the Company is actively marketing AMITIZA.

In the first quarter of 2013, the Company commenced the approval process for CIC in other European Union countries for AMITIZA via the Mutual Recognition Procedure, or MRP, and filed for the OIC indication in the United Kingdom and Switzerland. The Company anticipates a decision in both countries in the first half of 2014. Pending the OIC approval in the United Kingdom, the Company will seek approval for AMITIZA in other European Union countries following the MRP.

RESCULA (unoprostone isopropyl)

Under our 2009 and 2011 agreements with R-Tech Ueno, Ltd., or R-Tech, we hold the exclusive rights to commercialize and develop unoprostone isopropyl worldwide except for Japan, Korea, Taiwan and the People's Republic of China, or R-Tech Territory, for its approved indication and all new ophthalmic indications developed by us. We are also evaluating the opportunities in the European Union and other European countries to commercialize unoprostone isopropyl there. We also seek to develop new formulations and we may consider using third party proprietary drug delivery technologies. We are exploring research programs with those third parties.

We began commercializing RESCULA in February 2013 in the United States. In April 2013, we paid a $500,000 milestone payment to R-Tech upon the February 2013 RESCULA re-launch. According to the United States approved product labeling, RESCULA may be used as a first-line agent or concomitantly with other topical ophthalmic drug products to lower IOP. RESCULA is a big potassium channel activator and has a different mechanism of action than other IOP lowering agents on the market.

During the third quarter of 2013, we recorded a $4.5 million non-cash write-off of its RESCULA inventory to reflect anticipated excess quantities of dated product consisting of $3.0 million of product for sale and $1.5 million of sample inventory. The anticipated excess inventory was largely a result of the necessity to pre-order product in advance of FDA approval due to a planned change in manufacturing facility and lower than anticipated sales within the useful life of the dated product. In addition to initial sales falling below their forecast, we recently decided to eliminate our in-house sales force and deploy a contract sales force to detail only current RESCULA prescribers at a much reduced level, which will further impact sales of RESCULA going forward.

Our Clinical Development Programs

Cobiprostone (Oral spray)

Cobiprostone is in development for the target indication of prevention and/or treatment of oral mucositis, or OM. In August 2013, we reported results that indicated cobiprostone to be generally well-tolerated. We expect to initiate phase 1b of clinical development in the fourth quarter of 2013.

Intravenous and Oral Ion Channel Activators

Two ion channel activators, in both the intravenous, or IV, and oral, or PO, forms, are in clinical development for the treatment of lumbar spinal stenosis, or LSS. We have completed the treatment phase of our phase 2a, double-blind, placebo-controlled study of the IV version of our ion channel activator for LSS, and are currently in the data analysis phase. The PO ion channel activator completed phase 1a clinical development in June 2013 and is expected to begin the next phase of clinical development in the fourth quarter of 2014, pending results of the IV ion channel activator phase 2 results. Additionally, this compound may be investigated for other indications.


Lubiprostone

Liquid Formulation: In October 2013, we announced the initiation of a pivotal trial of a liquid formulation of lubiprostone 24mcg twice daily in adults with CIC.

Pediatric Functional Constipation: We continue to prepare for initiation of the pivotal phase 3 program for AMITIZA in pediatric functional constipation. This is the first of a series of global, multicenter phase 3 studies to evaluate the efficacy, safety, and pharmacokinetics of lubiprostone in patients aged ? 6 months through 17 years of age with pediatric functional constipation. The program will consist of two randomized, placebo-controlled, double-blinded studies and two long-term safety extension studies. One of the pediatric trials will also use the liquid formulation.

China: We continue to evaluate development of lubiprostone in the People's Republic of China.

Unoprostone Isopropyl

We recently announced that our development partner, R-Tech, completed patient enrollment of a phase 3 clinical trial for unoprostone isopropyl for retinitis pigmentosa, or RP, in Japan. A substantial portion of the development costs for the program are being funded by the Japan Science and Technology Agency. We have the rights to the clinical data for potential filing in Europe and the United States, where unoprostone isopropyl has orphan drug designation, and will decide on our path forward assuming the Japanese trial is successful.

Product Pipeline

The table below summarizes the development status of lubiprostone, unoprostone isopropyl and several other prostone-based product candidates. We currently hold all of the commercialization rights to the prostone compounds in our product pipeline, other than for commercialization of AMITIZA in the United States, Canada and Japan, which is covered by our collaboration and license agreements with Takeda and Abbott, and for RESCULA, for which we hold all rights except in the R-Tech Territory. Commercialization of each product candidate may be implemented after successful completion of clinical studies and approval from appropriate governmental agencies.


Product/Product    Target Indication    Development Phase    Next Milestone
   Candidate
AMITIZA ®         Chronic idiopathic    Marketed in the     _____
(lubiprostone)    constipation (CIC)    U.S.
                  (adults of all
                  ages)

                                        Marketed in         _____
                                        Switzerland

                                        Marketing           Obtain NICE
                                        Authorization       endorsement
                                        Application (MAA)   within the U.K.
                                        approved            Following OIC
                                        for CIC in August   approval in the
                                        2012 in U.K.        U.K., will
                                        Initiated mutual    advance MRP
                                        recognition         process for CIC
                                        process (MRP) for   and OIC
                                        approval in
                                        other E.U.
                                        countries.

                  Liquid formulation    Completion of       Analyze results
                                        first patient       and file sNDA
                                        enrollment in
                                        phase 3 trial

                  Chronic               Marketed in Japan   _____
                  constipation          since Q4 2012

                  Opioid-induced        sNDA approved in    OIC approval in
                  constipation (OIC)    U.S. in Q2 2013.    Switzerland and
                  in patients with      MAA submitted in    U.K.; MRP-wide
                  chronic non-cancer    Switzerland and     E.U. approval
                  pain                  U.K. in Q1 2013     after
                                                            U.K. approval

                  Pediatric             Initiate pivotal    Completion of
                  functional            phase 3             first patient
                  constipation          development         enrollment in
                                        program             phase 3 trial

                  Irritable bowel       Marketed in the     Initiate phase 4
                  syndrome with         U.S.                study on higher
                  constipation (adult                       dosage and with
                  women) (IBS-C)                            additional male
                                                            subjects

RESCULA ®         Primary open angle    Launched in the     _____
(unoprostone      glaucoma and          U.S. in Q1 2013
isopropyl)        ocular hypertension

                  Glaucoma and ocular   _____               Updated label and
                  hypertension                              reauthorization
                                                            in the E.U. and
                                                            Switzerland

                  Retinitis             In phase 3 by       Decide path
                  pigmentosa            development         forward for U.S.
                                        partner R-Tech      and
                                        Ueno. Orphan        Europe following
                                        drug status         the interim
                                        obtained in the     results of
                                        U.S. and E.U.       Japanese trial

Cobiprostone      Oral mucositis        Initiated phase     Complete phase 1b
                                        1b trial            study

PO Ion Channel    Spinal stenosis       Phase 1a            Initiate phase 1b
Activator                               completed           trial, pending
                                                            results of the IV
                                                            ion channel
                                                            activator phase 2
                                                            results

IV Ion Channel    Spinal stenosis       Treatment phase     Analyze results
Activator                               of phase 2a trial   of phase 2a study
                                        completed

Results of Operations

Comparison of three months ended September 30, 2013 and September 30, 2012

Revenues

The following table summarizes our revenues for the three months ended September 30, 2013 and 2012:


                                       Three Months Ended
                                          September 30,
(In thousands)                          2013          2012
Research and development revenue     $    2,027     $    737
Product royalty revenue                  13,595       13,890
Product sales revenue                     5,378            -
Co-promotion revenue                          -          730
Contract and collaboration revenue          163          139
Total                                $   21,163     $ 15,496

Total revenues were $21.2 million for the three months ended September 30, 2013, compared to $15.5 million for the three months ended September 30, 2012, an increase of $5.7 million or 36.6%.

Research and development revenue

Research and development revenue was $2.0 million for the three months ended September 30, 2013, compared to $737,000 for the three months ended September 30, 2012, an increase of $1.3 million or 175.0%. The increase in research and development revenue was primarily due to the commencement of the pediatric study for AMITIZA.

Product royalty revenue

Product royalty revenue represents royalty revenue earned on net sales of AMITIZA in the United States. Product royalty revenue was $13.6 million for the three months ended September 30, 2013, compared to $13.9 million for the three months ended September 30, 2012, a decrease of $295,000 or 2.1%. The decrease in product royalty revenue was primarily due to a $544,000 payment of additional royalties received by us as a result of a true-up calculation reflecting contractual limitations on gross-to-net sales deductions for royalty calculation purposes during the three months ended September 30, 2012. Excluding the true-up payment, product royalty revenue actually increased $249,000 or 1.9% for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. The increase in product royalty revenue was primarily due to higher price.

Product sales revenue

Product sales revenue represents drug product net sales of AMITIZA in Japan and Switzerland and RESCULA in the United States. Product sales revenue was $5.4 million for the three months ended September 30, 2013, compared to nil for the three months ended September 30, 2012, an increase of $5.4 million. The increase in product sales was due to the commencement of product sales of AMITIZA in Japan in the fourth quarter of 2012 and in Switzerland during the first quarter of 2013, and the commencement of product sales of RESCULA in the United States in the first quarter of 2013.

Co-promotion revenue

Co-promotion revenue represents reimbursements by Takeda of co-promotion costs for our specialty sales force. Co-promotion revenue was nil for the three months ended September 30, 2013, compared to $730,000 for the three months ended September 30, 2012, a decrease of $730,000 or 100.0%. The decrease in co-promotion revenue was the result of our sales force shifting away from selling AMITIZA, which was partially reimbursed by Takeda, to selling RESCULA.

Cost of goods sold

Cost of goods sold relates to purchase and distribution costs of the Company's products sold by the Company, including inventory write-offs for excess and obsolete inventory and amortization of marketing licenses. Cost of goods sold was $6.3 million for the three months ended September 30, 2013, compared to nil for the three months ended September 30, 2012, an increase of $6.3 million. The increase in cost of goods sold relates to drug product sales of AMITIZA in Japan and Switzerland and RESCULA in the United States. During the third quarter of 2013, we recorded a $3.0 million non-cash write-off of its RESCULA inventory to reflect anticipated excess quantities of dated product. The anticipated excess inventory was largely a result of the necessity to pre-order product in advance of FDA approval due to a planned manufacturer shutdown and lower than anticipated sales within the useful life of the dated product. In addition to initial sales falling below their forecast, we recently decided to eliminate our in-house sales force and deploy a contract sales force to detail only current RESCULA prescribers at a much reduced level, which will further impact sales of RESCULA going forward.


Research and Development Expenses

The following table summarizes our research and development expenses for the
three months ended September 30, 2013 and 2012:

                          Three Months Ended
                             September 30,
(In thousands)             2013          2012
Direct costs:
Lubiprostone            $    2,712      $ 2,438
Cobiprostone                    83          542
SPI-017                        795           15
Unoprostone isopropyl         (396 )        944
Other                          239        1,061
Total                        3,433        5,000

Indirect costs               1,041          615
Total                   $    4,474      $ 5,615

Total research and development expenses were $4.5 million for the three months ended September 30, 2013, compared to $5.6 million for the three months ended September 30, 2012, a decrease of $1.1 million or 20.3%. The decrease in research and development expenses was primarily due to lower costs associated with our unoprostone isopropyl development program and a lower provision associated with our Numab collaboration, partially offset by higher costs associated with the clinical development of our lumbar spinal stenosis program and higher regulatory fees.

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the
three months ended September 30, 2013 and 2012:

                                                      Three Months Ended
                                                         September 30,
(In thousands)                                         2013          2012
Salaries, benefits and related costs                $    2,032      $ 2,164
Legal, consulting and other professional expenses        1,527        3,256
Stock option expense                                       268          174
Pharmacovigilance                                          337           47
Other expenses                                           1,276        1,615
Total                                               $    5,440      $ 7,256

General and administrative expenses were $5.4 million for the three months ended September 30, 2013, compared to $7.3 million for the three months ended September 30, 2012, a decrease of $1.8 million or 25.0%. The decrease in general and administrative expenses was primarily due to lower legal, consulting and other professional expenses as a result of the conclusion of certain legal matters in 2012, as well as expense reductions from 2013 productivity initiatives. These decreases were partially offset by an increase in pharmacovigilance costs associated with the launch of AMITIZA in Japan.

Selling and Marketing Expenses

The following table summarizes our selling and marketing expenses for the three
months ended September 30, 2013 and 2012:


                                       28
--------------------------------------------------------------------------------

                                               Three Months Ended
                                                  September 30,
(In thousands)                                  2013          2012
Salaries, benefits and related costs         $    1,652      $ 1,704
Consulting and other professional expenses        1,245        1,011
Stock option expense                                 30           83
Sample expense                                    1,640            -
Other expenses                                    1,459        1,480
Total                                        $    6,026      $ 4,278

Selling and marketing expenses represent costs we incur to promote or co-promote our products, including salaries, benefits and related costs of our sales force and other sales and marketing personnel, as well as costs of market research and analysis and other selling and marketing expenses. Selling and marketing expenses were $6.0 million for the three months ended September 30, 2013, compared to $4.3 million for the three months ended September 30, 2012, an increase of $1.7 million or 40.1%. The increase in selling and marketing expenses relates primarily to launch costs for RESCULA and a $1.5 million non-cash write-off recorded for anticipated excess RESCULA samples.

Non-Operating Income and Expense

The following table summarizes our non-operating income and expense for the
three months ended September 30, 2013 and 2012:


                                Three Months Ended
                                   September 30,
(In thousands)                  2013           2012
Interest income               $      20       $    68
Interest expense                   (461 )        (596 )
Other income (expense), net         (49 )           8
Total                         $    (490 )     $  (520 )

Interest income was $20,000 for the three months ended September 30, 2013, compared to $68,000 for the three months ended September 30, 2012, a decrease of $48,000 or 70.5%.

Interest expense was $461,000 for the three months ended September 30, 2013, compared to $596,000 for the three months ended September 30, 2012, a decrease of $135,000 or 22.7%.

Other expense was $49,000 for the three months ended September 30, 2013, compared to other income of $8,000 for the three months ended September 30, 2012, an increase of $57,000.

Income Taxes

We recorded a tax benefit of $2.8 million and a tax provision of $3.8 million for three months ended September 30, 2013 and 2012, respectively. The tax benefit for the three months ended September 30, 2013 primarily related to pre-tax losses generated by our United States subsidiary. The consolidated global effective tax rate is higher than the statutory rate in these jurisdictions because of pre-tax losses generated in the European subsidiaries for which no tax benefit is recognized due to the full valuation allowance.

Comparison of nine months ended September 30, 2013 and September 30, 2012

Revenues

The following table summarizes our revenues for the nine months ended September 30, 2013 and 2012:


                                       Nine Months Ended
                                         September 30,
(In thousands)                         2013          2012
Research and development revenue     $  16,288     $  6,418
Product royalty revenue                 37,271       36,521
Product sales revenue                   10,994            -
Co-promotion revenue                        61        3,253
. . .
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