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SCMP > SEC Filings for SCMP > Form 10-K on 12-Mar-2014All Recent SEC Filings

Show all filings for SUCAMPO PHARMACEUTICALS, INC.

Form 10-K for SUCAMPO PHARMACEUTICALS, INC.


12-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis together with our Consolidated Financial Statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that are based on our current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discuss under Item 1A - "Risk Factors" and elsewhere in this Annual Report.

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. He initially found that that prostone production was high in early development, and postulated that prostones produced by 15-PGDH may play important roles as an endogenous local hormones in maturation and aging. Under his leadership we have pioneered the field of prostones. Prostones are naturally occurring fatty acid metabolites which were 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 have two approved products, AMITIZA® (lubiprostone) and RESCULA® (unoprostone isopropyl). Our strategic priorities are as follows: for AMITIZA, to increase sales in the United States, Japan and Europe, to expand into new indications, and to launch into new global markets; for RESCULA, to continue to commercialize the product to current prescribers in the United States, and to expand into new indications with unoprostone isopropyl; and to further develop our late-stage clinical development compounds.

First, in the United States, AMITIZA is being marketed and developed under a collaboration and license agreement with Takeda Pharmaceutical Company Limited, or Takeda, for gastrointestinal indications. In Japan, AMITIZA is being marketed under a collaboration agreement with Abbott Japan Co. Ltd., or Abbott. AMITIZA is also approved and currently being commercialized in the United Kingdom and Switzerland for chronic idiopathic constipation, or CIC. We have plans to file for approval in other European markets. Our priorities for AMITIZA are to increase sales of the product in markets where it is approved; to obtain approval of AMITIZA for other indications in certain European markets; to expand into new global markets; and to develop AMITIZA in a liquid formulation and for the pediatric market. We began clinical development for the liquid formulation and pediatric dosage in the second half of 2013.

Second, RESCULA received approval of a sNDA by the FDA in December 2012, and in the first quarter of 2013 we launched the product within the ophthalmology and optometry communities. This launch marks the first time we have commercialized a product in the United States on our own.

Third, a final priority for us is the development of our prostone-based pipeline. In 2013, we furthered our clinical development of three drug candidates: the intravenous and oral ion channel activators for lumbar spinal stenosis and cobiprostone for oral mucositis.

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 for additional indications for AMITIZA, RESCULA 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 segments. Such measures include the progress of research and development activities, collaboration and licensing efforts, commercialization activities and other factors.

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)

United States

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 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 as revenue, which we received in the second quarter of 2013. In November 2013, we announced that we are exercising our co-promotion option and will begin co-promoting AMITIZA for OIC in adults with chronic, non-cancer pain in the first quarter of 2014.


Japan

In Japan, AMITIZA is currently marketed under a license, commercialization and supply agreement, or the Abbott Agreement, with 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. On December 1, 2013, the two-week limitation on prescriptions, generally applied to all new approvals of products for the first year after reimbursement price approval, was removed.

Europe

We have retained full rights to develop and commercialize AMITIZA ourselves for the rest of the world's markets outside of the United States, Canada and Japan. In the United Kingdom, AMITIZA was approved for CIC in July 2012. We made AMITIZA available in the United Kingdom in the fourth quarter of 2013. We filed for the OIC indication in Switzerland in the first quarter of 2013, and we anticipate a decision in the first half of 2014. On March 7, 2014 MHRA notified us that the application for approval of the OIC indication in the United Kingdom was not approved, and we are considering the appropriate next steps with MHRA. We are also considering seeking approval for AMITIZA in other European Union countries following the Mutual Recognition Procedure, or MRP. We are currently working to achieve National Institute for Health and Care Excellence endorsement for CIC. In February 2012, we announced we are actively marketing AMITIZA in Switzerland. In February 2014, we announced that the BAG revised several limitations with which AMITIZA was first approved for reimbursement and inclusion in the specialitätenliste, or SL, to make it easier for all Swiss physicians to prescribe AMITIZA to patients who have failed previous treatments with at least two laxatives over a nine month period. The SL limitations that were revised are:

· All Swiss physicians, not just gastroenterologists, are now allowed to prescribe AMITIZA;

· The change in the maximum treatment duration of AMITIZA increased from 12 to 52 weeks before a review is needed by a health insurance health care practitioner; and

· The BAG removed from AMITIZA's SL a group limitation pertaining to the number of AMITIZA packs that physicians can prescribe at one time.

Other Global Markets

We and Takeda are currently exploring the commercialization of AMITIZA in Canada and we have met with Health Canada to discuss the best ways to proceed with AMITIZA registration in this market in the near future.

We continue to explore options to develop and commercialize AMITIZA in other geographic regions, inclusive of Latin America, Russia, the Middle East and other Asian countries. In the People's Republic of China, we continue to evaluate development and potential commercialization of lubiprostone.

RESCULA (unoprostone isopropyl)

We began commercializing RESCULA in February 2013 in the United States. 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.

We are also evaluating the opportunities in the European Union and other European countries to commercialize unoprostone isopropyl there. In addition, we are co-developing unoprostone isopropyl with R-Tech and may file for FDA and EMA approval for the treatment of RP in the future assuming successful trials.

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. Beginning in January 2014, we significantly decreased the amount of in-person sales calls for RESCULA by using a contract sales force to focus its detailing on current prescribers. We also use a limited mix of inside sales and other promotional tactics, including digital, to reach the current non-prescriber base in an effort to increase prescribers and sales of RESCULA.

Our Other Clinical Development Programs


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. Upon reviewing the results of this trial, which we anticipate to end in the first half of 2014, we plan to file a new drug application for approval.

Pediatric Functional Constipation

In December 2013, we announced the initiation of the pivotal phase 3 clinical 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.

Unoprostone Isopropyl

Retinitis Pigmentosa

In October 2013, we 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. Additionally, we are currently evaluating opportunities in other retinal diseases, such as age-related macular degeneration.

Intravenous (IV) and Oral (PO) Ion Channel Activators

Lumbar Spinal Stenosis

We have both an IV ion channel activator and a PO ion channel activator in development for the treatment of lumbar spinal stenosis, or LSS. In December 2013, we reported results of the treatment phase of our phase 2a, double-blind, placebo-controlled study of the IV version of our ion channel activator for LSS, that indicated statistically significant improvement in Visual Analog Scale pain. We plan to initiate an additional phase 2a in the second half of 2014. The PO ion channel activator for phase 1a clinical development results were reported in August 2013 and demonstrated to be generally well-tolerated. We plan to initiate the next phase of clinical development in the first quarter of 2014. Additionally, these compounds may be investigated for other indications.

Cobiprostone

Oral spray for Oral Mucositis

Cobiprostone is in development for the target indication of prevention and/or treatment of oral mucositis, or OM. In August 2013, we reported results of our phase 1a trial for the oral spray formulation of cobiprostone that demonstrated the compound is to be generally well-tolerated in healthy volunteers. In October 2013, we initiated a phase 1b clinical development study, which is expected to conclude in the first half of 2014.

Financial Terms of our License, Commercialization and Supply Agreement with Abbott

Upfront Payment

Upon signing the Abbott Agreement in February 2009, we received a non-refundable upfront payment of $10.0 million.

Product Development Milestone Payments

We have received the following non-refundable payments from Abbott reflecting our achievement of specific product development milestones:

· $7.5 million upon the initiation of the phase 3 clinical trial for lubiprostone for the treatment of CIC in Japanese patients in May 2009;


· $5.0 million as a result of submission of a marketing application to the PMDA for AMITIZA at dosage strength of 24 micrograms for the indication of CIC in October 2010; and

· $15.0 million as a result of first commercial sale of AMITIZA at dosage strength of 24 micrograms in Japanese adults in November 2012.

There can be no assurances that we will receive additional development or commercial milestone payments under our agreement with Abbott.

Product Revenue

We purchase and assume title to inventories of AMITIZA and recognize revenues from the sales, to Abbott, of such product when earned.

Abbott Cash Flows and Revenue

The following table summarizes the cash streams and related revenue recognized
or deferred under the license, commercialization and supply agreement with
Abbott:

                                                                                                          Accounts
                                          Cash                                                           Receivable
                                       Received                                                         for the Year                          Amount
                                        Through                 Revenue Recognized for the                  Ended           Foreign         Deferred at
                                      December 31,                Year Ended December 31,               December 31,       Currency        December 31,
(In thousands)                            2013          Through 2011         2012           2013            2013            Effects            2013
Collaboration revenue:
Up-front payment associated with
the Company's obligation to
participate in joint committees      $          846     $         137     $       52     $       52     $           -     $        50      $         555

Research and development revenue:
Up-front payment - remainder         $        9,154     $       9,103     $      199     $        -     $           -     $      (148 )    $           -
Development milestone payment                27,500            12,598         15,157              -                 -            (255 )                -
Total                                $       36,654     $      21,701     $   15,356     $        -     $           -     $      (403 )    $           -


Product sales revenue:               $       19,017     $           -     $    5,023     $   15,807     $       2,076     $       263      $           -

Financial Terms of our License and Collaboration Agreement with Takeda

Upfront Payment

Upon signing the Takeda Agreement in October 2004, we received a non-refundable upfront payment of $20.0 million.

Product Development Milestone Payments

We have received the following non-refundable payments from Takeda reflecting our achievement of specific product development milestones:

· $10.0 million upon the filing of the NDA for AMITIZA to treat CIC in March 2005;

· $20.0 million upon the initiation of our phase 3 clinical trial related to AMITIZA for the treatment of IBS-C in May 2005;

· $20.0 million upon the receipt of approval from the FDA for AMITIZA for the treatment of CIC in adults of both genders and all ages in January 2006;

· $30.0 million upon the filing of the sNDA for AMITIZA to the FDA seeking marketing approval for AMITIZA for the treatment of IBS-C in June 2007;

· $50.0 million upon the receipt of approval from the FDA for AMITIZA for the treatment of IBS-C in women aged 18 years and older in May 2008; and

· $10.0 million upon the commercial sale of AMITIZA for OIC in the second quarter of 2013.

Research and Development Cost-Sharing for AMITIZA

Our Takeda Agreement and Supplemental Takeda Agreement provides for the sharing with Takeda the costs of our research and development activities for AMITIZA in the United States and Canada as follows:

Research and development expense related to AMITIZA for the treatment of CIC and IBS-C:


· Any additional research and development expense in excess of $50.0 million shall be shared equally between Takeda and us. As of December 31, 2013, the related aggregate research and development expense incurred was $45.8 million.

· For research and development expenses relating to changing or expanding the labeling of AMITIZA to treat CIC and IBS-C, Takeda is responsible for 70% of these expenses and we are responsible for 30%. Through December 31, 2013, we had incurred $2.4 million of these expenses, of which we were reimbursed approximately $1.6 million by Takeda.

· The expense of ongoing and future clinical development of AMITIZA for the treatment of pediatric functional constipation will be borne by Takeda up to 70%. As of December 31, 2013, we had incurred $10.5 million of these expenses, 70% of which have been or are to be reimbursed by Takeda.

· For expenses in connection with additional clinical trials required by regulatory authorities relating to AMITIZA to treat CIC or IBS-C, Takeda and we are responsible to share these expenses equally. We have not incurred any expenses of this nature to date.

Research and development expense related to AMITIZA for the treatment of gastrointestinal indications other than CIC and IBS-C:

· Takeda is responsible for the first $50.0 million in expenses we incur related to the development of AMITIZA for each gastrointestinal indication other than CIC and IBS-C, and any expenses in excess of $50.0 million are shared equally between Takeda and us. We conducted clinical trials of AMITIZA for the treatment of OIC. Through December 31, 2013, we had incurred $78.6 million of reimbursable expenses.

· Takeda is responsible for the first $20.0 million in expenses we incur related to the development of each new formulation of AMITIZA, and any expenses in excess of $20.0 million are shared equally between Takeda and us. Through December 31, 2013, we have incurred $4.5 million of expenses to date relating to liquid formulation.

Co-Promotion Expense Reimbursements

In connection with the Supplemental Takeda Agreement (which co-promotion expense reimbursement provision expired in May 2011) and the Takeda Agreement, Takeda agreed to reimburse a portion of our expenses related to our specialty sales force. We recognized $61,000, $3.6 million and $3.4 million of co-promotion revenue reflecting these reimbursements for the years ended December 31, 2013, 2012 and 2011, respectively. In 2013, our sales force shifted away from selling AMITIZA, which was partially reimbursed by Takeda, to selling RESCULA. In November, 2013, we announced that we would be exercising our co-promotion option and will begin co-promoting AMITIZA for OIC in adults with chronic, non-cancer pain in the first quarter of 2014. Takeda will reimburse us under the Takeda Agreement for those product details made by our contract sales force of healthcare professionals.

Product Royalty Revenue

Takeda is obligated to pay us a sliding royalty rate based on a percentage of the net sales revenue from the sale of AMITIZA in the United States and Canada. The actual percentage depends on the level of net sales revenue attained each calendar year. All sales of AMITIZA in the United States and Canada, including those arranged by our specialty sales force, are made through Takeda. AMITIZA is currently marketed only in the United States and during the years ended December 31, 2013, 2012 and 2011 we recognized a total of $52.1 million, $50.7 million and $41.5 million, respectively, as product royalty revenue.

Commercialization Milestone Payments

Our agreements also require Takeda to pay us up to an additional aggregate of $50.0 million upon the achievement of specified targets for annual net sales revenue from AMITIZA in the United States and Canada. Sales of AMITIZA have not met these targets as of December 31, 2013.


Takeda Cash Flows and Revenue

The following table summarizes the cash streams and related collaboration and
research and development revenue recognized under the Takeda Agreements:

                                                                                                          Accounts
                                            Cash                                                         Receivable
                                         Received                                                       for the Year         Amount
                                          Through                Revenue Recognized for the                Ended           Deferred at
                                        December 31,              Year Ended December 31,               December 31,      December 31,
(In thousands)                              2013           Through 2011        2012         2013          2013 (1)            2013
Collaboration revenue:
Up-front payment associated with
the Company's obligation to
participate in joint committees        $        2,375     $        1,052     $    147     $    147     $            -     $       1,029

Research and development revenue:
Up-front payment - remainder           $       17,624     $       17,624     $      -     $      -     $            -     $           -
Development milestones                        140,000            130,000            -       10,000                  -                 -
Reimbursement of research and
development expenses                          114,670            100,262        6,189       10,354              2,554               419
Total                                  $      272,294     $      247,886     $  6,189     $ 20,354     $        2,554     $         419

Product royalty revenue                $      276,598     $      188,631     $ 50,696     $ 52,100     $       14,829     $           -

Co-promotion revenue                   $       29,453     $       25,816     $  3,576     $     61     $            -     $           -


_______


(1) Includes billed and unbilled accounts receivable.

Financial Terms of our Supply Agreement with R-Tech

Under the exclusive supply agreement with R-Tech, R-Tech has the exclusive right to manufacture and supply lubiprostone in the United States and Canada, and in consideration for such rights R-Tech agreed to pay us as follows: $1.0 million upon execution of the agreement and $2.0 million upon commencement of a first phase 2 lubiprostone trial. Upon execution of the agreement, we had already commenced phase 2 clinical trials for lubiprostone, which resulted in an immediate payment of $3.0 million ?V $1.0 million for the agreement execution and $2.0 million for the commencement of the first phase 2 lubiprostone trial. We evaluated the total cash receipts of $6.0 million from R-Tech and determined the payments were made for the exclusive right to supply inventory to us and determined that the amounts should be deferred until commercialization of the drug begins since this is the point at which the underlying services would commence. Management determined that the full deferred amount would be amortized over the contractual life of the relationship which was equivalent to the estimated commercialization period of lubiprostone (estimated to be through December 2020).

As previously reported, we ceased development of another prostone, RUG-015, in 2005. This changed the amortization period of the $6.0 million deferred revenue to the commercialization period of AMITIZA, which began in April 2006. We recognized revenue of $419,000 for the years ended December 31, 2013 and 2012, respectively, which is recorded as contract revenue. During the years ended December 31, 2013, 2012 and 2011, we purchased clinical supplies from R-Tech of approximately $827,000, $1.4 million and $72,000, respectively, under the terms of this agreement.

Under the exclusive manufacturing and supply agreement with R-Tech to manufacture and supply lubiprostone for clinical and commercial supplies within Europe, there have been no clinical supply purchases in 2013, 2012 or 2011. During the years ended December 31, 2013, 2012 and 2011, we purchased approximately zero, $124,000 and $125,000, respectively, of commercial supplies of lubiprostone from R-Tech in anticipation of a commercial launch in Europe.

Under the two-year, automatic renewal exclusive clinical manufacturing and supply agreement with R-Tech for cobiprostone and ion channel activators, no purchases were made for such clinical supplies during the years ended December 31, 2013, 2012 and 2011.

We entered into an exclusive supply arrangement with R-Tech under which we granted R-Tech the exclusive right to manufacture and supply lubiprostone to meet its commercial and clinical requirements in Asia, Australia and New Zealand. During the years ended December 31, 2013, 2012 and 2011, we purchased approximately $14.9 million, $3.1 million and $166,000, respectively, of commercial supplies of lubiprostone from R-Tech under this agreement. During the years ended December 31, 2013 and 2012, we purchased approximately $673,000 and $10,000, respectively, of clinical supplies from R-Tech under this agreement. There were no such clinical supplies purchased in 2011 from R-Tech under this agreement.


In April 2009, we entered into an agreement with R-Tech to acquire rights to RESCULA in the United States and Canada. Under the terms of the agreement, we hold the exclusive rights to commercialize RESCULA in the United States and Canada for its approved ophthalmic indication and any new indication developed by us. Under the terms of the agreement, we made an upfront payment of $3.0 million and may be required to pay up to $5.5 million in additional milestone payments to R-Tech based on the achievement of specified development and commercialization goals. The first milestone payment of $500,000 was paid to R-Tech in the first quarter of 2013 upon the re-launch of RESCULA for the treatment of glaucoma.

Under the terms of the 2011 agreement, we may be required to pay up to $100.0 million in additional milestone payments to R-Tech based on the achievement of specified development and commercialization goals. Through December 31, 2013, we . . .

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