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PTX > SEC Filings for PTX > Form 10-Q on 11-Aug-2014All Recent SEC Filings

Show all filings for PERNIX THERAPEUTICS HOLDINGS, INC.

Form 10-Q for PERNIX THERAPEUTICS HOLDINGS, INC.


11-Aug-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is designed to provide a better understanding of our unaudited consolidated financial statements, including a brief discussion of our business and products, key factors that impact our performance and a summary of our operating results. You should read the following Management's Discussion and Analysis of Financial Condition and Results of Operations together with our unaudited condensed consolidated financial statements and the related notes included in "Part I-Item 1. Financial Statements" of this Quarterly Report on Form 10-Q and the condensed consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2013. In addition to historical information, the following discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated by the forward-looking statements due to important factors including, but not limited to, those set forth under "Part I-Item1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2013 and "Part II-Item1A. Risk Factors" of this Quarterly Report on Form 10-Q for the three and six months ended June 30, 2014.

Executive Overview

We are a pharmaceutical company that has traditionally sold products addressing a variety of therapeutic areas. The Company is in the process of transitioning to a specialty focused company that sells and markets branded and generic pharmaceutical products primarily indicated for sleep, depression, bacterial infections and cough and cold conditions. We intend to see continued growth through the promotion of our products to physicians, healthcare practitioners and consumers, as appropriate. Since inception, we have engaged in a number of acquisitions and licensing arrangements to expand our product offerings. As part of our ongoing expansion strategy, we plan to make strategic acquisitions of products and companies, as well as develop and in-license additional products, with the aim of adding specialty products to our revenue base.

Acquisition of Treximet®. On August 4, 2014, we announced that the closing of our transaction to acquire the U.S rights to Treximet® (sumatriptan / naproxen sodium) for the acute treatment of migraine attacks with or without aura in adults was delayed due to a short-term supply constraint for the product. We are working with GlaxoSmithKline plc (NYSE: GSK) and certain of its related affiliates (together, "GSK") to ensure sufficient supply to meet anticipated demand. We and our lenders are performing additional due diligence related to this supply constraint. The terms for this acquisition are defined in the Asset Purchase and Sale Agreement (the "Agreement") that we entered into on May 13, 2014 with GSK. Upon closing, we anticipate making an upfront payment to GSK of $250 million for the U.S rights to Treximet®. We also anticipate making a contingent payment of up to $17 million to GSK upon receipt of an updated Written Request for pediatric exclusivity from the U.S. Food & Drug Administration. As a condition to closing, GSK will continue to manufacture Treximet® under a long-term Supply Agreement with us. We expect to fund this acquisition with $220 million in debt, plus approximately $50 million from cash available.

In connection with the anticipated close of the Agreement, GSK will assign the Product Development and Commercialization Agreement (the "PDC Agreement") between GSK and POZEN, Inc. (NASDAQ: POZN) to us. We and POZEN will amend the PDC Agreement to facilitate further development of Treximet®. Under the proposed amendment, we [will be required to] complete the filing for a pediatric indication for Treximet® and undertake certain new activities to extend the product's life. In addition, [will be required to] to release restrictions on POZEN's right to develop and commercialize additional dosage forms of sumatriptan/naproxen combinations outside of the United States. The amended PDC Agreement will also provide for royalties of 18% of net sales with quarterly minimum royalty amounts of $4 million for the calendar quarters commencing on January 1, 2015 and ending on March 31, 2018.

In connection with the assignment of the PDC Agreement, we will pay $3 million, at closing, to CPPIB Credit Investments Inc. (who own the rights to the royalty payments under the PDC Agreement). We will also grant POZEN a warrant (the "Warrant") to purchase 500,000 shares of our common stock at an exercise price of $4.28 per share (the closing price of our common stock on May 13, 2014 as reported on NASDAQ). The Warrant is exercisable from the closing date of the Agreement until February 28, 2018. We agreed to file a registration statement for the resale of the shares underlying the Warrant on a Form S-3 within 30 days of the issuance date and to use our best efforts to have such registration statement declared effective as soon as practicable thereafter.

Current portfolio. Our branded products include CEDAX®, an antibiotic for middle ear infections, and a family of prescription treatments for cough and cold (ZUTRIPRO®, REZIRA®, and VITUZ®). We also market SILENOR® (doxepin), which is approved for the treatment of insomnia characterized by difficulty with sleep maintenance and is not a controlled substance. We currently promote Khedezla™ Extended-Release Tablets, 50 and 100 mg, for major depressive disorder through an Exclusive License Agreement with Osmotica Pharmaceutical Corp.


We also promote Omeclamox-Pak®, for the treatment of patients with H.pylori infection and duodenal ulcer disease, through a License and Supply Agreement with GastroEntero-Logic, LLC. During the fourth quarter of 2013, we entered into a promotion agreement with Cumberland Pharmaceuticals pursuant to which Cumberland began promoting Omeclamox-Pak to gastroenterologists.

We promote our branded products through our sales and marketing organization.

We sell our generic products in the areas of cough and cold, pain, vitamins, dermatology, antibiotics and gastroenterology through our wholly-owned subsidiaries, Macoven Pharmaceuticals, LLC, or Macoven, and Cypress Pharmaceuticals, Inc., or Cypress.

Exclusive License Agreement. On February 27, 2014, we entered into an exclusive license agreement with Osmotica Pharmaceutical Corporation to promote KHEDEZLA (desvenlafaxine) Extended-Release (ER) Tablets, 50 mg and 100 mg. The sales and marketing of KHEDEZLA will be supported by our team of approximately 100 sales professionals, promoting the product to high desvenlafaxine prescribing physicians. The New Drug Application (NDA) for KHEDEZLA Tablets was approved by the U.S. Food and Drug Administration pursuant to section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act in July 2013. KHEDEZLA is indicated for the treatment of major depressive disorder (MDD). Pursuant to the agreement, we agreed to make an upfront payment for the license and Osmotica's existing inventory of Khedezla, certain milestone payments payable upon the achievement of certain cumulative sales milestones and royalty payments for sales achieved for promoting the product. Subject to certain earlier termination rights, the initial term of the agreement expires in February 2024, with two year automatic renewals.

February 2014 Note Offering. On February 21, 2014, we issued $65 million aggregate principal amount of the Company's 8.00% Convertible Senior Notes due 2019 in accordance with each of the Securities Purchase Agreements dated February 4, 2014 by and between the Company and the investors party thereto and the related Indenture dated February 21, 2014, by and between the Company and the trustee. See further discussion herein under the heading "Liquidity and Capital Resources."

MidCap Revolver Amendment. On February 21, 2014, we, together with our subsidiaries, entered into Amendment No. 1 to the Amended and Restated Credit Agreement with MidCap Funding IV, LLC, as Agent and as a lender, and the other lenders from time to time parties thereto. This Amendment No. 1 amends the Amended and Restated Credit Agreement that the Company and its subsidiaries entered into, effective May 8, 2013, with MidCap Financial, LLC, as Administrative Agent and as a lender, and the additional lenders from time to time parties thereto. On April 23, 2014 we entered into Amendment No. 2 to the Amended and Restated Credit Agreement with MidCap to increase the letter of credit sublimit from $0 to $750,000. See Note 13, Debt, to our Condensed Consolidated Financial Statements for the three and six months ended June 30, 2014 and 2013 for further discussion.

See further discussion herein under the heading "Liquidity and Capital Resources."

Settlement with Former Shareholders of Cypress. A Stipulation of Dismissal was filed with the United States District Court for the Southern District of Texas (Houston Division) on January 29, 2014 in connection with the settlement of all claims brought against the Company by the former shareholders (the "Plaintiff Shareholders") of Cypress and all claims brought against the Plaintiff Shareholders by Cypress in connection with the purchase of Cypress by the Company pursuant to the Securities Purchase Agreement by and among the Company, Cypress and the Plaintiff Shareholders (the "Purchase Agreement").

Texas Attorney General Medicaid Investigation. The Company reached an agreement with the Attorney General of the State of Texas to settle all claims arising from certain actions by Cypress under the Texas Medicaid Fraud Prevention Act prior to its acquisition by the Company in connection with a Civil Investigative Demand made on Cypress.


Disposition of PML (formerly Great Southern Laboratories, or GSL). On April 21, 2014, we completed our disposition of the business assets of Pernix Manufacturing, LLC, or PML, a pharmaceutical contract manufacturing company located in Houston, Texas. We received approximately $1.2 million in proceeds net of the assumed mortgage and working capital liabilities at closing and expect to realize approximately $5.0 million in annualized costs savings from the divestiture. As part of the agreement, the purchaser will continue to manufacture the existing Pernix products under a long-term supply agreement with terms similar to those provided to us by other third party manufacturers.

Business Strategy

Our objective is to be a leader in developing, marketing and selling prescription branded pharmaceutical products in the U.S. for specialty indications. Our strategy to achieve this objective includes the following elements:

Leveraging our focused sales and marketing organization - We have built an effective sales and marketing organization recently expanding our sales organization up to 100 territories, including the addition of 25 new sales geographic territories where we were previously absent. Our sales representatives are focused on promoting our migraine, sleep, depression, gastro, antibiotic and cough and cold medications. Over time we intend to add further specialty products that we can promote to specialty audiences.

We believe the concentration of high volume prescribers within specialist physician audiences enables us to effectively promote our products with a smaller and more focused sales and marketing organization than would be required for other markets. We intend to acquire or in-license products that will leverage the capacity of our sales and marketing organization, as well as the relationships we have established with our target physicians. Further, we believe fixed costs per representative are significantly better leveraged than those incurred by larger, more established pharmaceutical companies, due to our higher ratio of incentive based compensation. This aligns representative pay to sales performance, providing upside commission potential and attracting top sales performers.

Accessing parallel market channels through generic versions of selected branded products through our Macoven and Cypress subsidiaries - We intend to continue to utilize our Macoven and Cypress subsidiaries to diversify our product mix while leveraging this low-cost base business, without branding or sales force detailing. Our business goals for Macoven and Cypress include launching authorized generic products for branded pharmaceutical companies including generic equivalents of our own branded products and generic products for patented or niche branded products. We believe that our low-cost generics platform provides an attractive partner for branded pharmaceutical companies seeking to maximize the value of their product franchises via generic distribution.

Acquiring or in-licensing late-stage product development candidates - We also selectively seek to acquire or in-license late-stage product development candidates. We are focused on product development candidates that are ready for or have already entered Phase III clinical trials and should therefore present less development risk than product candidates at an earlier stage of development. We focus on product development candidates that would be prescribed by our target physicians. We believe that our established sales and marketing organization and our cash position make us an attractive commercialization partner for many biotechnology and pharmaceutical companies with late-stage product development candidates. We are actively pursuing the acquisition of rights to product candidates that, if successful, may require the use of a substantial portion of our capital resources.

Acquiring or in-licensing approved pharmaceuticals - We have historically grown our business by acquiring or in-licensing rights to market and sell prescription pharmaceutical products, and we intend to continue to grow in this manner. We are particularly focused on products that are prescribed by specialist physicians and that are under-promoted by large pharmaceutical companies. We believe that the revenue threshold for products that large pharmaceutical companies can promote effectively is increasing, potentially creating attractive opportunities for us to acquire additional products where the promotional audiences are smaller. We are actively pursuing the acquisition of rights to market and sell additional products which, if successful, may require the use of a substantial portion of our capital resources.

Acquisitions and License Agreements, Co-Promotions and Collaborations

We have and continue to grow our business through the use of acquisitions, license agreements, co-promotions and collaborations. We enter into acquisition, license and co-promotion agreements to acquire, develop, commercialize and market products and product candidates. In certain of these agreements, we market the products of others and remit a specified profit share to them. In certain other agreements, the contracted third party under the agreement markets products to which we have rights and remits a specified profit share to us. Collaborative agreements often include research and development efforts and/or capital funding requirements of the parties necessary to bring a product candidate to market. License, co-promotion and collaboration agreements may require royalty or profit share payments, contingent upon the occurrence of certain future events linked to the success of the product, as well as expense reimbursements or payments to third-party licensors.


Collaborations

Development of Late-state Pediatric Product. In March 2012, we entered into a product development agreement with a private company for a prescription product for the pediatrics market. Under the terms of the agreement, Pernix obtained exclusive marketing rights to this late-stage development product in the United States, and in consideration for our agreement to pay the costs related to the development of the product. As of June 30, 2014, we have invested approximately $1.92 million, and we expect to make an additional investment of approximately $0.7 million over the next 15 months, for development and regulatory expenses related to this product candidate. Under the terms of the product development agreement, our development partner will manage the development program. We and our development partner expect to commence pivotal phase III studies in 2015 after a thorough review of our phase II data and consultation with the FDA.

Planning continues on the Silenor Rx to OTC switch and we expect to submit the IND in 2014. We will continue to be opportunistic in exploiting our in-house expertise and intellectual property to initiate additional low risk development projects. In addition, we continue to look for external opportunities through in-license, collaborations or partnerships to build the Pernix pipeline.

Second Quarter 2014 Highlights

The following summarizes certain key financial measures as of and for the three months ended June 30, 2014:

? Cash and cash equivalents equaled $60.8 million as of June 30, 2014.

Net revenues were approximately $17.4 million and $20.6 million for the ? three months ended June 30, 2014 and 2013, respectively.

? Net loss before taxes was approximately $10.0 million and $7.7 million for the three months ended June 30, 2014 and 2013, respectively. Net loss before income before taxes was approximately $25.4 million and $18.7 million for the six months ended June 30, 2014 and 2013, respectively. For the six month ended June 30, 2014, the net loss included a loss on the sale of PML of approximately $6.7 million.

Opportunities and Trends

There continue to be unmet patient needs in certain therapeutic areas. We believe that we can systematically focus our efforts on developing and acquiring products or acquiring the assets of other companies whose products or assets can meet these needs. We also believe that future growth will be realized in the execution of branded and generic development opportunities in certain therapeutic areas. We believe the combination of product development and acquisition will enhance our growth opportunities. Additionally, we will continue to leverage our industry relationships to identify and take advantage of new product opportunities. Currently, we continue to believe that we have significant opportunities in leveraging the assets and improving the profitability of the assets acquired in the Cypress and Somaxon acquisitions as well as continuing the progress of certain in-process research and development projects as capital permits. There are a significant number of specialty pharmaceutical assets for sale and we see ourselves as an attractive buyer with a proven track record of being able to execute deals and grow products.

We are operating in challenging economic and industry environments. The challenges we face are compounded by the continued uncertainty around the continuing impact of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, which we refer to collectively herein as Health Care Reform. Given this business climate, we will continue to focus on managing and deploying our available cash efficiently and strengthening our industry relationships in order to be well-positioned to identify and capitalize upon potential growth opportunities.

As we execute our strategy, we will monitor and evaluate success through the following measures:

? net product sales generated from our existing products;

? acquisition of products and product rights that align with our strategy and that offer potential for sustainable growth;

? revenues generated from revenue sharing arrangements; and,

? our ability to effectively streamline and improve the operating effectiveness and efficiencies of our business.


Financial Operations Overview

The discussion in this section describes our statement of comprehensive loss categories. For a discussion of our results of operations, see "Results of Operations" below.

Net Revenues

Pernix's net revenues consist of net product sales and revenue from co-promotion and other revenue sharing arrangements, as well as revenue from PML until the manufacturing operations were sold on April 21, 2014. Pernix recognizes product sales net of estimated allowances for product returns, price adjustments (customer rebates, managed care rebates, service fees, chargebacks, coupons and other discounts), government program rebates (Medicaid, Medicare and other government sponsored programs) and prompt pay discounts. The primary factors that determine Pernix's net product sales are the level of demand for Pernix's products, unit sales prices, the applicable federal and supplemental government program rebates, contracted rebates, services fees, and chargebacks and other discounts that Pernix may offer such as consumer coupon programs. In addition to our own product portfolio, we have entered into co-promotion agreements and other revenue sharing arrangements with various parties in return for a percentage of revenue on sales we generate or on sales they generate.

The following table sets forth a summary of Pernix's net revenues for the three and six months ended June 30, 2014 and 2013:

                                             Three Months Ended           Six Months Ended
                                                  June 30,                    June 30,
                                             2014          2013          2014          2013
                                                             (in thousands)

Upper respiratory, allergy and
antibiotic products                        $   8,616     $  10,902     $  28,449     $  28,074
Gastroenterology products                      1,318         2,430         2,195         4,131
Dietary supplements and medical food
products                                       5,979         8,421        11,575        17,804
Analgesics                                     6,955         4,951        14,957         9,502
Sleep maintenance                              7,490         4,632        11,654         5,751
Depressive disorder                            2,879             -         2,879             -
Dermatology products                             124         1,250           280         2,355
Other products                                 3,414         2,837         5,357         6,390
  Gross Product Sales                         36,775        35,423        77,346        74,007
  Sales Allowances                           (20,260 )     (16,493 )     (43,301 )     (35,166 )
    Net Product Sales                         16,515        18,930        34,045        38,841
Manufacturing revenue                            713         1,092         1,363         1,735
Co-promotion and other revenue                   154           551         1,025         2,075
Total Net Revenues                         $  17,382     $  20,573     $  36,433     $  42,651


Allowances for Prompt Pay Discounts, Product Returns, Price Adjustments, and
Medicaid Rebates

The following table sets forth a summary of our allowances for product returns,
government rebate programs and price adjustments as of June 30, 2014. Prompt pay
discounts are recorded as a reduction of accounts receivable and revenue and,
therefore, are not included in the table below. The allowance for prompt pay
discounts as of June 30, 2014 and December 31, 2013 was approximately $502,000
and $532,000, respectively.

                                                                      Government
                                                      Product          Program              Price
                                                      Returns          Rebates           Adjustments
                                                                    (in thousands)
Balance at December 31, 2012                         $  12,057     $          7,037     $      10,960
Allowances assumed in acquisition of Somaxon               776                  479             1,113
Post-closing opening balance sheet adjustments           1,374                  391               416
Allowances for certain co-promotion agreements (1)          58                  110               483
Reclass from contingent consideration                    3,934                    -                 -
Current provision:
Adjustments to provision for prior year sales            1,611                 (921 )            (300 )
Provision - current year sales                           9,394                6,335            48,567
Payments and credits                                   (17,155 )             (9,495 )         (42,938 )
Balance at December 31, 2013                            12,049                3,936            18,301
Increase in allowances for certain co-promotion
agreements (1)                                             113                  300               333
Current provision:
Adjustments to provision for prior year sales                -                  475                 -
Provision - current year sales                           5,506                5,234            30,481
Payments and credits                                    (8,850 )             (4,911 )         (28,110 )
Balance at June 30, 2014                             $   8,818     $          5,034     $      21,005

(1) Allowances for certain co-promotion agreements represent allowances for which the expense is the responsibility of the other party to the co-promotion agreement. However, since we are responsible for the remittance of the payment of these deduction items to the billing third party, these items are included in accrued allowances on our balance sheet.

Product Returns. Consistent with industry practice, we offer contractual return rights that allow our customers to return short-dated or expiring products within an 18-month period, commencing from six months prior to and up to twelve months subsequent to the product expiration date. Our products have a 15 to 36-month expiration period from the date of manufacture. We adjust our estimate of product returns if we become aware of other factors that we believe could significantly impact our expected returns. These factors include our estimate of inventory levels of our products in the distribution channel, the shelf life of the product shipped, review of consumer consumption data as reported by external information management companies, actual and historical return rates for expired lots, the forecast of future sales of the product, competitive issues such as new product entrants and other known changes in sales trends. We estimate returns at percentages up to 10% of sales of branded and generic products and from time to time, higher on launch return percentages for sales of new products. Returns estimates are based upon historical data and other facts and circumstances that may impact future expected returns to derive an average return percentage for our products. The returns reserve may be adjusted as sales history and returns experience is accumulated on this portfolio of products. We review and adjust these reserves quarterly. If estimates regarding product demand are inaccurate, if changes in the competitive environment affect demand for certain products, or if other unforeseen circumstances affect a product's salability, actual returns could differ and such differences could be material. For example, a 1% difference in our provision assumptions for the six months ended June 30, 2014 would have affected pre-tax loss by approximately $774,000.

Government Program Rebates. The liability for Medicaid, Medicare and other government program rebates is estimated based on historical and current rebate redemption and utilization rates contractually submitted by each state's program . . .

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