e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the year ended December 31, 2008.
Or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
For the transition period from to .
Commission file number 0-18443
MEDICIS PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
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| Delaware
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52-1574808 |
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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| 7720 N. Dobson Road, Scottsdale, Arizona
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85256-2740 |
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| (Address of principal executive office)
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(Zip Code) |
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Registrant’s telephone number, including area code: (602) 808-8800
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| Securities registered pursuant to Section 12(b) of the Act: Class A common stock, $0.014 par value |
New York Stock Exchange
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Preference Share Purchase Rights |
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(Name of each exchange on which
registered)
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(Title of each Class) |
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
or any amendment to this Form 10-K o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer þ |
Accelerated filer o |
Non-accelerated filer o
(Do not check if a smaller reporting company) |
Smaller reporting company o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act) Yes o No þ
The aggregate market value of the voting stock held on June 30, 2008 by non-affiliates of the
registrant was $1,026,926,425 based on the closing price of $20.78 per share as reported on the New
York Stock Exchange on June 30, 2008, the last business day of the registrant’s most recently
completed second fiscal quarter (calculated by excluding all shares held by executive officers,
directors and holders known to the registrant of ten percent or more of the voting power of the
registrant’s common stock, without conceding that such persons are “affiliates” of the registrant
for purposes of the federal securities laws). As of February 24, 2009, there were 56,722,705
outstanding shares of Class A common stock.
Documents incorporated by reference:
Portions of the Proxy Statement for the registrant’s 2009 Annual Meeting of Shareholders (the
“Proxy Statement”) are incorporated herein by reference in Part III of this Form 10-K to the
extent stated herein.
PART I
Item 1. Business
The Company
Medicis Pharmaceutical Corporation (“Medicis”, the “Company”, or as used in the context of
“we”, “us” or “our”), together with our wholly owned subsidiaries, is a leading independent
specialty pharmaceutical company focusing primarily on helping patients attain a healthy and
youthful appearance and self-image through the development and marketing in the U.S. of products
for the treatment of dermatological, aesthetic and podiatric conditions. We believe that the U.S.
market for dermatological pharmaceutical sales exceeds $6 billion annually. According to the
American Society for Aesthetic Plastic Surgery, a national not-for-profit organization for
education and research in cosmetic plastic surgery, nearly 11.7 million cosmetic surgical and
non-surgical procedures were performed in the United States during 2007, including approximately
9.6 million non-surgical cosmetic procedures. We also market products in Canada for the treatment
of dermatological and aesthetic conditions.
On July 1, 2008, we acquired LipoSonix, Inc. (“LipoSonix”), an independent, privately-held
company that employs a staff of approximately 40 scientists, engineers and clinicians located near
Seattle, Washington. LipoSonix is a medical device company developing non-invasive body sculpting
technology, and recently launched its first product in Europe, where it is being marketed and sold
through distributors. The LipoSonix technology is currently not approved for sale or use in the
U.S. We believe the U.S. non-invasive fat ablation market could be several hundred million dollars
annually.
We have built our business by executing a four-part growth strategy: promoting existing
brands, developing new products and important product line extensions, entering into strategic
collaborations, and acquiring complementary products, technologies and businesses. Our core
philosophy is to cultivate high integrity relationships of trust and confidence with the foremost
dermatologists and podiatrists and the leading plastic surgeons in the United States.
We offer a broad range of products addressing various conditions or aesthetic improvements,
including facial wrinkles, acne, fungal infections, rosacea, hyperpigmentation, photoaging,
psoriasis, skin and skin-structure infections, seborrheic dermatitis and cosmesis (improvement in
the texture and appearance of skin). We currently offer 18 branded products. Our primary brands
are PERLANE® (hyaluronic acid), RESTYLANE® (hyaluronic acid),
SOLODYN® (minocycline HCl, USP), TRIAZ® (benzoyl peroxide), VANOS®
(fluocinonide) Cream 0.1%, and ZIANA® (clindamycin phosphate 1.2% and tretinoin 0.025%)
Gel. Many of our primary brands currently enjoy branded market leadership in the segments in which
they compete. Because of the significance of these brands to our business, we concentrate our
sales and marketing efforts in promoting them to physicians in our target markets. We also sell a
number of other products that we consider less critical to our business.
We have historically developed and obtained marketing and distribution rights to
pharmaceutical agents in various stages of development. We have a variety of products under
development, ranging from new products to existing product line extensions and reformulations of
existing products. Our product development strategy involves the rapid evaluation and formulation
of new therapeutics by obtaining preclinical safety and efficacy data, when possible, followed by
rapid safety and efficacy testing in humans. As a result of our increasing financial strength, we
have begun adding long-term projects to our development pipeline. Historically, we have
supplemented our research and development efforts by entering into research and development
agreements with other pharmaceutical and biotechnology companies.
Currently, except for the LipoSonix technology, we outsource all of our product manufacturing
needs. The underlying cost to us for manufacturing our products is established in our agreements
with outside manufacturers. Because of the short-term nature of these agreements, our expenses for
manufacturing are not fixed and could change from contract to contract.
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Our Products
We currently market 18 branded products. Our sales and marketing efforts are currently
focused on our primary brands. The following chart details certain important features of our
primary brands:
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Treatment |
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U.S. Market Impact |
PERLANE®
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Injectable gel for implantation into the
deep dermis to superficial subcutis for
the correction of moderate to severe
facial folds and wrinkles, such as
nasolabial folds
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Launched in May 2007 following U.S. Food and
Drug Administration (“FDA”) approval on
May 2, 2007 |
RESTYLANE®
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Injectable gel for treatment of moderate
to severe facial wrinkles and folds,
such as nasolabial folds
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The leading worldwide injectable dermal filler,
launched in January 2004 following FDA approval
on December 12, 2003 |
SOLODYN®
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Once daily dosage in the treatment of
inflammatory lesions of non-nodular
moderate to severe acne vulgaris in
patients 12 and older
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Launched in July 2006 following FDA approval
on May 8, 2006. |
TRIAZ®
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Topical patented gel and cleanser and
patent-pending pad treatments for acne
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A leading branded prescription benzoyl
peroxide product, launched during fiscal 1996 |
VANOS®
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Super-high potency topical corticosteroid
indicated for the relief of the inflammatory
and pruritic manifestations of corticosteroid
responsive dermatoses in patients 12 years
of age or older
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Launched in April 2005 following FDA
approval on February 11, 2005 |
ZIANA®
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Once daily topical gel treatment for acne
vulgaris in patients 12 and older
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Approved by the FDA on November 7, 2006. First
commercial sales to wholesalers in December 2006
and launched in January 2007 |
Dermal Restorative Products
Our principal branded dermal restorative products are described below:
RESTYLANE®, PERLANE®, RESTYLANE FINE LINESTM and RESTYLANE
SUBQTM are injectable, transparent, stabilized hyaluronic acid gels, which require no
patient sensitivity tests in advance of product administration. These products are the world’s
leading hyaluronic acid dermal fillers and their unique particle-based gel formulations offer
structural support and lift when implanted into the skin. On a worldwide basis, more than ten
million treatments have been successfully performed in more than 70 countries since its
introduction in 1996. In the United States, the FDA regulates these products as medical devices.
Medicis offers all four of these products in Canada, and began offering RESTYLANE® and
PERLANE® in the United States on January 6, 2004 and May 21, 2007, respectively. In the
U.S., RESTYLANE® is the first and only hyaluronic acid dermal filler whose FDA-approved
label includes duration data up to 18 months with one follow-up treatment. RESTYLANE FINE
LINES TM and RESTYLANE SUBQTM have not yet been approved by the FDA for use
in the United States. We acquired the exclusive U.S. and Canadian rights to these dermal
restorative products from Q-Med AB, a Swedish biotechnology and medical device company and its
affiliates (collectively “Q-Med”) through license agreements.
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Prescription Pharmaceuticals
Our principal branded prescription pharmaceutical products are described below:
SOLODYN®, launched to dermatologists in July 2006 after approval by the FDA on May
8, 2006, is the only oral minocycline approved for once daily dosage in the treatment of
inflammatory lesions of non-nodular moderate to severe acne vulgaris in patients 12 years of age
and older. SOLODYN® is the first approved minocycline in extended release tablet form.
SOLODYN® is lipid soluble, and its mode of action occurs in the skin and sebum.
SOLODYN® is not bioequivalent to any other minocycline products, and is in no way
interchangeable with other forms of minocycline. SOLODYN® is patented until 2018 by a
U.S. patent which covers SOLODYN® (see also Item 1A. Risk Factors). Other patent
applications covering SOLODYN® are pending (see also Item 1A. Risk Factors).
SOLODYN® is available by prescription in 45mg, 90mg and 135mg extended release tablet
dosages.
TRIAZ®, a topical therapy prescribed for the treatment of numerous forms and
varying degrees of acne, is available as a patented gel or cleanser or in a patent-pending pad in
three concentrations. TRIAZ® products are manufactured using the active ingredient
benzoyl peroxide in a patented vehicle containing glycolic acid and zinc lactate. Studies
conducted by third parties have shown that benzoyl peroxide is the most efficacious agent available
for eradicating the bacteria that cause acne with no reported resistance. We introduced the
TRIAZ® brand in fiscal 1996. In July 2003, we launched TRIAZ® Pads, the
first benzoyl peroxide pad available in the U.S. indicated for the topical treatment of acne
vulgaris. TRIAZ® is protected by a U.S. patent that expires in 2015.
VANOS® Cream, launched to dermatologists in April 2005 after approval by the FDA on
February 11, 2005, is a super-high potency (Class I) topical corticosteroid indicated for the
relief of the inflammatory and pruritic manifestations of corticosteroid responsive dermatoses in
patients 12 years of age or older. The active ingredient in VANOS® is fluocinonide
0.1%, and is the only fluocinonide available in the Class I category of topical corticosteroids.
Two double blind clinical studies have demonstrated the efficacy, safety and tolerability of
VANOS®. Its base was formulated to have the cosmetic elegance of a cream, yet behave
like an ointment on the skin. In addition, physicians have the flexibility of prescribing
VANOS® either for once or twice daily application. VANOS® Cream is protected
by one U.S. patent that expires in 2021 and two U.S. patents that expire in 2023.
VANOS® Cream is available by prescription in 30 gram, 60 gram and 120 gram tubes.
ZIANA® Gel, which contains clindamycin phosphate 1.2% and tretinoin 0.025%, was
approved by the FDA on November 7, 2006. Initial shipments of ZIANA® to wholesalers
began in December 2006, with formal promotional launch to dermatologists occurring in January 2007.
ZIANA® is the first and only combination of clindamycin and tretinoin approved for once
daily use for the topical treatment of acne vulgaris in patients 12 years and older.
ZIANA® is also the first and only approved acne product to combine an antibiotic and a
retinoid. ZIANA® is protected by a U.S. patent for both composition of matter on the
aqueous-based vehicle and method that expires in 2020. An additional patent covering composition
of matter has been placed before the U.S. Patent and Trademark Office to be reissued. Each of
these patents cover aspects of the unique vehicle which are used to deliver the active ingredients
in ZIANA®. ZIANA® is available by prescription in 30 gram and 60 gram tubes.
Research and Development
We have historically developed and obtained rights to pharmaceutical agents in various stages
of development. Currently, we have a variety of products under development, ranging from new
products to existing product line extensions and reformulations of existing products. Our product
development strategy involves the rapid evaluation and formulation of new therapeutics by obtaining
preclinical safety and efficacy data, when possible, followed by rapid safety and efficacy testing
in humans. As a result of our increasing financial strength, we have begun adding long-term
projects to our development pipeline. Historically, we have supplemented our research and
development efforts by entering into research and development agreements with other pharmaceutical
and biotechnology companies.
We incurred total research and development costs for all of our sponsored and unreimbursed
co-sponsored pharmaceutical projects for 2008, 2007 and 2006, of $99.9 million, $39.4 million and
$161.8 million, respectively. Research and development costs for 2008 include a $40.0 million
payment to IMPAX Laboratories, Inc.
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(“IMPAX”) related to our development agreement with IMPAX and a $25.0 million payment to Ipsen
Ltd., a wholly-owned subsidiary of Ipsen, S.A. (“Ipsen”) upon the FDA’s May 2008 acceptance of
filing of Ipsen’s Biologics License Application (“BLA”) for RELOXIN®. Research and
development costs for 2007 include $8.0 million related to our option to acquire Revance
Therapeutics, Inc. (“Revance”) or to license Revance’s product currently under development.
Research and development costs for 2006 include $125.2 million paid to Ipsen pursuant to the
RELOXIN® development agreements.
On November 26, 2008, we entered into a joint development agreement with IMPAX whereby we and
IMPAX will collaborate on the development of five strategic dermatology product opportunities,
including an advanced-form SOLODYN® product. Under terms of the agreement, we made an
initial payment of $40.0 million upon execution of the agreement. In addition, we are required to
pay up to $23.0 million upon successful completion of certain clinical and commercial milestones.
We will also make royalty payments based on sales of the advanced-form SOLODYN® product
if and when it is commercialized by us upon approval by the FDA. We will share equally in the gross
profit of the other four development products if and when they are commercialized by IMPAX upon
approval by the FDA. The $40.0 million payment was recognized as a charge to research and
development expense during the three months ended December 31, 2008.
On March 17, 2006, we entered into a development and distribution agreement with Ipsen,
whereby Ipsen granted to one of our wholly-owned subsidiaries the rights to develop, distribute and
commercialize Ipsen’s botulinum toxin type A product in the United States, Canada and Japan for
aesthetic use by physicians. The product is commonly referred to as RELOXIN® in the
U.S. aesthetic market and DYSPORT® in medical and aesthetic markets outside the U.S.
The product is not currently approved for use in the U.S., Canada or Japan. Upon execution of the
development and distribution agreement, we made an initial payment to Ipsen in the amount of $90.1
million in consideration for the exclusive distribution rights in the U.S., Canada and Japan.
Additionally, on March 17, 2006, Medicis and Ipsen agreed to negotiate and enter into an
agreement relating to the exclusive distribution and development rights of the product for the
aesthetic market in Europe, and subsequently in certain other markets. Under the terms of the
U.S., Canada and Japan agreement, as amended, we were obligated to make an additional $35.1 million
payment to Ipsen if this agreement was not entered into by April 15, 2006. On April 13, 2006,
Medicis and Ipsen agreed to extend this deadline to July 15, 2006. In connection with this
extension, we paid Ipsen approximately $12.9 million in April 2006, which would be applied against
the total obligation, in the event an agreement was not entered into by the extended deadline. On
July 17, 2006, Medicis and Ipsen agreed that the two companies would not pursue an agreement for
the commercialization of the product outside of the U.S., Canada and Japan. On July 17, 2006, we
made the additional $22.2 million payment to Ipsen, representing the remaining portion of the $35.1
million total obligation, resulting from the discontinuance of negotiations for other territories.
The initial $90.1 million payment and the $35.1 million obligation were recognized as charges
to research and development expense during 2006.
In May 2008, the FDA accepted the filing of Ipsen’s BLA for RELOXIN®, and in
accordance with the agreement, we paid Ipsen $25.0 million during the three months ended June 30,
2008. In December 2008, we paid Ipsen $1.5 million upon the achievement of an additional
regulatory milestone. The $25.0 million payment was recognized as a charge to research and
development expense during the three months ended June 30, 2008, and the $1.5 million payment was
recognized as a charge to research and development expense during the three months ended December
31, 2008. We will pay Ipsen an additional $75.0 million upon the product’s approval by the FDA and
$2.0 million upon regulatory approval of the product in Japan. Ipsen will manufacture and provide
the product to us for the term of the agreement, which extends to December 2036. Ipsen will
receive a royalty based on sales and a supply price, the total of which is equivalent to
approximately 30% of net sales as defined under the agreement if and when the product is
commercialized by us upon regulatory approval. Under the terms of the agreement, we are
responsible for all remaining research and development costs associated with obtaining the
product’s approval in the U.S., Canada and Japan.
On June 27, 2008, we and a U.S. company entered into a license agreement that provides patent
rights for development and commercialization of dermatologic products. Under terms of the
agreement, we made an initial payment of $2.0 million upon execution of the agreement. In
addition, we will be required to pay $19.0 million
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upon successful completion of certain clinical milestones, $15.0 million upon the first
commercial sales of the products in the U.S. and $30.0 million upon achievement of certain
commercial milestones. We will also make royalty payments based on net sales as defined in the
license. The $2.0 million payment was recognized as a charge to research and development expense
during the three months ended June 30, 2008.
On December 11, 2007, we entered into a strategic collaboration with Revance whereby we made
an equity investment in Revance and purchased an option to acquire Revance or to license
exclusively in North America Revance’s novel topical botulinum toxin type A product currently under
clinical development. The consideration to be paid to Revance upon our exercise of the option will
be at an amount that will approximate the then fair value of Revance or the license of the product
under development, as determined by an independent appraisal. The option period will extend
through the end of Phase 2 testing in the United States. In consideration for our $20.0 million
payment, we received preferred stock representing an approximate 13.7 percent ownership in Revance,
or approximately 11.7 percent on a fully diluted basis, and the option to acquire Revance or to
license the product under development. The $20.0 million is expected to be used by Revance
primarily for the development of the new product. Approximately $12.0 million of the $20.0 million
payment represents the fair value of the investment in Revance at the time of the investment and
was included in other long-term assets in our consolidated balance sheets as of December 31, 2007.
The remaining $8.0 million, which is non-refundable and is expected to be utilized in the
development of the new product, represents the residual value of the option to acquire Revance or
to license the product under development and was recognized as a charge to research and development
expense during the three months ended December 31, 2007. Additionally, we have committed to make
further equity investments in Revance of up to $5.0 million under certain terms, subject to certain
conditions and prior to the exercise of the option to acquire Revance or to license exclusively
Revance’s topical botulinum toxin type A product in North America.
Prior to the exercise of the option, Revance will remain primarily responsible for the
worldwide development of Revance’s topical botulinum toxin type A product in consultation with us
in North America. We will assume primary responsibility for the development of the product should
consummation of either a merger or a license for topically delivered botulinum toxin type A in
North America be completed under the terms of the option. Revance will have sole responsibility
for manufacturing the development product and manufacturing the product during commercialization
worldwide. Our right to exercise the option is triggered upon Revance’s successful completion of
certain regulatory milestones through the end of Phase 2 testing in the United States. A license
would contain a payment upon exercise of the license option, milestone payments related to
clinical, regulatory and commercial achievements, and royalties based on sales, as defined in the
license. If we elect to exercise the option, the financial terms for the acquisition or license
will be determined through an independent valuation in accordance with specified methodologies.
On October 9, 2007, we entered into a development and license agreement with a company for the
development of a dermatologic product. Under terms of the agreement, we made an initial payment of
$1.5 million upon execution of the agreement. In addition, we are required to pay $18.0 million
upon successful completion of certain clinical milestones and $5.2 million upon the first
commercial sales of the product in the U.S. We will also make royalty payments based on net sales
as defined in the license. The $1.5 million payment was recognized as a charge to research and
development expense during 2007.
On June 19, 2006, we entered into an exclusive start-up development agreement with a company
for the development of a dermatologic product. Under terms of the agreement, we made an initial
payment of $1.0 million upon execution of the agreement, and are required to pay a milestone
payment of $3.0 million upon execution of a development and license agreement between the parties.
In addition, we will pay approximately $16.0 million upon successful completion of certain clinical
milestones and approximately $12.0 million upon the first commercial sales of the product in the
U.S. We also will make additional milestone payments upon the achievement of certain commercial
milestones. The $1.0 million payment was recognized as a charge to research and development
expense during 2006.
7
Sales and Marketing
Our combined dedicated sales force, consisting of 216 employees as of December 31, 2008,
focuses on high patient volume dermatologists and plastic surgeons. Since a relatively small
number of physicians are responsible for writing a majority of dermatological prescriptions and
performing dermal aesthetic procedures, we believe that the size of our sales force, including its
currently ongoing expansion, is appropriate to reach our target physicians. Our therapeutic
dermatology sales forces consist of 105 employees who regularly call on approximately 9,000
dermatologists. Our dermal aesthetic sales force consists of 111 employees who regularly call on
leading plastic surgeons, facial plastic surgeons, dermatologists and dermatologic surgeons. We
also have eight national account managers who regularly call on major drug wholesalers, managed
care organizations, large retail chains, formularies and related organizations.
Our strategy is to cultivate relationships of trust and confidence with the high prescribing
dermatologists and the leading plastic surgeons in the United States. We use a variety of
marketing techniques to promote our products including sampling, journal advertising, promotional
materials, specialty publications, coupons, money-back or product replacement guarantees,
educational conferences and informational websites. We also promote our dermal aesthetic products
through television and radio advertising.
We believe we have created an attractive incentive program for our sales force that is based
upon goals in prescription growth, market share achievement and customer service.
Warehousing and Distribution
We utilize an independent national warehousing corporation to store and distribute our
pharmaceutical products in the U.S. from primarily two regional warehouses in Nevada and Georgia,
as well as an additional warehouse in North Carolina. Upon the receipt of a purchase order through
electronic data input (“EDI”), phone, mail or facsimile, the order is processed through our
inventory management systems and is transmitted electronically to the appropriate warehouse for
picking and packing. Upon shipment, the warehouse sends back to us via EDI the necessary
information to automatically process the invoice in a timely manner.
Customers
Our customers include certain of the nation’s leading wholesale pharmaceutical distributors,
such as Cardinal Health, Inc. (“Cardinal”) and McKesson Corporation (“McKesson”) and other major
drug chains. During 2008, 2007 and 2006, these customers accounted for the following portions of
our net revenues:
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2008 |
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2007 |
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2006 |
McKesson |
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45.8 |
% |
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52.2 |
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56.8 |
% |
Cardinal |
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21.2 |
% |
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16.9 |
% |
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19.3 |
% |
McKesson is our sole distributor of our RESTYLANE® and PERLANE® products
in the United States and Canada.
Third-Party Reimbursement
Our operating results and business success depend in large part on the availability of
adequate third-party payor reimbursement to patients for our prescription-brand products. These
third-party payors include governmental entities such as Medicaid, private health insurers and
managed care organizations. Because of the size of the patient population covered by managed care
organizations, marketing of prescription drugs to them and the pharmacy benefit managers that serve
many of these organizations has become important to our business.
The trend toward managed healthcare in the United States and the growth of managed care
organizations could significantly influence the purchase of pharmaceutical products, resulting in
lower prices and a reduction in product demand. Managed care organizations and other third party
payors try to negotiate the pricing of medical
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services and products to control their costs. Managed care organizations and pharmacy benefit
managers typically develop formularies to reduce their cost for medications. Formularies can be
based on the prices and therapeutic benefits of the available products. Due to their lower costs,
generic products are often favored. The breadth of the products covered by formularies varies
considerably from one managed care organization to another, and many formularies include
alternative and competitive products for treatment of particular medical conditions. Exclusion of
a product from a formulary can lead to its sharply reduced usage in the managed care organization
patient population. Payment or reimbursement of only a portion of the cost of our prescription
products could make our products less attractive, from a net-cost perspective, to patients,
suppliers and prescribing physicians.
Some of our products are not of a type generally eligible for reimbursement. It is possible
that products manufactured by others could address the same effects as our products and be subject
to reimbursement. If this were the case, some of our products may be unable to compete on a price
basis. In addition, decisions by state regulatory agencies, including state pharmacy boards,
and/or retail pharmacies may require substitution of generic for branded products, may prefer
competitors’ products over our own, and may impair our pricing and thereby constrain our market
share and growth.
Seasonality
Our business, taken as a whole, is not materially affected by seasonal factors. We schedule
our inventory purchases to meet anticipated customer demand. As a result, relatively small delays
in the receipt of manufactured products by us could result in revenues being deferred or lost.
Manufacturing
We currently, except for the LipoSonix technology, outsource all of our manufacturing needs,
and we are required by the FDA to contract only with manufacturers who comply with current Good
Manufacturing Practices (“cGMP”) regulations and other applicable laws and regulations. Typically
our manufacturing contracts are short-term. We review our manufacturing arrangements on a regular
basis and assess the viability of alternative manufacturers if our current manufacturers are unable
to fulfill our needs. If any of our manufacturing partners are unable to perform their obligations
under our manufacturing agreements or if any of our manufacturing agreements are terminated, we may
experience a disruption in the manufacturing of the applicable product that would adversely affect
our results of operations.
Under several exclusive supply agreements, with certain exceptions, we must purchase most of
our product supply from specific manufacturers. If any of these exclusive manufacturer or supplier
relationships were terminated, we would be forced to find a replacement manufacturer or supplier.
The FDA requires that all manufacturers used by pharmaceutical companies comply with the FDA’s
regulations, including the cGMP regulations applicable to manufacturing processes. The cGMP
validation of a new facility and the approval of that manufacturer for a new drug product may take
a year or more before manufacture can begin at the facility. Delays in obtaining FDA validation of
a replacement manufacturing facility could cause an interruption in the supply of our products.
Although we have business interruption insurance to assist in covering the loss of income for
products where we do not have a secondary manufacturer, which may reduce the harm to us from the
interruption of the manufacturing of our largest-selling products caused by certain events, the
loss of a manufacturer could still cause a significant reduction in our sales, margins and market
share, as well as harm our overall business and financial results.
We and the manufacturers of our products rely on suppliers of raw materials used in the
production of our products. Some of these materials are available from only one source and others
may become available from only one source. We try to maintain inventory levels that are no greater
than necessary to meet our current projections, which could have the effect of exacerbating supply
problems. Any interruption in the supply of finished products could hinder our ability to timely
distribute finished products. If we are unable to obtain adequate product supplies to satisfy our
customers’ orders, we may lose those orders and our customers may cancel other orders and stock and
sell competing products. This, in turn, could cause a loss of our market share and reduce our
revenues. In addition, any disruption in the supply of raw materials or an increase in the cost of
raw materials to our manufacturers could have a significant effect on their ability to supply us
with our products, which would adversely affect our financial condition and results of operations.
9
Our TRIAZ®, VANOS® and ZIANA® branded products are
manufactured by Contract Pharmaceuticals Limited pursuant to a manufacturing agreement that
automatically renews on an annual basis, unless terminated by either party. We are also in the
process of evaluating alternative manufacturing facilities and raw material suppliers for some of
these products.
Our RESTYLANE® and PERLANE® branded products in the U.S. and Canada are
manufactured by Q-Med pursuant to a long-term supply agreement that expires no earlier than 2013.
Our SOLODYN® branded product is manufactured by Wellspring Pharmaceutical and
AAIPharma pursuant to long-term supply agreements that expire in 2011 and 2010, respectively,
unless extended by mutual agreement. We are also in the process of evaluating an alternative
manufacturing facility for future SOLODYN® production.
Raw Materials
We and the manufacturers of our products rely on suppliers of raw materials used in the
production of our products. Some of these materials are available from only one source and others
may become available from only one source. Any disruption in the supply of raw materials or an
increase in the cost of raw materials to our manufacturers could have a significant effect on their
ability to supply us with our products.
License and Royalty Agreements
Pursuant to license agreements with third parties, we have acquired rights to manufacture, use
or market certain of our existing products, as well as many of our development products and
technologies. Such agreements typically contain provisions requiring us to use our best efforts or
otherwise exercise diligence in pursuing market development for such products in order to maintain
the rights granted under the agreements and may be canceled upon our failure to perform our payment
or other obligations. In addition, we have licensed certain rights to manufacture, use and sell
certain of our technologies outside the United States and Canada to various licensees.
Trademarks, Patents and Proprietary Rights
We believe that trademark protection is an important part of establishing product and brand
recognition. We own a number of registered trademarks and trademark applications. U.S. federal
registrations for trademarks remain in force for 10 years and may be renewed every 10 years after
issuance, provided the mark is still being used in commerce.
We have obtained and licensed a number of patents covering key aspects of our products,
including a U.S. patent expiring in October of 2015 covering various formulations of
TRIAZ®, a U.S. patent expiring in December 2017 covering RESTYLANE®, a U.S.
patent expiring in February 2018 covering SOLODYN® Tablets, two U.S. patents expiring in
February 2015 and August 2020 covering ZIANA® Gel, one U.S. patent expiring in December
2021 and two U.S. patents expiring in January 2023 covering VANOS® Cream, and two U.S.
patents expiring in September 2009 and December 2024 covering LipoSonix technology. We have patent
applications pending relating to SOLODYN® Tablets, LOPROX® Shampoo and
ZIANA® Gel. We are also pursuing several other U.S. and foreign patent applications.
We hold additional LipoSonix patents, and have numerous LipoSonix patent applications pending in
the U.S. and in other countries.
We rely and expect to continue to rely upon unpatented proprietary know-how and technological
innovation in the development and manufacture of many of our principal products. Our policy is to
require all our employees, consultants and advisors to enter into confidentiality agreements with
us.
Our success with our products will depend, in part, on our ability to obtain, and successfully
defend if challenged, patent or other proprietary protection. However, the issuance of a patent is
not conclusive as to its validity or as to the enforceable scope of the claims of the patent.
Accordingly, our patents may not prevent other companies from developing similar or functionally
equivalent products or from successfully challenging the validity of our patents. As a result, if
our patent applications are not approved or, even if approved, such patents are
10
circumvented or not upheld in a legal proceeding, our ability to competitively exploit our
patented products and technologies may be significantly reduced. Also, such patents may or may not
provide competitive advantages for their respective products or they may be challenged or
circumvented by competitors, in which case our ability to commercially exploit these products may
be diminished.
Third parties may challenge and seek to invalidate or circumvent our patents and patent
applications relating to our products, product candidates and technologies. Challenges may result
in potentially significant harm to our business. The cost of responding to these challenges and
the inherent costs to defend the validity of our patents, including the prosecution of
infringements and the related litigation, can require a substantial commitment of our management’s
time, be costly and can preclude or delay the commercialization of products. For example, on
January 13, 2009, we filed suit against Mylan, Inc., Matrix Laboratories Ltd., Matrix Laboratories
Inc., Sandoz, Inc. and Barr Laboratories, Inc. (collectively “Defendants”) in the United States
District Court for the District of Delaware seeking an adjudication that Defendants have infringed
one or more claims of Medicis’ U.S. Patent No. 5,908,838 (the “‘838 Patent”) by submitting to the
Food And Drug Administration their respective Abbreviated New Drug Applications for generic
versions of SOLODYN®. See Item 3 of Part I of this report, “Legal Proceedings” and
Note 14, “Commitments and Contingencies,” in the notes to the consolidated financial statements
listed under Item 15 of Part IV of this report, “Exhibits and Financial Statement Schedules,” for
information concerning our current intellectual property litigation.
From time to time, we may need to obtain licenses to patents and other proprietary rights held
by third parties to develop, manufacture and market our products. If we are unable to timely obtain
these licenses on commercially reasonable terms, our ability to commercially exploit such products
may be inhibited or prevented.
Competition
The pharmaceutical and dermal aesthetics industries are characterized by intense competition,
rapid product development and technological change. Numerous companies are engaged in the
development, manufacture and marketing of health care products competitive with those that we
offer. As a result, competition is intense among manufacturers of prescription pharmaceuticals and
dermal injection products, such as for our primary brands.
Many of our competitors are large, well-established pharmaceutical, chemical, cosmetic or
health care companies with considerably greater financial, marketing, sales and technical resources
than those available to us. Additionally, many of our present and potential competitors have
research and development capabilities that may allow them to develop new or improved products that
may compete with our product lines. Our products could be rendered obsolete or made uneconomical
by the development of new products to treat the conditions addressed by our products, technological
advances affecting the cost of production, or marketing or pricing actions by one or more of our
competitors. Each of our products competes for a share of the existing market with numerous
products that have become standard treatments recommended or prescribed by dermatologists and
podiatrists and administered by plastic surgeons and aesthetic dermatologists. In addition to
product development, other competitive factors affecting the pharmaceutical industry include
testing, approval and marketing, industry consolidation, product quality and price, product
technology, reputation, customer service and access to technical information.
The largest competitors for our prescription dermatological products include Allergan,
Galderma, Johnson & Johnson, Sanofi-Aventis, Stiefel Laboratories and Warner Chilcott. Several of
our primary prescription brands compete or may compete in the near future with generic
(non-branded) pharmaceuticals, which claim to offer equivalent therapeutic benefits at a lower
cost. In some cases, insurers, third-party payors and pharmacies seek to encourage the use of
generic products, making branded products less attractive, from a cost perspective, to buyers.
Our facial aesthetics products compete primarily against Allergan. Among other dermal filler
products, Allergan markets Juvéderm® Ultra and Juvéderm® Ultra Plus.
Allergan is a larger company than Medicis, and has greater financial, marketing, sales and
technical resources than those available to us. Other dermal filler products, such as
OrthoNeutrogena’s Evolence®, Mentor’s Prevelle® Silk, BioForm Medical’s
Radiesse®, Sanofi-Aventis’ Sculptra®, and Anika Therapeutics’
Elevess® have also recently been approved by the FDA. Patients may differentiate these
products from RESTYLANE® and PERLANE® based on price, efficacy and/or
duration, which
11
may appeal to some patients. In addition, there are several dermal filler products under
development and/or in the FDA pipeline for approval, including products from Johnson & Johnson and
Mentor Corporation, which claim to offer equivalent or greater facial aesthetic benefits to
RESTYLANE® and PERLANE® and, if approved, the companies producing such
products could charge less to doctors for their products.
Government Regulation
The manufacture and sale of medical devices, drugs and biological products are subject to
regulation principally by the FDA, but also by other federal agencies, such as the Drug Enforcement
Administration (“DEA”), and state and local authorities in the United States, and by comparable
agencies in certain foreign countries. The Federal Trade Commission (“FTC”), the FDA and state and
local authorities regulate the advertising of over-the-counter drugs and cosmetics. The Federal
Food, Drug and Cosmetic Act (“FDCA”), as amended, and the regulations promulgated thereunder, and
other federal and state statutes and regulations, govern, among other things, the testing,
manufacture, safety, effectiveness, labeling, storage, record keeping, approval, sale,
distribution, advertising and promotion of our products.
Our RESTYLANE® and PERLANE® dermal filler products are prescription
medical devices intended for human use and are subject to regulation by the FDA in the United
States. Unless an exemption applies, a medical device in the U.S. must have a Premarket Approval
Application (“PMA”) in accordance with the FDCA, as amended, or a 510(k) clearance (a demonstration
that the new device is “substantially equivalent” to a device already on the market).
RESTYLANE®, PERLANE® and non-collagen dermal fillers are subject to PMA
regulations that require premarket review of clinical data on safety and effectiveness. FDA device
regulations for PMAs generally require reasonable assurance of safety and effectiveness prior to
marketing, including safety and efficacy data obtained under clinical protocols approved under an
Investigational Device Exemption (“IDE”) and the manufacturing of the device requires compliance
with “quality system regulations” (“QSRs”), as verified by detailed FDA inspections of
manufacturing facilities. These regulations also require post-approval reporting of alleged
product defects, recalls and certain adverse experiences to the FDA. Generally, FDA regulations
divide medical devices into three classes. Class I devices are subject to general controls that
require compliance with device establishment registration, product listing, labeling, QSRs and
other general requirements that are also applicable to all classes of medical devices but, at least
currently, most are not subject to premarket review. Class II devices are subject to special
controls in addition to general controls and generally require the submission of a premarket
notification (501(k) clearance before marketing is permitted. Class III devices are subject to the
most comprehensive regulation and in most cases, other than those that remain grandfathered based
on clinical use before 1976, require submission to the FDA of a PMA application that includes
biocompatibility, manufacturing and clinical data supporting the safety and effectiveness of the
device as well as compliance with the same provisions applicable to all medical devices such as
QSRs. Annual reports must be submitted to the FDA, as well as descriptions of certain adverse
events that are reported to the sponsor within specified timeframes of receipt of such reports.
RESTYLANE® and PERLANE® are regulated as Class III PMA-required medical
devices. RESTYLANE® and PERLANE® have been approved by the FDA under a PMA.
In general, products falling within the FDA’s definition of “new drugs,” including both drugs
and biological products, require premarket approval by the FDA. Products falling within the FDA’s
definition of “cosmetics” or “drugs” and that are “generally recognized as safe and effective” (and
therefore not “new drugs”) do not require premarketing clearance although all drugs must comply
with a host of post-market regulations, including manufacture under cGMP and adverse experience
reporting.
“New drug” products are thoroughly tested to demonstrate their safety and effectiveness.
Preclinical or biocompatibility testing is generally conducted on laboratory animals to evaluate
the potential safety and toxicity of a drug. The results of these studies are submitted to the FDA
as a part of an Investigational New Drug Application (“IND”), which must be effective before
clinical trials in humans can begin. Typically, clinical evaluation of new drugs involves a time
consuming and costly three-phase process. In Phase I, clinical trials are conducted with a small
number of healthy subjects to determine the early safety profile, the relationship of safety to
dose, and the pattern of drug distribution and metabolism. In Phase II, one or more clinical
trials are conducted with groups of patients afflicted with a specific disease or condition to
determine preliminary efficacy and expanded evidence of safety; the degree of effect, if any, as
compared to the current treatment regimen; and the optimal dose to be used in large scale trials.
In Phase III, typically at least two large-scale, multi-center, comparative trials are conducted
with
12
patients afflicted with a target disease or condition to provide sufficient confirmatory data
to support the efficacy and safety required by the FDA. The FDA closely monitors the progress of
each of the three phases of clinical trials and may, at its discretion, re-evaluate, alter, suspend
or terminate the testing based upon the data that have been accumulated to that point and its
assessment of the risk/benefit ratio to the patient.
The steps required before a “new drug” may be marketed, shipped or sold in the United States
typically include (i) preclinical laboratory and animal testing of pharmacology and toxicology;
(ii) manufacture under cGMPs as verified by a pre-approval inspection (“PAI”) by the FDA; (iii)
submission to the FDA of an IND; (iv) at least two adequate and well-controlled clinical trials to
establish the safety and efficacy of the drug (for some applications, the FDA may accept one large
clinical trial) beyond those human clinical trials necessary to establish a safe dose and to
identify the human absorption, distribution, metabolism and excretion of the active ingredient or
biological substance as applicable; (v) submission to the FDA of a New Drug Application (or “NDA”)
or BLA; and (vi) FDA approval of the NDA or BLA. In addition to obtaining FDA approval for each
product, each drug-manufacturing establishment must be registered with the FDA.
New drugs may also be approved by the agency pursuant to an Abbreviated New Drug Application
(“ANDA”) for generic drugs if the same active ingredient has previously been approved by the agency
and the original sponsor of the NDA no longer has patent protection or statutory marketing
exclusivity. Approval of an ANDA does not generally require the submission of clinical data on the
safety and effectiveness of the drug product if in an oral or parental dosage form. Clinical
studies demonstrating equivalence to the innovator drug product may be required for certain topical
drug products submitted under ANDAs. However, even if no clinical studies are required, the
applicant must provide dissolution and/or bioequivalence studies to show that the active ingredient
in an oral generic drug sponsor’s application is comparably available to the patient as the
original product in the NDA upon which the ANDA is based.
FDA approval is required before a “new drug” product may be marketed in the United States.
However, many historically over-the-counter (“OTC”) drugs are exempt from the FDA’s premarket
approval requirements. In 1972, the FDA instituted the ongoing OTC Drug Review to evaluate the
safety and effectiveness of all OTC active ingredients and associated labeling (“OTC drugs”).
Through this process, the FDA issues monographs that set forth the specific active ingredients,
dosages, indications and labeling statements for OTC drugs that the FDA will consider generally
recognized as safe and effective and therefore not subject to premarket approval. Before issuance
of a final OTC drug monograph as a federal regulation, OTC drugs are classified by the FDA in one
of three categories: Category I ingredients and labeling which are deemed “generally recognized as
safe and effective” for OTC use; Category II ingredients and labeling, which are deemed “not
generally recognized as safe and effective” for OTC use;” and Category III ingredients and
labeling, for which “available data are insufficient” to classify as Category I or II, pending
further studies. Based upon the results of these ongoing studies and pursuant to a court order,
the FDA is required to reclassify all Category III ingredients as either Category I or Category II
before issuance of a final monograph through notice and comment rule-making. For certain
categories of OTC drugs not yet subject to a final monograph, the FDA usually permits such drugs to
continue to be marketed until a final monograph becomes effective, unless the drug will pose a
potential health hazard to consumers. Stated differently, the FDA generally permits continued
marketing only of any Category I products and Category III products that are “safe but unknown
efficacy” products during the pendency of a final monograph. Drugs subject to final monographs, as
well as drugs that are subject only to proposed monographs, are also and separately subject to
various FDA regulations concerning, for example, cGMP, general and specific OTC labeling
requirements and prohibitions against promotion for conditions other than those stated in the
labeling. OTC drug manufacturing facilities are subject to FDA inspection, and failure to comply
with applicable regulatory requirements may lead to administrative or judicially imposed penalties.
The active ingredient in the LOPROX® (ciclopirox) products has been approved by the
FDA under multiple NDAs. The active ingredient in the DYNACIN® (minocycline HCl)
branded products has been approved by the FDA under multiple ANDAs. Benzoyl peroxide, the active
ingredient in the TRIAZ® products, has been classified as a Category III ingredient
under a tentative final FDA monograph for OTC use in treatment of labeled conditions. The FDA has
requested, and a task force of the Non-Prescription Drug Manufacturers Association (or “NDMA”), a
trade association of OTC drug manufacturers, has undertaken further studies to confirm that benzoyl
peroxide is not a tumor promoter when tested in conjunction with UV light exposure. The
TRIAZ® products, which we sell on a prescription basis, have the same ingredients at the
same dosage levels as the OTC products. When the
13
FDA issues the final monograph, one of several possible outcomes that may occur is that we may
be required by the FDA to discontinue sales of TRIAZ® products until and unless we file
an NDA covering such product. There can be no assurance as to the results of these studies or any
FDA action to reclassify benzoyl peroxide. In addition, there can be no assurance that adverse
test results would not result in withdrawal of TRIAZ® products from marketing. An
adverse decision by the FDA with respect to the safety of benzoyl peroxide could result in the
assertion of product liability claims against us and could have a material adverse effect on our
business, financial condition and results of operations.
Our TRIAZ® branded products must meet the composition and labeling requirements
established by the FDA for OTC products containing their respective basic ingredients. We believe
that compliance with those established standards avoids the requirement for premarket clearance of
these products. There can be no assurance that the FDA will not take a contrary position in the
future. Our PLEXION® branded products, which contain the active ingredients sodium
sulfacetamide and sulfur, are marketed under the FDA compliance policy entitled “Marketed New Drugs
without Approved NDAs or ANDAs.”
We believe that certain of our products, as they are promoted and intended by us for use, are
exempt from being considered “new drugs” and therefore do not require premarket clearance. There
can be no assurance that the FDA will not take a contrary position in the future. If the FDA were
to do so, we may be required to seek FDA approval for these products, market these products as
over-the-counter products or withdraw such products from the market. We believe that these products
are compliant with applicable regulations governing product safety, use of ingredients, labeling,
promotion and manufacturing methods.
We also will be subject to foreign regulatory authorities governing clinical trials and
pharmaceutical sales for products we seek to market outside the United States. Whether or not FDA
approval has been obtained, approval of a product by the comparable regulatory authorities of
foreign countries must be obtained before marketing the product in those countries. The approval
process varies from country to country, the approval process time required may be longer or shorter
than that required for FDA approval, and any foreign regulatory agency may refuse to approve any
product we submit for review.
Our History
We filed our certificate of incorporation with the Secretary of State of Delaware on July 28,
1988. We completed our initial public offering during our fiscal year ended June 30, 1990, and
launched our initial pharmaceutical products during our fiscal year ended June 30, 1991.
Change in Fiscal Year
Effective December 31, 2005, we changed our fiscal year end from June 30 to December 31. This
change was made to align our fiscal year end with other companies within our industry. This Form
10-K is intended to cover the audited calendar year January 1, 2008 to December 31, 2008, which we
refer to as “2008.” We refer to the audited calendar year January 1, 2007 to December 31, 2007 as
“2007.” We refer to the audited calendar year January 1, 2006 to December 31, 2006 as “2006.”
Comparative financial information to 2006 is provided in this Form 10-K with respect to the
calendar year January 1, 2005 to December 31, 2005, which is unaudited and we refer to as “2005.”
Additional audited information is provided with respect to the transition period July 1, 2005
through December 31, 2005, which we refer to as the “Transition Period.” We refer to the period
beginning July 1, 2004 and ending June 30, 2005 as “fiscal 2005.”
Employees
At December 31, 2008, we had 578 full-time employees. No employees are subject to a
collective bargaining agreement. We believe we have a good relationship with our employees.
Available Information
We make available free of charge on or through our Internet website, www.Medicis.com, our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all
amendments to those
14
reports, if any, filed or furnished pursuant to Section 13(a) of 15(d) of the Securities Exchange
Act of 1934, as amended, as soon as reasonably practicable after they are electronically filed
with, or furnished to, the Securities and Exchange Commission (“SEC”). We also make available free
of charge on or through our website our Business Code of Conduct and Ethics, Corporate Governance
Guidelines, Nominating and Governance Committee Charter, Stock Option and Compensation Committee
Charter and Audit Committee Charter. The information contained on our website is not incorporated
by reference into this Annual Report on Form 10-K.
Item 1A. Risk Factors
Our statements in this amended report, other reports that we file with the SEC, our press
releases and in public statements of our officers and corporate spokespersons contain
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, Section 21 of the Securities Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995. You can identify these statements by the fact that they do not
relate strictly to historical or current events, and contain words such as “anticipate,”
“estimate,” “expect,” “project,” “intend,” “will,” “plan,” “believe,” “should,” “outlook,” “could,”
“target” and other words of similar meaning in connection with discussion of future operating or
financial performance. These include statements relating to future actions, prospective products
or product approvals, future performance or results of current and anticipated products, sales
efforts, expenses, the outcome of contingencies such as legal proceedings and financial results.
These statements are based on certain assumptions made by us based on our experience and perception
of historical trends, current conditions, expected future developments and other factors we believe
are appropriate in the circumstances. Such statements are subject to a number of assumptions,
risks and uncertainties, many of which are beyond our control. These forward-looking statements
reflect the current views of senior management with respect to future events and financial
performance. No assurances can be given, however, that these activities, events or developments
will occur or that such results will be achieved, and actual results may vary materially from those
anticipated in any forward-looking statement. Any such forward-looking statements, whether made in
this amended report or elsewhere, should be considered in context of the various disclosures made
by us about our businesses including, without limitation, the risk factors discussed below. We do
not plan to update any such forward-looking statements and expressly disclaim any duty to update
the information contained in this filing except as required by law.
We operate in a rapidly changing environment that involves a number of risks. The following
discussion highlights some of these risks and others are discussed elsewhere in this amended
report. These and other risks could materially and adversely affect our business, financial
condition, prospects, operating results or cash flows.
Risks Related To Our Business
Certain of our primary products could lose patent protection in the near future and become subject
to competition from generic forms of such products. If that were to occur, sales of those products
would decline significantly and such decline could have a material adverse effect on our results of
operations.
We depend upon patents to provide us with exclusive marketing rights for certain of our
primary products for some period of time. If product patents for our primary products expire, or
are successfully challenged by our competitors, in the United States and in other countries, we
would face strong competition from lower price generic drugs. Loss of patent protection for any of
our primary products would likely lead to a rapid loss of sales for that product, as lower priced
generic versions of that drug become available. In the case of products that contribute
significantly to our sales, the loss of patent protection could have a material adverse effect on
our results of operations.
In addition, SOLODYN® may face generic competition in the near future. We
currently have one issued patent relating to SOLODYN® that does not expire until 2018.
As part of our patent strategy, we are currently pursuing additional patent applications for
SOLODYN®. However, we cannot provide any assurance that any additional patents will be
issued relating to SOLODYN®. For example, on December 24, 2008, we received a non-final
rejection from the USPTO in SOLODYN® application number 11/695,514. During January and
February of 2009, responses to final rejection were filed in applications serial numbers
11/166,817 and 11/695,539, a response to a non-final rejection was filed in application serial
number 11/944,186, and a request for continuing examination was filed in application serial number
11/776,676. The failure to obtain additional patent protection could adversely
15
affect our ability to deter generic competition, which would adversely affect
SOLODYN® revenue and our results of operations.
On January 15, 2008, we announced that IMPAX sent us a letter advising that IMPAX has filed an
ANDA seeking FDA approval to market a generic version of SOLODYN® (minocycline HCl)
extended-release capsules. Also on January 15, 2008, IMPAX filed a lawsuit against us in the
United States District Court for the Northern District of California seeking a declaratory judgment
that our U.S. Patent No. 5,908,838 (the “‘838 Patent”) related to SOLODYN® is invalid
and is not infringed by IMPAX’s ANDA for a generic version of SOLODYN®. On April 16,
2008, the Court granted Medicis’ motion to dismiss the IMPAX complaint for lack of jurisdiction.
IMPAX appealed the Court’s order dismissing the case to the United States Court of Appeals for the
Federal Circuit. On November 26, 2008, we entered into a License and Settlement Agreement and a
Joint Development Agreement with IMPAX. In connection with the License and Settlement Agreement,
Medicis and IMPAX agreed to terminate all legal disputes between them relating to
SOLODYN®. Additionally, under terms of the License and Settlement Agreement, IMPAX has
confirmed that Medicis’ patents relating to SOLODYN® are valid and enforceable, and
cover IMPAX’s activities relating to its generic product under ANDA #90-024. Under the terms of
the License and Settlement Agreement, IMPAX has a license to market its generic versions of
SOLODYN® 45mg, 90mg and 135mg under the SOLODYN® intellectual property rights
belonging to Medicis upon the occurrence of certain events. Upon launch of its generic formulations
of SOLODYN®, IMPAX may be required to pay Medicis a royalty, based on sales of those
generic formulations by IMPAX under terms described in the License and Settlement Agreement. On
December 12, 2008, we announced that we had received a Paragraph IV Patent Certification from
IMPAX, advising it had filed an ANDA with the FDA for generic SOLODYN® in its current
forms of 45mg, 90mg and 135mg strengths. IMPAX’s certification alleged that the ‘838 Patent will
not be infringed by IMPAX’s manufacture, use or sale of the product for which the ANDA was
submitted because it has been granted a patent license by us for the ‘838 Patent. On February 3,
2009, the FDA approved IMPAX’s ANDA for generic SOLODYN®. IMPAX has not yet launched a
generic formulation of SOLODYN®.
On August 18, 2008, we announced that the United States Patent and Trademark Office (“USPTO”)
has granted a Request for Ex Parte Reexamination of our ‘838 Patent. During the reexamination
process, the USPTO will review the ‘838 Patent and could determine that the patent claims, as
written, were properly allowed. This determination would assist us in defending challenges to the
validity of the ‘838 Patent. Alternatively, the USPTO could narrow or reject certain or all of the
claims of the ‘838 Patent. Depending upon the specifics of what narrowing amendments are required
and the claims rejected, these determinations of the USPTO could result in the loss of patent
protection on SOLODYN®, which would have a material adverse impact on our results of
operations. The timing of the USPTO’s completion of the reexamination is uncertain. We believe
that the USPTO should reconfirm the validity of the ‘838 Patent. However, there can be no
guarantee as to the outcome.
Pursuant to Section 125 of the Food and Drug Administration Modernization Act (FDAMA), several
statutory provisions added to the FD&C Act by the Hatch-Waxman Amendments of 1984, including the
patent listing, certification and notice provisions and the 30-month stay provision, did not apply
to so-called “old antibiotics” such as minocycline HCl, the active ingredient in
SOLODYN®. On October 8, 2008, the President signed into law the QI Program Supplemental
Funding Act of 2008, Pub. L. No. 110-379, 122 Stat. 4075 (2008) (the “Antibiotic Act”), which
provides that notwithstanding section 125 of FDAMA or any other provision of law, the provisions of
the Hatch-Waxman Amendments shall apply to old antibiotics. On December 3, 2008, in accordance
with and pursuant to the Antibiotic Act and FDA’s recently issued Draft Guidance for Industry
entitled Submission of Patent Information for Certain Old Antibiotics (Nov. 2008) (“November 2008
Guidance”), Medicis submitted the ‘838 patent covering SOLODYN® to the FDA’s Approved
Drug Products with Therapeutic Equivalents (“the Orange Book”).
On December 8, 2008, we announced that we had received a Paragraph IV Patent Certification
from Mylan Inc. (“Mylan”) advising that Mylan’s majority owned subsidiary Matrix Laboratories
Limited (“Matrix”) has filed an ANDA with the FDA for generic SOLODYN® in its current
forms of 45mg, 90mg and 135mg strengths. Mylan has not advised us as to the timing or status of
the FDA’s review of Matrix’s filing, or whether Matrix has complied with FDA requirements for
proving bioequivalence. Mylan’s Paragraph IV Certification alleges that our ‘838 Patent is invalid,
unenforceable and/or will not be infringed by Matrix’s manufacture, use, or sale of the product for
which the ANDA was submitted.
16
On December 12, 2008, we announced that we had received a Paragraph IV Patent Certification
from both Sandoz, Inc., a division of Novartis AG (“Sandoz”), and IMPAX, advising that they have
each filed an ANDA with the FDA for generic SOLODYN® in its current forms of 45mg, 90mg
and 135mg strengths. Sandoz has not advised us as to the timing or status of the FDA’s review of
their filing, or whether they have has complied with FDA requirements for proving bioequivalence.
Sandoz’s Paragraph IV Certification alleges that our ‘838 Patent is invalid, unenforceable and/or
will not be infringed by either Sandoz’s manufacture, use, or sale of the product for which the
ANDA was submitted. IMPAX’s certification alleges that the ‘838 Patent will not be infringed by
IMPAX’s manufacture, use or sale of the product for which the ANDA was submitted because it has
been granted a patent license by us for the ‘838 Patent. As noted above, the FDA approved IMPAX’s
ANDA for generic SOLODYN® on February 3, 2009.
On December 29, 2008 we announced that we had received a Paragraph IV Patent Certification
from Barr Laboratories, Inc. (“Barr”) advising that Barr has filed an ANDA with the FDA for generic
SOLODYN® in its current forms of 45mg, 90mg and 135mg strengths. Barr has not advised
us as to the timing or status of the FDA’s review of its filing, or whether it has complied with
FDA requirements for proving bioequivalence. Barr’s Paragraph IV Certification alleges that our
‘838 Patent is invalid, unenforceable and/or will not be infringed by either Barr’s manufacture,
use, or sale of the product for which the ANDA was submitted.
On January 13, 2009, we filed suit against Mylan, Matrix, Matrix Laboratories Inc., Sandoz,
and Barr (collectively “Defendants”) in the United States District Court for the District of
Delaware seeking an adjudication that Defendants have infringed one or more claims of our ‘838
Patent by submitting to the FDA their respective ANDAs for generic versions of SOLODYN®.
The relief we requested includes a request for a permanent injunction preventing Defendants from
infringing the ‘838 patent by selling generic versions of SOLODYN®.
On February 13, 2009, we submitted a Citizen Petition to the FDA arguing that the Agency could
not approve the Mylan, Sandoz and Barr ANDAs for generic versions of SOLODYN® for thirty
(30) months pursuant to Section 505(j)(5)(B)(iii) of the FDCA because we sued the submitters of all
three ANDAs for patent infringement within 45 days of receiving notice from them of the submission
of a Paragraph IV Certification. In light of the recently enacted Antibiotic Act, we argued that
neither FDAMA nor the Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(“MMA”) stood as a barrier to SOLODYN® receiving a 30-month stay. The timing of the
FDA’s response to the Citizen Petition is uncertain. We believe the FDA should grant the Citizen
Petition. However, there can be no guarantee as to the outcome.
In addition to SOLODYN®, our other primary prescription products, including
VANOS®, may be subject to generic competition in the near future. For example, on May
1, 2008, we announced that Perrigo Israel Pharmaceuticals Ltd. (“Perrigo”) filed an ANDA with the
FDA for a generic version of VANOS®. Perrigo has not advised us as to the timing or
status of the FDA’s review of its filing. Perrigo’s certification letter sets forth allegations
that our U.S. Patent No. 6,765,001 is invalid, unenforceable and/or will not be infringed by
Perrigo’s manufacture, use, or sale of the product for which the ANDA was submitted. If any of our
primary products are rendered obsolete or uneconomical by competitive changes, including generic
competition, our results of operation would be materially and adversely affected.
If we are unable to secure and protect our intellectual property and proprietary rights, or if our
intellectual property rights are found to infringe upon the intellectual property rights of other
parties, our business could suffer.
Our success depends in part on our ability to obtain patents or rights to patents, protect
trade secrets, operate without infringing upon the proprietary rights of others, and prevent others
from infringing on our patents, trademarks, service marks and other intellectual property rights.
The patents and patent applications in which we have an interest may be challenged as to their
validity or enforceability or infringement. Any such challenges may result in potentially
significant harm to our business and enable generic entry to markets for our products. The cost of
responding to any such challenges and the cost of prosecuting infringement claims and any related
litigation, could be substantial. In addition, any such litigation also could require a
substantial commitment of our management’s time.
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On January 15, 2008, IMPAX filed a lawsuit against us in the United States District Court for
the Northern District of California seeking a declaratory judgment that our ‘838 Patent related to
SOLODYN® is invalid and is not infringed by IMPAX’s filing of an ANDA for a generic
version of SOLODYN®. On April 16, 2008, the Court granted Medicis’ motion to dismiss
the IMPAX complaint for lack of jurisdiction. IMPAX appealed the Court’s order dismissing the case
to the United States Court of Appeals for the Federal Circuit. On November 26, 2008, we entered
into a License and Settlement Agreement and a Joint Development Agreement with IMPAX. In
connection with the License and Settlement Agreement, Medicis and IMPAX agreed to terminate all
legal disputes between them relating to SOLODYN®. Additionally, under terms of the
License and Settlement Agreement, IMPAX has confirmed that Medicis’ patents relating to
SOLODYN® are valid and enforceable, and cover IMPAX’s activities relating to its generic
product under ANDA #90-024.
On August 18, 2008, we announced that the USPTO has granted a Request for Ex Parte
Reexamination of our ‘838 Patent. During the reexamination process, the USPTO will review the ‘838
Patent and could determine that the patent claims, as written, were properly allowed. This
determination would assist us in defending challenges to the validity of the ‘838 Patent.
Alternatively, the USPTO could narrow or reject certain or all of the claims of the ‘838 Patent.
Depending upon the specifics of what narrowing amendments are required and the claims rejected,
these determinations of the USPTO could have a material adverse impact on our results of
operations. The timing of the USPTO’s completion of the reexamination is uncertain. We believe
that the USPTO should reconfirm the validity of the ‘838 Patent. However, there can be no
guarantee as to the outcome.
On January 13, 2009, we filed suit against Mylan, Matrix, Matrix Laboratories Inc., Sandoz,
and Barr in the United States District Court for the District of Delaware seeking an adjudication
that Defendants have infringed one or more claims of our ‘838 Patent by submitting to the FDA their
respective ANDAs for generic versions of SOLODYN®. The relief we requested includes a
request for a permanent injunction preventing Defendants from infringing the ‘838 patent by selling
generic versions of SOLODYN®.
See Item 3 of Part I of this report, “Legal Proceedings” and Note 14, “Commitments and
Contingencies” in the notes to the consolidated financial statements under Item 15 of Part IV of
this report, “Exhibits and Financial Statement Schedules,” for information concerning our current
intellectual property litigation.
We are pursuing several United States patent applications; although we cannot be sure that any
of these patents will ever be issued. We also have acquired rights under certain patents and
patent applications in connection with our licenses to distribute products and by assignment of
rights to patents and patent applications from certain of our consultants and officers. These
patents and patent applications may be subject to claims of rights by third parties. If there are
conflicting claims to the same patent or patent application, we may not prevail and, even if we do
have some rights in a patent or patent application, those rights may not be sufficient for the
marketing and distribution of products covered by the patent or patent application.
The ownership of a patent or an interest in a patent does not always provide significant
protection. Others may independently develop similar technologies or design around the patented
aspects of our products. We only conduct patent searches to determine whether our products
infringe upon any existing patents when we think such searches are appropriate. As a result, the
products and technologies we currently market, and those we may market in the future, may infringe
on patents and other rights owned by others. If we are unsuccessful in any challenge to the
marketing and sale of our products or technologies, we may be required to license the disputed
rights, if the holder of those rights is willing to license such rights, otherwise we may be
required to cease marketing the challenged products, or to modify our products to avoid infringing
upon those rights. A claim or finding of infringement regarding one of our products could harm our
business, financial condition and results of operations. The costs of responding to infringement
claims could be substantial and could require a substantial commitment of our management’s time.
The expiration of patents may expose our products to additional competition.
We believe that the protection of our trademarks and service marks is an important factor in
product recognition and in our ability to maintain or increase market share. If we do not
adequately protect our rights in our various trademarks and service marks from infringement, their
value to us could be lost or diminished. If the marks we use are found to infringe upon the
trademark or service mark of another company, we could be forced to stop using those marks and, as
a result, we could lose the value of those marks and could be liable for damages caused by an
infringement.
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We also rely upon trade secrets, unpatented proprietary know-how and continuing technological
innovation in developing and manufacturing many of our primary products. It is our policy to
require all of our employees, consultants and advisors to enter into confidentiality agreements
prohibiting them from taking or disclosing our proprietary information and technology.
Nevertheless, these agreements may not provide meaningful protection for our trade secrets and
proprietary know-how if they are used or disclosed. Despite all of the precautions we may take,
people who are not parties to confidentiality agreements may obtain access to our trade secrets or
know-how. In addition, others may independently develop similar or equivalent trade secrets or
know-how.
We depend on licenses from others, and any loss of such licenses could harm our business, market
share and profitability.
We have acquired the rights to manufacture, use and market certain products, including certain
of our primary products. We also expect to continue to obtain licenses for other products and
technologies in the future. Our license agreements generally require us to develop a market for
the licensed products. If we do not develop these markets within specified time frames, the
licensors may be entitled to terminate these license agreements.
We may fail to fulfill our obligations under any particular license agreement for various
reasons, including insufficient resources to adequately develop and market a product, lack of
market development despite our diligence and lack of product acceptance. Our failure to fulfill
our obligations could result in the loss of our rights under a license agreement.
Our inability to continue the distribution of any particular licensed product could harm our
business, market share and profitability. Also, certain products we license are used in connection
with other products we own or license. A loss of a license in such circumstances could materially
harm our ability to market and distribute these other products.
Obtaining FDA and other regulatory approvals is time consuming, expensive and uncertain.
The research, development and marketing of our products are subject to extensive regulation by
government agencies in the U.S, particularly the FDA, and other countries. The process of
obtaining FDA and other regulatory approvals is time consuming and expensive. Clinical trials are
required, and the manufacturing of pharmaceutical products is subject to rigorous testing
procedures. We may not be able to obtain FDA approval to conduct clinical trials or to manufacture
or market any of the products we develop, acquire or license on a timely basis or at all.
Moreover, the costs to obtain approvals could be considerable, and the failure to obtain or delays
in obtaining an approval could significantly harm our business performance and financial results.
Marketing approval or clearance of a new product or new indication for an approved product may be
delayed, restricted, or denied for many reasons, including:
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determination by the FDA that the product is not safe and effective; |
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a different interpretation of preclinical and clinical data by FDA; |
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failure to obtain approval of the manufacturing process or facilities; |
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results of post-marketing studies; |
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changes in FDA policy or regulations related to product approvals; and |
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failure to comply with applicable regulatory requirements. |
No amount of time, effort, or resources invested in a new product or new indication for an
approved product can guarantee that regulatory approval will be granted.
The FDA vigorously monitors the ongoing safety of products, which can affect the approvability
of our products or the continued ability to market our products. If adverse events are associated
with products that have already been approved or cleared for marketing, such products could be
subject to increased regulatory scrutiny, changes in regulatory approval or labeling, or withdrawal
from the market. For example, the FDA recently stated it was reviewing the safety of two botulinum
toxin products currently marketed in the U.S. due to adverse reactions
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associated with use of the products. Even if pre-marketing approval from the FDA is received,
the FDA is authorized to impose post-marketing requirements such as:
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testing and surveillance to monitor the product and its continued compliance with
regulatory requirements, including cGMPs for drug and biologic products and the QSRs
for medical device products; |
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submitting products, facilities and records for inspection and, if any inspection
reveals that the product is not in compliance, prohibiting the sale of all products
from the same lot; |
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suspending manufacturing; |
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switching status from prescription to over-the-counter drug; |
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completion of post-marketing studies; |
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changes to approved product labeling; |
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advertising or marketing restrictions, including direct-to-consumer advertising; |
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Risk Evaluation and Mitigation Strategies (“REMS); |
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recalling products; and |
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withdrawing marketing clearance. |
In their regulation of advertising, the FDA and FTC from time to time issue correspondence to
pharmaceutical companies alleging that some advertising or promotional practices are false,
misleading or deceptive. The FDA has the power to impose a wide array of sanctions on companies for
such advertising practices, and the receipt of correspondence from the FDA alleging these practices
could result in the following:
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incurring substantial expenses, including fines, penalties, legal fees and costs to
comply with the FDA’s requirements; |
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changes in the methods of marketing and selling products; |
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taking FDA-mandated corrective action, which may include placing advertisements or
sending letters to physicians rescinding previous advertisements or promotion; and |
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disruption in the distribution of products and loss of sales until compliance with
the FDA’s position is obtained. |
In recent years, various legislative proposals have been offered in Congress and in some state
legislatures that include major changes in the health care system. These proposals have included
price or patient reimbursement constraints on medicines, restrictions on access to certain
products, reimportation of products from Canada or other sources and mandatory substitution of
generic for branded products. We cannot predict the outcome of such initiatives, and it is
difficult to predict the future impact of the broad and expanding legislative and regulatory
requirements affecting us.
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If we market products in a manner that violates health care fraud and abuse laws, we may be subject
to civil or criminal penalties.
Federal health care program anti-kickback statutes prohibit, among other things, knowingly and
willfully offering, paying, soliciting or receiving remuneration to induce, or in return for
purchasing, leasing, ordering or arranging for the purchase, lease or order of any health care item
or service reimbursable under Medicare, Medicaid, or other federally financed health care programs.
This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on
one hand and prescribers, purchasers and formulary managers on the other. Although there are a
number of statutory exemptions and regulatory safe harbors protecting certain common activities
from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve
remuneration intended to induce prescribing, purchasing, or recommending may be subject to scrutiny
if they do not qualify for an exemption or safe harbor. From time to time we may enter into
business arrangements (e.g. loans or investments) involving our customers and those arrangements
may be reviewed by federal and state regulators. Although we believe that we are in compliance,
our practices may be determined to fail to meet all of the criteria for safe harbor protection from
anti-kickback liability.
Federal false claims laws prohibit any person from knowingly presenting, or causing to be
presented, a false claim for payment to the federal government, or knowingly making, or causing to
be made, a false statement to get a false claim paid. Pharmaceutical companies have been
prosecuted under these laws for a variety of alleged promotional and marketing activities, such as
allegedly providing free product to customers with the expectation that the customers would bill
federal programs for the product; reporting to pricing services inflated average wholesale prices
that were then used by federal programs to set reimbursement rates; engaging in off-label promotion
that caused claims to be submitted to Medicaid for non-covered off-label uses; and submitting
inflated best price information to the Medicaid Rebate Program. The majority of states also have
statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply
to items and services reimbursed under Medicaid and other state programs, or, in several states,
apply regardless of the payor. Sanctions under these federal and state laws may include civil
monetary penalties, exclusion of a manufacturer’s products from reimbursement under government
programs, criminal fines, and imprisonment. Because of the breadth of these laws and the
narrowness of the safe harbors, it is possible that some of our business activities could be
subject to challenge under one or more of such laws.
On April 25, 2007, we entered into a Settlement Agreement with the Justice Department, the
Office of Inspector General of the Department of Health and Human Services (“OIG”) and the TRICARE
Management Activity (collectively, the “United States”) and private complainants to settle all
outstanding federal and state civil suits against us in connection with claims related to our
alleged off-label marketing and promotion of LOPROX® and LOPROX® TS products
to pediatricians during periods prior to our May 2004 disposition of our pediatric sales division
(the “Settlement Agreement”). The settlement is neither an admission of liability by us nor a
concession by the United States that its claims are not well founded. Pursuant to the Settlement
Agreement, we agreed to pay approximately $10 million to settle the matter. Pursuant to the
Settlement Agreement, the United States released us from the claims asserted by the United States
and agreed to refrain from instituting action seeking exclusion from Medicare, Medicaid, the
TRICARE Program and other federal health care programs for the alleged conduct. These releases
relate solely to the allegations related to us and do not cover individuals. The Settlement
Agreement also provides that the private complainants release us and our officers, directors and
employees from the asserted claims, and we release the United States and the private complainants
from asserted claims.
As part of the settlement, we have entered into a five-year Corporate Integrity Agreement (the
“CIA”) with the OIG to resolve any potential administrative claims the OIG may have arising out of
the government’s investigation. The CIA acknowledges the existence of our comprehensive existing
compliance program and provides for certain other compliance-related activities during the term of
the CIA, including the maintenance of a compliance program that, among other things, is designed to
ensure compliance with the CIA, federal health care programs and FDA requirements. Pursuant to the
CIA, we are required to notify the OIG, in writing, of: (i) any ongoing government investigation or
legal proceeding involving an allegation that we have committed a crime or has engaged in
fraudulent activities; (ii) any other matter that a reasonable person would consider a probable
violation of applicable criminal, civil, or administrative laws; (iii) any written report,
correspondence, or communication to the FDA that materially discusses any unlawful or improper
promotion of our products; and (iv)
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any change in location, sale, closing, purchase, or establishment of a new business unit or
location related to items or services that may be reimbursed by Federal health care programs. We
are also subject to periodic reporting and certification requirements attesting that the provisions
of the CIA are being implemented and followed, as well as certain document and record retention
mandates. We have hired a Chief Compliance Officer and created an enterprise-wide compliance
function to administer our obligations under the CIA. Failure to comply under the CIA could result
in substantial civil or criminal penalties and being excluded from government health care programs,
which could materially reduce our sales and adversely affect our financial condition and results of
operations.
On or about October 12, 2006, we and the United States Attorney’s Office for the District of
Kansas entered into a Nonprosecution Agreement wherein the government agreed not to prosecute us
for any alleged criminal violations relating to the alleged off-label marketing and promotion of
LOPROX®. In exchange for the government’s agreement not to pursue any criminal charges
against us, we agreed to continue cooperating with the government in its ongoing investigation into
whether past and present employees and officers may have violated federal criminal law regarding
alleged off-label marketing and promotion of LOPROX® to pediatricians. As a result of
the investigation, prosecutions and other proceedings, certain past and present sales and marketing
employees and officers separated from the Company. See Item 3 of Part I of this report, “Legal
Proceedings” and Note 14, “Commitments and Contingencies,” in the notes to the consolidated
financial statements listed under Item 15 of Part IV of this report, “Exhibits and Financial
Statement Schedules,” for information concerning our current litigation.
Our corporate compliance program cannot guarantee that we are in compliance with all potentially
applicable U.S. federal and state regulations and all potentially applicable foreign regulations.
The development, manufacturing, distribution, pricing, sales, marketing and reimbursement of
our products, together with our general operations, is subject to extensive federal and state
regulation in the United States and in foreign countries. While we have developed and instituted a
corporate compliance program based on what we believe to be current best practices, we cannot
assure you that we or our employees are or will be in compliance with all potentially applicable
federal, state or foreign regulations and/or laws or the Corporate Integrity Agreement we entered
into with the Office of Inspector General of the Department of Health and Human Services. If we
fail to comply with the Corporate Integrity Agreement or any of these regulations and/or laws a
range of actions could result, including, but not limited to, the failure to approve a product
candidate, restrictions on our products or manufacturing processes, including withdrawal of our
products from the market, significant fines, exclusion from government healthcare programs or other
sanctions or litigation.
We depend on a limited number of customers, and if we lose any of them, our business could be
harmed.
Our customers include some of the United States’ leading wholesale pharmaceutical
distributors, such as Cardinal, McKesson, and major drug chains. We recently entered into
distribution services agreements with McKesson and Cardinal. During 2008, McKesson and Cardinal
accounted for 45.8% and 21.2%, respectively, of our net revenues. During 2007, McKesson and
Cardinal accounted for 52.2% and 16.9%, respectively, of our net revenues. During 2006, McKesson
and Cardinal accounted for 56.8% and 19.3%, respectively, of our net revenues. The loss of either
of these customers’ accounts or a material reduction in their purchases could harm our business,
financial condition or results of operations. McKesson is our sole distributor of our
RESTYLANE® and PERLANE® products in the United States and Canada.
The consolidation of drug wholesalers could increase competition and pricing pressures throughout
the pharmaceutical industry.
We sell our pharmaceutical products primarily through major wholesalers. These customers
comprise a significant part of the distribution network for pharmaceutical products in the United
States. This distribution network is continuing to undergo significant consolidation marked by
mergers and acquisitions. As a result, a smaller number of large wholesale distributors control a
significant share of the market. In addition, the number of independent drug stores and small
chains has decreased as retail consolidation has occurred. Further consolidation among, or any
financial difficulties of, distributors or retailers could result in the combination or elimination
of warehouses which may result in product returns to us, cause a reduction in the inventory levels
of distributors and retailers, result in reductions in purchases of our products or increase
competitive and pricing pressures on pharmaceutical manufacturers, any of which could harm our
business, financial condition and results of operations.
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We derive a majority of our sales revenue from our primary products, and any factor adversely
affecting sales of these products would harm our business, financial condition and results of
operations.
We believe that the prescription volume of our primary prescription products, in particular,
SOLODYN®, VANOS® and ZIANA®, and sales of our dermal aesthetic
products, RESTYLANE® and PERLANE®, will continue to constitute a significant
portion of our sales revenue for the foreseeable future. Accordingly, any factor adversely
affecting our sales related to these products, individually or collectively, could harm our
business, financial condition and results of operations.
We are experiencing intense competition in the dermal filler market. Other dermal filler
products, such as Juvéderm®, Evolence®, Prevelle® Silk,
Radiesse®, Sculptra® and Elevess® have also recently been approved
by the FDA. Patients may differentiate these products from RESTYLANE® and
PERLANE® based on price, efficacy and/or duration, which may appeal to some patients.
In addition, there are several dermal filler products under development and/or in the FDA pipeline
for approval which claim to offer equivalent or greater facial aesthetic benefits to
RESTYLANE® and PERLANE® and, if approved, the companies producing such
products could charge less to doctors for their products.
Each of IMPAX, Mylan, Sandoz and Barr have filed with the FDA to obtain approval to introduce
a generic form of SOLODYN®. On January 13, 2009, we filed suit against Mylan, Matrix,
Matrix Laboratories Inc., Sandoz, and Barr (collectively “Defendants”) in the United States
District Court for the District of Delaware seeking an adjudication that Defendants have infringed
one or more claims of our ‘838 Patent by submitting to the FDA their respective ANDAs for generic
versions of SOLODYN®. The relief we requested includes a request for a permanent
injunction preventing Defendants from infringing the ‘838 patent by selling generic versions of
SOLODYN®. On February 3, 2009, the FDA approved IMPAX’s ANDA for generic
SOLODYN®. IMPAX has not yet launched a generic formulation of SOLODYN®.
There can be no assurance that we will prevail in patent litigation or that these competitors will
not successfully introduce products that would cause a loss of our market share and reduce our
revenues.
On May 1, 2008, we announced that Perrigo filed an ANDA with the FDA for a generic version of
VANOS®. Perrigo has not advised us as to the timing or status of the FDA’s review of
its filing. Perrigo’s certification letter sets forth allegations that our U.S. Patent No.
6,765,001 is invalid, unenforceable and/or will not be infringed by Perrigo’s manufacture, use, or
sale of the product for which the ANDA was submitted.
Sales related to our primary prescription products, including SOLODYN®,
VANOS® and ZIANA®, and sales of our dermal restorative products,
RESTYLANE® and PERLANE® could also be adversely affected by other factors,
including:
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manufacturing or supply interruptions; |
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the development of new competitive pharmaceuticals and technological advances to
treat the conditions addressed by our primary products, including the introduction of
new products into the marketplace; |
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generic competition; |
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marketing or pricing actions by one or more of our competitors; |
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regulatory action by the FDA and other government regulatory agencies; |
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importation of other dermal fillers; |
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changes in the prescribing or procedural practices of dermatologists, plastic
surgeons and/or podiatrists; |
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changes in the reimbursement or substitution policies of third-party payors or
retail pharmacies; |
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product liability claims; |
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the outcome of disputes relating to trademarks, patents, license agreements and
other rights; |
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changes in state and federal law that adversely affect our ability to market our
products to dermatologists, plastic surgeons and/or podiatrists; and |
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restrictions on travel affecting the ability of our sales force to market to
prescribing physicians and plastic surgeons in person. |
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Our continued growth depends upon our ability to develop new products.
Our ability to develop new products is the key to our continued growth. Our research and
development activities, as well as the clinical testing and regulatory approval process, which must
be completed before commercial sales can commence, will require significant commitments of
personnel and financial resources. We cannot assure you that we will be able to develop products
or technologies in a timely manner, or at all. Delays in the research, development, testing or
approval processes will cause a corresponding delay in revenue. For example, on January 7, 2009,
Ipsen announced that the FDA provided notification to Ipsen that the Prescription Drug User Fee Act
(PDUFA) action date for the BLA for RELOXIN®, in aesthetics has been extended to April
13, 2009.
We may not be able to identify and acquire products, technologies and businesses on acceptable
terms, if at all, which may constrain our growth.
Our strategy for continued growth includes the acquisition of products, technologies and
businesses. These acquisitions could involve acquiring other pharmaceutical companies’ assets,
products or technologies. In addition, we may seek to obtain licenses or other rights to develop,
manufacture and distribute products. We cannot be certain that we will be able to identify
suitable acquisition or licensing candidates, if they will be accretive in the near future, or if
any will be available on acceptable terms. Other pharmaceutical companies, with greater financial,
marketing and sales resources than we have, are also attempting to grow through similar acquisition
and licensing strategies. Because of their greater resources, our competitors may be able to offer
better terms for an acquisition or license than we can offer, or they may be able to demonstrate a
greater ability to market licensed products. In addition, even if we identify potential
acquisitions and enter into definitive agreements relating to such acquisitions, we may not be able
to consummate planned acquisitions on the terms originally agreed upon or at all. For example, on
March 20, 2005, we entered into an agreement and plan of merger with Inamed, pursuant to which we
agreed to acquire Inamed. On December 13, 2005, we entered into a merger termination agreement
with Inamed following Allergan Inc.’s exchange offer for all outstanding shares of Inamed, which
was commenced on November 21, 2005.
We reevaluate our research and development efforts regularly to assess whether our efforts to
develop a particular product or technology are progressing at a rate that justifies our continued
expenditures. On the basis of these reevaluations, we have abandoned in the past, and may abandon
in the future, our efforts on a particular product or technology. Products that we research or
develop may not be successfully commercialized. If we fail to take a product or technology from
the development stage to market on a timely basis, we may incur significant expenses without a
near-term financial return.
We have in the past, and may in the future, supplement our internal research and development
by entering into research and development agreements with other pharmaceutical companies. We may,
upon entering into such agreements, be required to make significant up-front payments to fund the
projects. We cannot be sure, however, that we will be able to locate adequate research partners or
that supplemental research will be available on terms acceptable to us in the future. If we are
unable to enter into additional research partnership arrangements, we may incur additional costs to
continue research and development internally or abandon certain projects. Even if we are able to
enter into collaborations, we cannot assure you that these arrangements will result in successful
product development or commercialization.
Our products may not gain market acceptance.
There is a risk that our products may not gain market acceptance among physicians, patients
and the medical community generally. The degree of market acceptance of any medical device or
other product that we develop will depend on a number of factors, including demonstrated clinical
efficacy and safety, cost-effectiveness, potential advantages over alternative products, and our
marketing and distribution capabilities. Physicians will not recommend our products until clinical
data or other factors demonstrate their safety and efficacy compared to other competing products.
Even if the clinical safety and efficacy of using our products is established, physicians may elect
to not recommend using them for any number of other reasons, including whether our products best
meet the particular needs of the individual patient.
Our operating results and financial condition may fluctuate.
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Our operating results and financial condition may fluctuate from quarter to quarter and year
to year for a number of reasons. The following events or occurrences, among others, could cause
fluctuations in our financial performance from period to period:
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development and launch of new competitive products, including OTC or generic
competitor products; |
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the timing and receipt of FDA approvals or lack of approvals; |
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changes in the amount we spend to develop, acquire or license new products,
technologies or businesses; |
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costs related to business development transactions; |
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untimely contingent research and development payments under our third-party product
development agreements; |
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changes in the amount we spend to promote our products; |
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delays between our expenditures to acquire new products, technologies or businesses
and the generation of revenues from those acquired products, technologies or
businesses; |
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changes in treatment practices of physicians that currently prescribe our products; |
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changes in reimbursement policies of health plans and other similar health insurers,
including changes that affect newly developed or newly acquired products; |
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increases in the cost of raw materials used to manufacture our products; |
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manufacturing and supply interruptions, including failure to comply with
manufacturing specifications; |
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changes in prescription levels and the effect of economic changes in hurricane and
other natural disaster-affected areas; |
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the impact on our employees, customers, patients, manufacturers, suppliers, vendors,
and other companies we do business with and the resulting impact on the results of
operations associated with the possible mutation of the avian form of influenza from
birds or other animal species to humans, current human morbidity, and mortality levels
persist following such potential mutation; |
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the mix of products that we sell during any time period; |
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lower than expected demand for our products; |
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our responses to price competition; |
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expenditures as a result of legal actions, including the defense of our patents and
other intellectual property; |
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market acceptance of our products; |
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the impairment and write-down of goodwill or other intangible assets; |
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implementation of new or revised accounting or tax rules or policies; |
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disposition of primary products, technologies and other rights; |
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termination or expiration of, or the outcome of disputes relating to, trademarks,
patents, license agreements and other rights; |
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increases in insurance rates for existing products and the cost of insurance for new
products; |
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general economic and industry conditions, including changes in interest rates
affecting returns on cash balances and investments that affect customer demand, and our
ability to recover quickly from such economic and industry conditions; |
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seasonality of demand for our products; |
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our level of research and development activities; |
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new accounting standards and/or changes to existing accounting standards that would
have a material effect on our consolidated financial position, results of operations or
cash flows; |
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costs and outcomes of any tax audits or any litigation involving intellectual
property, customers or other issues; |
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failure by us or our contractors to comply with all applicable FDA and other
regulatory requirements; |
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the imposition of a REMS program requirement on any of our products; |
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adverse decisions by FDA advisory committees related to any of our products; and |
25
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timing of payments and/or revenue recognition related to licensing agreements and/or
strategic collaborations. |
As a result, we believe that period-to-period comparisons of our results of operations are not
necessarily meaningful, and these comparisons should not be relied upon as an indication of future
performance. The above factors may cause our operating results to fluctuate and adversely affect
our financial condition and results of operations.
We face significant competition within our industry.
The pharmaceutical and dermal aesthetics industries are highly competitive. Competition in our
industry occurs on a variety of fronts, including:
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developing and bringing new products to market before others; |
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developing new technologies to improve existing products; |
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developing new products to provide the same benefits as existing products at less
cost; and |
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developing new products to provide benefits superior to those of existing products. |
The intensely competitive environment requires an ongoing, extensive search for technological
innovations and the ability to market products effectively. Consequently, we must continue to
develop and introduce products in a timely and cost-efficient manner to effectively compete in the
marketplace and maintain our revenue and gross margins.
Our competitors vary depending upon product categories. Many of our competitors are large,
well-established companies in the fields of pharmaceuticals, chemicals, cosmetics and health care.
Among our largest competitors are Allergan, Galderma, Johnson & Johnson, Sanofi-Aventis, Stiefel
Laboratories, Warner Chilcott and others.
Many of these companies have greater resources than we do to devote to marketing, sales,
research and development and acquisitions. As a result, they have a greater ability to undertake
more extensive research and development, marketing and pricing policy programs. It is possible
that our competitors may develop new or improved products to treat the same conditions as our
products or make technological advances reducing their cost of production so that they may engage
in price competition through aggressive pricing policies to secure a greater market share to our
detriment. These competitors also may develop products that make our current or future products
obsolete. Any of these events could significantly harm our business, financial condition and
results of operations, including reducing our market share, gross margins, and cash flows.
We sell and distribute prescription brands, medical devices and over-the-counter products.
Each of these products competes with products produced by others to treat the same conditions.
Several of our prescription products compete with generic pharmaceuticals, which claim to offer
equivalent benefit at a lower cost. In some cases, insurers and other health care payment
organizations try to encourage the use of these less expensive generic brands through their
prescription benefits coverage and reimbursement policies. These organizations may make the
generic alternative more attractive to the patient by providing different amounts of reimbursement
so that the net cost of the generic product to the patient is less than the net cost of our
prescription brand product. Aggressive pricing policies by our generic product competitors and the
prescription benefits policies of third party payors could cause us to lose market share or force
us to reduce our gross margins in response.
There are several dermal filler products under development and/or in the FDA pipeline for
approval which claim to offer equivalent or greater facial aesthetic benefits to
RESTYLANE® and PERLANE® and if approved, the companies producing such
products could charge less to doctors for their products.
Our investments in other companies and our collaborations with companies could adversely affect our
results of operations and financial condition.
26
We have made substantial investments in, and entered into significant collaborations with,
other companies. We may use these and other methods to develop or commercialize products in the
future. These arrangements typically involve other pharmaceutical companies as partners that may
be competitors of ours in certain markets. In many instances, we will not control these companies
or collaborations, and cannot assure you that these ventures will be profitable or that we will not
lose any or all of our invested capital. If these investments and collaborations are unsuccessful,
our results of operations could materially suffer.
Our profitability is impacted by our continued participation in governmental pharmaceutical pricing
programs.
In order for our products to receive reimbursement by state Medicaid programs, we must
participate in the Medicaid drug rebate program. Participation in the program requires us to
provide a rebate for each unit of our products that is reimbursed by Medicaid. Rebate amounts for
our products are determined by a statutory formula that is based on prices defined by statute:
average manufacturer price (“AMP”), which we must calculate for all products that are covered
outpatient drugs under the Medicaid program, and best price, which we must calculate only for those
of our covered outpatient drugs that are innovator products. We are required to report AMP and
best price for each of our covered outpatient drugs to the government on a regular basis. In July
2007, the Centers for Medicare and Medicaid Services (“CMS”), the federal agency that is
responsible for administering the Medicaid drug rebate program, issued a final rule that, among
other things, clarifies how manufacturers must calculate both AMP and best price and implements new
requirements under the Deficit Reduction Act of 2005 on the use of AMP to calculate federal upper
limits on pharmacy reimbursement amounts under the Medicaid program. These upper limits are used
to determine ceilings placed on the amounts that state Medicaid programs can pay for certain
prescription drugs using federal dollars. We cannot predict the full impact of these changes,
which became effective in part on January 1, 2007 and in part on October 1, 2007, on our business,
nor can we predict whether there will be additional federal legislative or regulatory proposals to
modify current Medicaid rebate rules.
To receive reimbursement under state Medicaid programs and the Medicare Part B program for our
products, we also are required by federal law to provide discounts under other pharmaceutical
pricing programs. For example, we are required to enter into a Federal Supply Schedule (“FSS”)
contract with the Department of Veterans Affairs (“VA”) under which we must make our covered drugs
available to the “Big Four” federal agencies — the VA, the Department of Defense, the Public
Health Service, and the Coast Guard — at pricing that is capped pursuant to a statutory Federal
ceiling price (“FCP”) formula set forth in the Veterans Health Care Act of 1992 (“VHCA”). The FCP
is based on a weighted average wholesaler price known as the “non-federal average manufacturer
price,” which manufacturers are required to report on a quarterly and annual basis to the VA. FSS
contracts are federal procurement contracts that include standard government terms and conditions
and separate pricing for each product. In addition to the Big Four agencies, all other federal
agencies and some non-federal entities are authorized to access FSS contracts. FSS contractors are
permitted to charge FSS purchasers other than the Big Four agencies “negotiated pricing” for
covered drugs that is not capped by the VHCA formula; instead, such pricing is negotiated based on
a mandatory disclosure of the contractor’s commercial “most favored customer” pricing. Medicis
chooses to offer one single FCP-based FSS contract price for each product to the Big Four agencies
as well as all to other FSS purchasers. All items on FSS contracts are subject to a standard FSS
contract clause that requires FSS contract price reductions under certain circumstances where
pricing to an agreed “tracking customer” is reduced.
To receive reimbursement under state Medicaid programs and the Medicare Part B program for our
products, we also are required by federal law to provide discounted purchase prices under the
Public Health Service Drug Pricing Program to certain categories of entities defined by statute.
The formula for determining the discounted purchase price is defined by statute and is based on the
AMP and rebate amount for a particular product as calculated under the Medicaid drug rebate
program, discussed above. To the extent that the statutory and regulatory definitions of AMP and
the Medicaid rebate amount change as a result of the Deficit Reduction Act and final rule discussed
above, these changes also could impact the discounted purchase prices that we are obligated to
provide under this program. We cannot predict the full impact of these changes, which became
effective in part on January 1, 2007 and in part on October 1, 2007, on our business, nor can we
predict whether there will be additional federal legislative or regulatory proposals to modify this
program or current Medicaid rebate rules which then could impact this program as well.
27
Our profitability may be impacted by our ongoing review of our prior reports under certain Federal
pharmaceutical pricing programs.
Under the terms of our Medicaid drug rebate program agreement and our VA FSS contract and
related pricing agreements required under the Veterans Health Care Act of 1992, we are required to
accurately report our pharmaceutical pricing data, which is based, in part, on accurate
classifications of our customers’ classes of trade. On May 1, 2007, and on May 15, 2007, we
notified the U.S. Department of Health and Human Services and the Department of Veterans Affairs,
respectively, that we may have misclassified certain of our customers’ classes of trade, which
could affect the prices previously reported under the Medicaid drug rebate program and/or prices on
our VA FSS contract. We have reviewed this issue and have identified certain customer class of
trade misclassifications.
Based on this finding, we are undertaking a review and recalculation of our Non-Federal
Average Manufacturer Prices (“Non-FAMPs”) and related Federal Ceiling Prices, Average Manufacturer
Prices (“AMPs”), and Best Prices (“BPs”) for a period going back at least (3) years from the
expected completion date of the recalculation to determine the impact, if any, that
reclassification of customers to appropriate classes of trade might have on these reported prices.
In doing the recalculation, we will generally review the methodologies for computing the reported
prices, the classification of products under the various programs, and any other potentially
significant issues identified in the course of the review. It is unclear whether any issue that
may be identified during this review may result in any changes to our Medicaid rebate liability
and/or Public Health Service Drug Pricing Program prices for prior quarters, or any penalties, or
whether any such changes or penalties would have a material impact on our business, financial
condition, results of operations or cash flows.
In addition, we conducted a review and recalculation of our Non-Federal Average Manufacturer
Prices (“Non-FAMPs”) and Federal Ceiling Prices (“FCPs”) for a period spanning the duration of our
current FSS contract to determine what, if any, impact reclassification of customers to appropriate
classes of trade and any other issues identified in the course of the review might have on these
reported prices. In doing the recalculation, we assigned all customers to an appropriate class of
trade, implemented a revised calculation methodology, and addressed all other issues identified in
the course of the review. Our review also involved assessment of compliance with the FSS Price
Reductions Clause for the products on our current FSS contract.
On September 15, 2008, we submitted a report to the VA detailing the recalculations and the
impact figures associated with overcharges under the current FSS contract. The submission showed
liability in the amount of $121,646, resulting from overcharges under our FSS contract through July
31, 2008. On December 18, 2008, we submitted a supplement to the September 15 submission, which,
based on certain issues uncovered subsequent to the September 15, 2008 submission, showed an
additional $61,459 in overcharges. The VA has informed us that our submission is currently under
review. Upon VA approval of our submissions, we will calculate the impact, if any, associated
with August — December 2008.
We will be unable to meet our anticipated development and commercialization timelines if clinical
trials for our products are unsuccessful, delayed, or additional information is required by the
FDA.
The production and marketing of our products and our ongoing research and development,
pre-clinical testing and clinical trials activities are subject to extensive regulation and review
by numerous governmental authorities. Before obtaining regulatory approvals for the commercial
sale of any products, we and/or our partners must demonstrate through pre-clinical testing and
clinical trials that our products are safe and effective for use in humans. Conducting clinical
trials is a lengthy, time-consuming and expensive process that may be subject to unexpected delays.
In addition to testing and approval procedures, extensive regulations also govern marketing,
manufacturing, distribution, labeling and record-keeping procedures.
28
Completion of clinical trials may take several years or more. Our commencement and rate of
completion of clinical trials may be delayed by many factors, including:
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lack of efficacy during the clinical trials; |
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unforeseen safety issues; |
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severe or harmful side effects; |
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failure to obtain necessary proprietary rights; |
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shortage or lack of supply sufficient to complete studies; |
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the decision to modify the product; |
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lack of economical pathway to manufacture and commercialize product; |
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cost-effectiveness of continued product development; |
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slower than expected patient recruitment; |
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failure of Medicis, investigators, or other contractors to strictly adhere to
federal regulations governing the conduct and data collection procedures involved in
clinical trials; |
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development of issues that might delay or impede performance by a contractor; |
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errors in clinical documentation or at the clinical locations; |
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non-acceptance by the FDA of our NDAs, ANDAs or BLAs; |
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government or regulatory delays. For example, on January 7, 2009, Ipsen announced
that the FDA provided notification to Ipsen that the PDUFA action date for the BLA for
RELOXIN®, in aesthetics has been extended to April 13, 2009; and |
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unanticipated requests from the FDA for new or additional information. |
The results from pre-clinical testing and early clinical trials are often not predictive of
results obtained in later clinical trials. A number of new products have shown promising results
in clinical trials, but subsequently failed to establish sufficient safety and efficacy data to
obtain necessary regulatory approvals. Data obtained from pre-clinical and clinical activities are
susceptible to varying interpretations, which may delay, limit or prevent regulatory approval. In
addition, regulatory delays or rejections may be encountered as a result of many factors, including
perceived defects in the design of the clinical trials and changes in regulatory policy during the
period of product development. Any delays in, or termination of, our clinical trials could
materially and adversely affect our development and commercialization timelines, which could
adversely affect our financial condition, results of operations and cash flows.
Downturns in general economic conditions may adversely affect our financial condition, results of
operations and cash flows.
Our business, and in particular our dermal restorative and branded prescription products, have
been and are expected to continue to be adversely affected by downturns in general economic
conditions. Economic conditions such as employment levels, business conditions, interest rates,
energy and fuel costs, consumer confidence and tax rates could change consumer purchasing habits or
reduce personal discretionary spending. A reduction in consumer spending may have an adverse
impact on our financial condition, results of operations and cash flows. In addition, our ability
to meet our expected financial performance is dependent upon our ability to rapidly recover from
downturns in general economic conditions.
Recent global market and economic conditions have been unprecedented and challenging with
tighter credit conditions and recession in most major economies continuing into 2009. Continued
concerns about the systemic impact of potential long-term and wide-spread recession, energy costs,
geopolitical issues, the availability and cost of credit, and the global housing and mortgage
markets have contributed to increased market volatility and diminished expectations for western and
emerging economies. In the second half of 2008, added concerns fueled by the U.S. government
conservatorship of the Federal Home Loan Mortgage Corporation and the Federal National Mortgage
Association, the declared bankruptcy of Lehman Brothers Holdings Inc., the U.S. government
financial assistance to American International Group Inc., Citibank, Bank of America and other
federal government interventions in the U.S. financial system lead to increased market uncertainty
and instability in both U.S. and international capital and credit markets. These conditions,
combined with volatile oil prices, declining business and consumer confidence and increased
unemployment, have contributed to volatility of unprecedented levels.
29
As a result of these market conditions, the cost and availability of credit has been and may
continue to be adversely affected by illiquid credit markets and wider credit spreads. Concern
about the stability of the markets generally and the strength of counterparties specifically has
led many lenders and institutional investors to reduce, and in some cases, cease to provide credit
to businesses and consumers. These factors have led to a decrease in spending by businesses and
consumers alike, and a corresponding decrease in global infrastructure spending. Continued
turbulence in the U.S. and international markets and economies and prolonged declines in business
consumer spending may adversely affect our liquidity and financial condition, and the liquidity and
financial condition of our customers, including our ability to refinance maturing liabilities and
access the capital markets to meet liquidity needs.
The current condition of the credit markets may not allow us to secure financing for potential
future activities on satisfactory terms, or at all.
Our existing cash and short-term investments are available for dividends, strategic
investments, acquisitions of companies or products complimentary to our business, the repayment of
outstanding indebtedness, repurchases of our outstanding securities and other potential large-scale
needs. We may consider incurring additional indebtedness and issuing additional debt or equity
securities in the future to fund potential acquisitions or investments, to refinance existing debt
or for general corporate purposes. As a result of recent subprime loan losses and write-downs, as
well as other economic trends in the credit market industry, we may not be able to secure
additional financing for future activities on satisfactory terms, or at all, which may adversely
affect our financial condition and results of operations. In addition, while we believe existing
cash and short-term investments, together with funds generated from operations, should be
sufficient to meet operating requirements for the foreseeable future, our cash balances decreased
materially during 2008 due to the repurchase of $283.7 million of our 1.5% Contingent Convertible
Senior Notes Due 2033 and the $150.0 million payment of the initial purchase price for our
acquisition of LipoSonix, which could adversely affect our ability to obtain financing.
Negative conditions in the credit markets may impair the liquidity of a portion of our short-term
and long-term investments.
Our short-term and long-term investments consist of corporate and various government agency
and municipal debt securities and auction rate floating securities. As of December 31, 2008, our
investments included $38.2 million of auction rate floating securities. Our auction rate floating
securities are debt instruments with a long-term maturity and with an interest rate that is reset
in short intervals through auctions. The recent negative conditions in the credit markets have
prevented some investors from liquidating their holdings, including their holdings of auction rate
floating securities. During the three months ended March 31, 2008, we were informed that there was
insufficient demand at auction for the auction rate floating securities. As a result, these
affected auction rate floating securities are now considered illiquid, and we could be required to
hold them until they are redeemed by the holder at maturity. We may not be able to liquidate the
securities until a future auction on these investments is successful. As a result of the lack of
liquidity of these investments, we recorded an other-than-temporary impairment loss of $6.4 million
during 2008, based on our estimate of the fair value of these investments. We could be required to
record further impairment losses in the future, depending on market conditions.
30
If Q-Med is unable to protect its intellectual property and proprietary rights with respect to our
dermal filler products, our business could suffer.
RESTYLANE®,
PERLANE®, RESTYLANE FINE LINESTM and RESTYLANE
SUBQTM currently have patent protection in the United States until 2015, and the
exclusivity period of the license granted to us by Q-Med will terminate on the later of (i) the
expiration of the last patent covering the products or (ii) upon the licensed know-how becoming
publicly known. If the validity or enforceability of these patents is successfully challenged, the
cost to us could be significant and our business may be harmed. For example, if any such
challenges are successful, Q-Med may be unable to supply products to us. As a result, we may be
unable to market, distribute and commercialize the products or it may no longer be profitable for
us to do so.
We may not be able to collect all scheduled license payments from BioMarin.
As part of our asset purchase agreement, license agreement and securities purchase agreement
with BioMarin Pharmaceutical Inc. (“BioMarin”) discussed in Note 9 to our consolidated financial
statements, BioMarin will make license payments to us of $1.5 million per quarter for the two
quarters beginning in January 2009. While we did receive all scheduled quarterly license payments
during 2008, 2007 and 2006, we cannot give any assurances as to BioMarin’s continuing ability to
make these payments to us. Currently, our revenue recognition of these payments is on a cash
basis. In addition, while we expect BioMarin to make the final payment of $70.6 million to us
during the third quarter of 2009 for the purchase of all of the outstanding shares of Ascent
Pediatrics, we cannot give any assurances as to BioMarin’s ability to make this payment. If
BioMarin defaults on its obligations to make the required payments, we may be forced to incur
indebtedness or otherwise reallocate our financial resources to cover the loss of these expected
cash payments.
We depend upon our key personnel and our ability to attract, train, and retain employees.
Our success depends significantly on the continued individual and collective contributions of
our senior management team, and Jonah Shacknai, our Chairman and Chief Executive Officer, in
particular. While we have entered into employment agreements with many members of our senior
management team, including Mr. Shacknai, the loss of the services of any member of our senior
management for any reason or the inability to hire and retain experienced management personnel
could adversely affect our ability to execute our business plan and harm our operating results. In
addition, our future success depends on our ability to hire, train and retain skilled employees.
Competition for these employees is intense.
We may acquire technologies, products and companies in the future and these acquisitions could
disrupt our business and harm our financial condition and results of operations. In addition, we
may not obtain the benefits that the acquisitions were intended to create.
As part of our business strategy, we regularly consider and, as appropriate, make acquisitions
(whether by acquisition, license or otherwise) of technologies, products and companies that we
believe are complementary to our business. Acquisitions typically entail many risks and could
result in difficulties in integrating the operations, personnel, technologies, products and
companies acquired, and may result in significant charges to earnings. If we are unable to
successfully integrate our acquisitions with our existing business, or we otherwise make an
acquisition that does not result in the benefits that we anticipated, our business, results of
operations, financial condition and cash flows could be materially and adversely affected, which
would adversely affect our ability to develop and introduce new products and the market price of
our stock. In addition, in connection with acquisitions, we could experience disruption in our
business or employee base, or key employees of companies that we acquire may seek employment
elsewhere, including with our competitors. Furthermore, the products of companies we acquire may
overlap with our products or those of our customers, creating conflicts with existing relationships
or with other commitments that are detrimental to the combined businesses.
31
We may not be able to successfully integrate the operations of LipoSonix.
We are currently integrating the operations of LipoSonix into our own. There are inherent
challenges in integrating the operations that could result in a delay or the failure to achieve the
anticipated synergies and, therefore, any potential cost savings and increases in earnings. Issues
that must be addressed in integrating the operations of LipoSonix into our own include, among other
things:
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conforming standards, controls, procedures and policies, business cultures and
compensation structures between the companies; |
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conforming information technology and accounting systems; |
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consolidating corporate and administrative infrastructures; |
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consolidating sales and marketing operations; |
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retaining existing customers and attracting new customers; |
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retaining key employees; |
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identifying and eliminating redundant and underperforming operations and assets; |
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minimizing the diversion of management’s attention from ongoing business concerns; |
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coordinating geographically dispersed organizations; |
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managing tax costs or inefficiencies associated with integrating the operations of
the combined company; and |
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making any necessary modifications to operating control standards to comply with the
Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder. |
If we are not able to adequately address these challenges, we may not realize the anticipated
benefits of the integration of the companies. Actual cost and synergies, if achieved at all, may
be lower than we expect and may take longer to achieve than we anticipate.
We may not realize all of the anticipated benefits of our acquisition of LipoSonix.
Our ability to realize the anticipated benefits of our acquisition of LipoSonix could be
affected by a number of factors, including:
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our ability to attain regulatory approvals of LipoSonix’s product both in the United
States and worldwide, and the timing of such approvals; |
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the efficacy of LipoSonix’s technology; |
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market acceptance of LipoSonix’s technology; |
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increases or decreases in the expected costs to be incurred in connection with the
research and development, clinical trials, regulatory approvals, commercialization and
marketing of the LipoSonix technology; |
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the anticipated size of the markets and demand of the LipoSonix technology; |
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our ability to integrate the operations of LipoSonix with our operations; |
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our ability to retain key personnel of LipoSonix; and |
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our ability to effectively compete in the liposuction marketplace. |
We rely on third parties to conduct business operations outside of the U.S., and we may be
adversely affected if they act in violation of the U.S. Foreign Corrupt Practices Act or other
anti-bribery laws.
The U.S. Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions
prohibit companies and their agents from making improper payments to government officials for the
purpose of obtaining or retaining business. These laws are complex and often difficult to
interpret and apply, and in certain cases, local business practices may conflict with strict
adherence to anti-bribery laws. Our policies and contractual arrangements are designed to maintain
compliance with these anti-bribery laws. We also provide training to relevant employees and agents
regarding compliance with anti-bribery laws. We cannot guarantee that our policies and procedures,
contractual obligations, and training programs will prevent reckless or criminal acts committed by
our employees or agents. Violations may result in criminal and civil penalties, including fines,
imprisonment, loss
32
of our export licenses, suspension of our ability to do business with the federal government,
denial of government reimbursement for our products, and exclusion from participation in government
healthcare programs. Allegations or evidence that we or our agents have violated these laws could
disrupt our business and subject us to criminal or civil enforcement actions. Such action could
have a material adverse effect on our business.
Our success depends on our ability to manage our growth.
We have experienced a period of rapid growth from both acquisitions and internal expansion of
our operations. This growth has placed significant demands on our human and financial resources.
We must continue to improve our operational, financial and management information controls and
systems and effectively motivate, train and manage our employees to properly manage this growth.
If we do not manage this growth effectively, maintain the quality of our products despite the
demands on our resources and retain key personnel, our business could be harmed.
We rely on others to manufacture our products.
Currently, we rely on third party manufacturers for much of our product manufacturing needs.
All third party manufacturers are required by law to comply with the FDA’s regulations, including
the cGMP regulations (for drugs and biologics) and the QSR (for medical devices), as applicable.
These regulations set forth standards for both quality assurance and quality control. Third party
manufacturers also must maintain records and other documentation as required by applicable laws and
regulations. In addition to a legal obligation to comply, our third party manufacturers are
contractually obligated to comply with all applicable laws and regulations. However, we cannot
guarantee that third party manufacturers will ensure compliance with all applicable laws and
regulations. Failure of a third party manufacturer to maintain compliance with applicable laws and
regulations could result in decreased sales of our products and decreased revenues. Failure of a
third party manufacturer to maintain compliance with applicable laws and regulations also could
result in reputational harm to Medicis and potentially subject us to sanctions, including:
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delays, warning letters, and fines; |
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product recalls or seizures; |
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injunctions on sales; |
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refusal of FDA to review pending applications; |
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total or partial suspension of production; |
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withdrawal of prior marketing approvals or clearances; and |
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civil penalties and criminal prosecutions. |
Typically, our manufacturing contracts are short-term. We are dependent upon renewing
agreements with our existing manufacturers or finding replacement manufacturers to satisfy our
requirements. As a result, we cannot be certain that manufacturing sources will continue to be
available or that we can continue to outsource the manufacturing of our products on reasonable or
acceptable terms.
The underlying cost to us for manufacturing our products is established in our agreements with
these outside manufacturers. Because of the short-term nature of these agreements, our expenses
for manufacturing are not fixed and could change from contract to contract. If the cost of
production increases, our gross margins could be negatively affected.
In addition, we rely on outside manufacturers to provide us with an adequate and reliable
supply of our products on a timely basis and in accordance with good manufacturing standards and
applicable product specifications. As a result, we are subject to and have little or no control
over delays and quality control lapses that our third-party manufacturers and suppliers may suffer.
For example, in early May 2008, we became aware that our third-party manufacturer and supplier of
SOLODYN® mistakenly filled at least one bottle labeled as SOLODYN® with a
different pharmaceutical product. As a result of this occurrence, we initiated a voluntary recall
of the two affected lots, and we may be subject to claims, fines or other penalties. We are
pursuing an indemnification claim against the manufacturer, but no assurance can be given that we
will ultimately recoup our losses.
33
Loss of a supplier or any difficulties that arise in the supply chain could significantly
affect our inventories and supply of products available for sale. We do not have alternative
sources of supply for all of our products. If a primary supplier of any of our primary products is
unable to fulfill our requirements for any reason, it could reduce our sales, margins and market
share, as well as harm our overall business and financial results. If we are unable to supply
sufficient amounts of our products on a timely basis, our revenues and market share could decrease
and, correspondingly, our profitability could decrease.
Under several exclusive supply agreements, with certain exceptions, we must purchase most of
our product supply from specific manufacturers. If any of these exclusive manufacturer or supplier
relationships were terminated, we would be forced to find a replacement manufacturer or supplier.
Manufacturing facilities must be approved by the FDA before they are used to manufacture our
products. The validation of a new facility and the approval of that manufacturer for a new product
may take a year or more before manufacture can begin at the facility. Delays in obtaining FDA
validation of a replacement manufacturing facility could cause an interruption in the supply of our
products. The new facility also may be subject to follow-up inspections. Although we have
business interruption insurance to assist in covering the loss of income for products where we do
not have a secondary manufacturer, which may mitigate the harm to us from the interruption of the
manufacturing of our largest selling products caused by certain events, the loss of a manufacturer
could still cause a reduction in our sales, margins and market share, as well as harm our overall
business and financial results.
We and our third-party manufacturers rely on a limited number of suppliers of the raw materials of
our products. A disruption in supply of raw material would be disruptive to our inventory supply.
We and the manufacturers of our products rely on suppliers of raw materials used in the
production of our products. Some of these materials are available from only one source and others
may become available from only one source. We try to maintain inventory levels that are no greater
than necessary to meet our current projections, which could have the effect of exacerbating supply
problems. Any interruption in the supply of finished products could hinder our ability to timely
distribute finished products. If we are unable to obtain adequate product supplies to satisfy our
customers’ orders, we may lose those orders and our customers may cancel other orders and stock and
sell competing products. This, in turn, could cause a loss of our market share and reduce our
revenues. In addition, any disruption in the supply of raw materials or an increase in the cost of
raw materials to our manufacturers could have a significant effect on their ability to supply us
with our products, which would adversely affect our financial condition and results of operations.
We could experience difficulties in obtaining supplies of
RESTYLANE®
, PERLANE®, RESTYLANE FINE
LINESTM and RESTYLANE
SUBQTM.
The manufacturing process to create bulk non-animal stabilized hyaluronic acid necessary to
produce RESTYLANE®, PERLANE®, RESTYLANE FINE LINESTM and RESTYLANE
SUBQTM products is technically complex and requires significant lead-time. Any failure
by us to accurately forecast demand for finished product could result in an interruption in the
supply of RESTYLANE®, PERLANE®, RESTYLANE FINE LINESTM and
RESTYLANE SUBQTM products and a resulting decrease in sales of the products.
We depend exclusively on Q-Med for our supply of RESTYLANE®, PERLANE®,
RESTYLANE FINE LINESTM and RESTYLANE SUBQTM products. There are currently no
alternative suppliers of these products. Q-Med has committed to supply RESTYLANE® to us
under a long-term license that is subject to customary conditions and our delivery of specified
milestone payments. Q-Med manufactures RESTYLANE®, PERLANE®, RESTYLANE FINE
LINESTM and RESTYLANE SUBQTM at its facility in Uppsala, Sweden. We cannot
be certain that Q-Med will be able to meet our current or future supply requirements. Any
impairment of Q-Med’s manufacturing capacities could significantly affect our inventories and our
supply of products available for sale, which would materially and adversely affect our results of
operations.
34
Supply interruptions may disrupt our inventory levels and the availability of our products.
Numerous factors could cause interruptions in the supply of our finished products, including:
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timing, scheduling and prioritization of production by our contract manufacturers; |
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labor interruptions; |
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changes in our sources for manufacturing; |
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the timing and delivery of domestic and international shipments; |
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our failure to locate and obtain replacement manufacturers as needed on a timely
basis; |
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conditions affecting the cost and availability of raw materials; and |
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hurricanes and other natural disasters. |
We estimate customer demand for our prescription products primarily through use of third party
syndicated data sources which track prescriptions written by health care providers and dispensed by
licensed pharmacies. The data represents extrapolations from information provided only by certain
pharmacies, and are estimates of historical demand levels. We estimate customer demand for our
non-prescription products primarily through internal data that we compile. We observe trends from
these data, and, coupled with certain proprietary information, prepare demand forecasts that are
the basis for purchase orders for finished and component inventory from our third party
manufacturers and suppliers. Our forecasts may fail to accurately anticipate ultimate customer
demand for products. Overestimates of demand may result in excessive inventory production and
underestimates may result in inadequate supply of our products in channels of distribution.
We sell our products primarily to major wholesalers and retail pharmacy chains. Approximately
65-75% of our gross revenues are typically derived from two major drug wholesale concerns. We have
recently entered into distribution services agreements with our two largest wholesale customers.
We review the supply levels of our significant products sold to major wholesalers by reviewing
periodic inventory reports supplied by our major wholesalers. We rely wholly upon our wholesale
and drug chain customers to effect the distribution allocation of substantially all of our
products.
We periodically offer promotions to wholesale and chain drugstore customers to encourage
dispensing of our prescription products, consistent with prescriptions written by licensed health
care providers. Because many of our prescription products compete in multi-source markets, it is
important for us to ensure the licensed health care providers’ dispensing instructions are
fulfilled with our branded products and are not substituted with a generic product or another
therapeutic alternative product which may be contrary to the licensed health care providers’
recommended prescribed Medicis brand. We believe that a critical component of our brand protection
program is maintenance of full product availability at drugstore and wholesale customers. We
believe such availability reduces the probability of local and regional product substitutions,
shortages and backorders, which could result in lost sales. We expect to continue providing
favorable terms to wholesale and retail drug chain customers as may be necessary to ensure the
fullest possible distribution of our branded products within the pharmaceutical chain of commerce.
From time to time, we may enter into business arrangements (e.g., loans or investments) involving
our customers and those arrangements may be reviewed by federal and state regulators.
Purchases by any given customer, during any given period, may be above or below actual
prescription volumes of any of our products during the same period, resulting in fluctuations in
product inventory in the distribution channel. Any decision made by management to reduce wholesale
inventory levels will decrease our product revenue.
Fluctuations in demand for our products create inventory maintenance uncertainties.
We schedule our inventory purchases to meet anticipated customer demand. As a result,
miscalculation of customer demand or relatively small delays in our receipt of manufactured
products could result in revenues being deferred or lost. Our operating expenses are based upon
anticipated sales levels, and a high percentage of our operating expenses are relatively fixed in
the short term. Depending on the customer, we recognize revenue at the time of shipment to the
customer, or at the time of receipt by the customer, net of estimated provisions.
35
Consequently, variations in the timing of revenue recognition could cause significant
fluctuations in operating results from period to period and may result in unanticipated periodic
earnings shortfalls or losses.
We selectively outsource certain non-sales and non-marketing services, and cannot assure you that
we will be able to obtain adequate supplies of such services on acceptable terms.
To enable us to focus on our core marketing and sales activities, we selectively outsource
certain non-sales and non-marketing functions, such as laboratory research, manufacturing and
warehousing. As we expand our activities, we expect to expend additional financial resources in
these areas. We typically do not enter into long-term manufacturing contracts with third party
manufacturers. Whether or not such contracts exist, we cannot assure you that we will be able to
obtain adequate supplies of such services or products in a timely fashion, on acceptable terms, or
at all.
Importation of products from Canada and other countries into the United States may lower the prices
we receive for our products.
Our products are subject to competition from lower priced versions of our products and
competing products from Canada and other countries where government price controls or other market
dynamics result in lower prices. The ability of patients and other customers to obtain these lower
priced imports has grown significantly as a result of the Internet, an expansion of pharmacies in
Canada and elsewhere targeted to American purchasers, the increase in United States-based
businesses affiliated with Canadian pharmacies marketing to American purchasers, and other factors.
Most of these foreign imports are illegal under current United States law. However, the volume of
imports continues to rise due to the limited enforcement resources of the FDA and the United States
Customs Service, and there is increased political pressure to permit the imports as a mechanism for
expanding access to lower priced medicines.
In December 2003, Congress enacted the Medicare Prescription Drug, Improvement and
Modernization Act of 2003. This law contains provisions that may change United States import laws
and expand consumers’ ability to import lower priced versions of our and competing products from
Canada, where there are government price controls. These changes to United States import laws will
not take effect unless and until the Secretary of Health and Human Services certifies that the
changes will lead to substantial savings for consumers and will not create a public health safety
issue. The former Secretary of Health and Human Services did not make such a certification.
However, it is possible that the current Secretary or a subsequent Secretary could make the
certification in the future. As directed by Congress, a task force on drug importation recently
conducted a comprehensive study regarding the circumstances under which drug importation could be
safely conducted and the consequences of importation on the health, medical costs and development
of new medicines for United States consumers. The task force issued its report in December 2004,
finding that there are significant safety and economic issues that must be addressed before
importation of prescription drugs is permitted, and the current Secretary has not yet announced any
plans to make the required certification. In addition, federal legislative proposals have been made
to implement the changes to the United States import laws without any certification, and to broaden
permissible imports in other ways. Even if the changes to the United States import laws do not
take effect, and other changes are not enacted, imports from Canada and elsewhere may continue to
increase due to market and political forces, and the limited enforcement resources of the FDA, the
United States Customs Service and other government agencies.
The importation of foreign products adversely affects our profitability in the United States.
This impact could become more significant in the future, and the impact could be even greater if
there is a further change in the law or if state or local governments take further steps to
facilitate the importation of products from abroad.
If we become subject to product liability claims, our earnings and financial condition could
suffer.
We are exposed to risks of product liability claims from allegations that our products
resulted in adverse effects to the patient or others. These risks exist even with respect to those
products that are approved for commercial sale by the FDA and manufactured in facilities licensed
and regulated by the FDA.
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In addition to our desire to reduce the scope of our potential exposure to these types of
claims, many of our customers require us to maintain product liability insurance as a condition of
conducting business with us. We currently carry product liability insurance in the amount of $50.0
million per claim and $50.0 million in the aggregate on a claims-made basis. Nevertheless, this
insurance may not be sufficient to cover all claims made against us. Insurance coverage is
expensive and may be difficult to obtain. As a result, we cannot be certain that our current
coverage will continue to be available in the future on reasonable terms, if at all. If we are
liable for any product liability claims in excess of our coverage or outside of our coverage, the
cost and expense of such liability could cause our earnings and financial condition to suffer.
If we suffer negative publicity concerning the safety of our products, our sales may be harmed and
we may be forced to withdraw products.
Physicians and potential patients may have a number of concerns about the safety of our
products, whether or not such concerns have a basis in generally accepted science or peer-reviewed
scientific research. Negative publicity, whether accurate or inaccurate, concerning our products
could reduce market or governmental acceptance of our products and could result in decreased
product demand or product withdrawal. In addition, significant negative publicity could result in
an increased number of product liability claims, whether or not these claims are supported by
applicable law.
Rising insurance costs could negatively impact profitability.
The cost of insurance, including workers compensation, product liability and general liability
insurance, have risen significantly in recent years and may increase in the future. In response,
we may increase deductibles and/or decrease certain coverages to mitigate these costs. These
increases, and our increased risk due to increased deductibles and reduced coverages, could have a
negative impact on our results of operations, financial condition and cash flows.
RESTYLANE® and
PERLANE® are consumer products and as such,
are susceptible to changes in popular trends and applicable laws, which could adversely affect sales or product
margins of RESTYLANE® and
PERLANE®.
RESTYLANE® and PERLANE® are consumer products. If we fail to
anticipate, identify or react to competitive products or if consumer preferences in the cosmetic
marketplace shift to other treatments for the treatment of fine lines, wrinkles and deep facial
folds, we may experience a decline in demand for RESTYLANE® and PERLANE®. In
addition, the popular media has at times in the past produced, and may continue in the future to
produce, negative reports regarding the efficacy, safety or side effects of facial aesthetic
products. Consumer perceptions of RESTYLANE® and PERLANE® may be negatively
impacted by these reports and other reasons.
Demand for RESTYLANE® and PERLANE® may be materially adversely affected
by changing economic conditions. Generally, the costs of cosmetic procedures are borne by
individuals without reimbursement from their medical insurance providers or government programs.
Individuals may be less willing to incur the costs of these procedures in weak or uncertain
economic environments, and demand for RESTYLANE® and PERLANE® could be
adversely affected.
37
The restatement of our consolidated financial statements has subjected us to a number of additional
risks and uncertainties, including increased costs for accounting and legal fees and the increased
possibility of legal proceedings.
As discussed in our Form 10-K/A for the year ended December 31, 2007 filed with the SEC on
November 10, 2008, and in Note 2 to our consolidated financial statements therein, we determined
that our consolidated financial statements for the annual, transition and quarterly periods in
fiscal years 2003 through 2007 and the first and second quarters of 2008 should be restated due to
an error in our interpretation and application of Statement of Financial Accounting Standards No.
48, Revenue Recognition When Right of Return Exists (“SFAS 48”), as it applies to a component of
our sales return reserve calculations. As a result of the restatement, we have become subject to a
number of additional risks and uncertainties, including:
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We incurred substantial unanticipated costs for accounting and legal fees in
connection with the restatement. Although the restatement is complete, we expect to
continue to incur accounting and legal costs as noted below. |
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As a result of the restatement, we have been named in a number of lawsuits as
discussed in Item 3 of Part I of this report, “Legal Proceedings” and Note 14,
“Commitments and Contingencies.” The plaintiffs in these lawsuits may make additional
claims, expand existing claims and/or expand the time periods covered by the
complaints. Other plaintiffs may bring additional actions with other claims, based on
the restatement. If such events occur, we may incur substantial defense costs
regardless of the outcome of these actions and insurance and indemnification may not be
sufficient to cover the losses we may incur. Likewise, such events might cause a
diversion of our management’s time and attention. If we do not prevail in one or more
of these actions, we could be required to pay substantial damages or settlement costs,
which could adversely affect our business, financial condition, results of operations
and liquidity. |
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On January 21, 2009, we received a letter from a stockholder demanding that our
Board of Directors take certain actions, including potentially legal action, in
connection with the restatement of our consolidated financial statements in 2008, and
threatening to pursue a derivative claim if our Board of Directors does not comply with
the stockholder’s demands. We may receive similar letters from other stockholders.
Our Board of Directors is reviewing the letter and has established a special committee
of the Board, comprised of directors who are independent and disinterested with respect
to the letter, (i) to assess whether there is any merit to the allegations contained in
the letter, (ii) if the special committee does conclude that there may be merit to any
of the allegations contained in the letter, to further assess whether it is in our best
interest to pursue litigation or other action against any or all of the persons named
in the letter or any other persons not named in the letter, and (iii) to recommend to
the Board any other appropriate action to be taken. The ultimate outcome of these
potential actions could have a material adverse effect on our business, financial
condition, results of operations, cash flows and the trading price for our securities. |
In 2008, management identified a material weakness in our internal control over financial reporting
with respect to our accounting for sales return reserves. Although as of December 31, 2008
management determined that the material weakness identified in 2008 had been remediated, management
may identify material weaknesses in the future that could adversely affect investor confidence,
impair the value of our common stock and increase our cost of raising capital.
In connection with the restatement of our consolidated financial statements in 2008,
management identified a material weakness in our internal control over financial reporting with
respect to our interpretation and application of SFAS 48 as it applies to the calculation of sales
return reserves. Management took steps to remediate the material weakness in our internal control
over financial reporting and, as of December 31, 2008, management determined that the material
weakness identified in 2008 had been remediated. There can be no assurance, however, that
additional material weaknesses will not be identified in the future.
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Any failure to remedy additional deficiencies in our internal control over financial reporting
that may be discovered in the future could harm our operating results, cause us to fail to meet our
reporting obligations or result in material misstatements in our financial statements. Any such
failure could, in turn, affect the future ability of our management to certify that our internal
control over our financial reporting is effective and, moreover, affect the results of our
independent registered public accounting firm’s attestation report regarding our management’s
assessment. Inferior internal control over financial reporting could also subject us to the
scrutiny of the SEC and other regulatory bodies and could cause investors to lose confidence in our
reported financial information, which could have an adverse effect on the trading price of our
common stock.
In addition, if we or our independent registered public accounting firm identify additional
deficiencies in our internal control over financial reporting, the disclosure of that fact, even if
quickly remedied, could reduce the market’s confidence in our financial statements and harm our
share price. Furthermore, additional deficiencies could result in future non-compliance with
Section 404 of the Sarbanes-Oxley Act of 2002. Such non-compliance could subject us to a variety
of administrative sanctions, including the suspension or delisting of our ordinary shares from the
NYSE and review by the NYSE, the SEC, or other regulatory authorities.
We may not be able to repurchase the Old Notes when required.
We have $169.2 million principal amount of outstanding 2.5% Contingent Convertible Senior
Notes due 2032 (the “Old Notes”). On June 4, 2012 and 2017 or upon the occurrence of a change in
control, holders of the Old Notes may require us to offer to repurchase their Old Notes for cash.
The source of funds for any repurchase required as a result of any such event will be our
available cash or cash generated from operating activities or other sources, including borrowings,
sales of assets, sales of equity or funds provided by a new controlling entity. We cannot assure
you, however, that sufficient funds will be available at the time of any such event to make any
required repurchases of the Notes tendered. If sufficient funds are not available to repurchase
the Old Notes, we may be forced to incur other indebtedness or otherwise reallocate our financial
resources. Furthermore, the use of available cash to fund the repurchase of the Old Notes may
impair our ability to obtain additional financing in the future.
Unanticipated changes in our tax rates or exposure to additional income tax liabilities could
affect our profitability.
We are subject to income taxes in both the U.S. and other foreign jurisdictions. Our
effective tax rate could be adversely affected by changes in the mix of earnings in countries with
different statutory tax rates, changes in the valuation of deferred tax assets and liabilities,
changes in or interpretations of tax laws including pending tax law changes (such as the research
and development credit and the deductibility of executive compensation), changes in our
manufacturing activities and changes in our future levels of research and development spending. In
addition, we are subject to the periodic examination of our income tax returns by the Internal
Revenue Service and other tax authorities. We regularly assess the likelihood of outcomes
resulting from these examinations to determine the adequacy of our provision for income taxes.
There can be no assurance that the outcomes from these periodic examinations will not have an
adverse effect on our provision for income taxes and estimated income tax liabilities.
39
Risks Related to Our Industry
The growth of managed care organizations, other third-party reimbursement policies, state
regulatory agencies and retailer fulfillment policies may harm our pricing, which may reduce our
market share and margins.
Our operating results and business success depend in large part on the availability of
adequate third-party payor reimbursement to patients for our prescription-brand products. These
third-party payors include governmental entities such as Medicaid, private health insurers and
managed care organizations. Because of the size of the patient population covered by managed care
organizations, marketing of prescription drugs to them and the pharmacy benefit managers that serve
many of these organizations has become important to our business.
The trend toward managed healthcare in the United States and the growth of managed care
organizations could significantly influence the purchase of pharmaceutical products, resulting in
lower prices and a reduction in product demand. Managed care organizations and other third party
payors try to negotiate the pricing of medical services and products to control their costs.
Managed care organizations and pharmacy benefit managers typically develop formularies to reduce
their cost for medications. Formularies can be based on the prices and therapeutic benefits of the
available products. Due to their lower costs, generic products are often favored. The breadth of
the products covered by formularies varies considerably from one managed care organization to
another, and many formularies include alternative and competitive products for treatment of
particular medical conditions. Exclusion of a product from a formulary can lead to its sharply
reduced usage in the managed care organization patient population. Payment or reimbursement of
only a portion of the cost of our prescription products could make our products less attractive,
from a net-cost perspective, to patients, suppliers and prescribing physicians. We cannot be
certain that the reimbursement policies of these entities will be adequate for our pharmaceutical
products to compete on a price basis. If our products are not included within an adequate number of
formularies or adequate reimbursement levels are not provided, or if those policies increasingly
favor generic products, our market share and gross margins could be harmed, as could our business,
financial condition, results of operations and cash flows.
In addition, healthcare reform could affect our ability to sell our products and may have a
material adverse effect on our business, results of operations, financial condition and cash flows.
Some of our products are not of a type generally eligible for reimbursement. It is possible
that products manufactured by others could address the same effects as our products and be subject
to reimbursement. If this were the case, some of our products may be unable to compete on a price
basis. In addition, decisions by state regulatory agencies, including state pharmacy boards,
and/or retail pharmacies may require substitution of generic for branded products, may prefer
competitors’ products over our own, and may impair our pricing and thereby constrain our market
share and growth.
Managed care initiatives to control costs have influenced primary-care physicians to refer
fewer patients to dermatologists and other specialists. Further reductions in these referrals
could reduce the size of our potential market, and harm our business, financial condition, results
of operations and cash flows.
We are subject to extensive governmental regulation.
Pharmaceutical companies are subject to significant regulation by a number of national, state
and local governments and agencies. The FDA administers requirements covering testing,
manufacturing, safety, effectiveness, labeling, storage, record keeping, approval, sampling,
advertising and promotion of our products. Several states have also instituted laws and
regulations covering some of these same areas. In addition, the FTC and state and local
authorities regulate the advertising of over-the-counter drugs and cosmetics. Failure to comply
with applicable regulatory requirements could, among other things, result in:
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fines; |
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changes to advertising; |
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suspensions of regulatory approvals of products; |
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product withdrawals and recalls; |
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delays in product distribution, marketing and sale; and |
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civil or criminal sanctions. |
For example, in early May 2008, we became aware that our third-party manufacturer and supplier
of SOLODYN® mistakenly filled at least one bottle labeled as SOLODYN® with a
different pharmaceutical product. As a result of this occurrence, we initiated a voluntary recall
of the two affected lots, each of which was shipped subsequent to March 31, 2008, and we may be
subject to claims, fines or other penalties.
Our prescription and over-the-counter products receive FDA review regarding their safety and
effectiveness. However, the FDA is permitted to revisit and change its prior determinations. We
cannot be sure that the FDA will not change its position with regard to the safety or effectiveness
of our products. If the FDA’s position changes, we may be required to change our labeling or
formulations or cease to manufacture and market the challenged products. Even prior to any formal
regulatory action, we could voluntarily decide to cease distribution and sale or recall any of our
products if concerns about their safety or effectiveness develop.
Before marketing any drug that is considered a “new drug” by the FDA, the FDA must provide its
approval of the product. All products which are considered drugs which are not “new drugs” and
that generally are recognized by the FDA as safe and effective for use do not require the FDA’s
approval. We believe that some of our products, as they are promoted and intended for use, are
exempt from treatment as “new drugs” and are not subject to approval by the FDA. The FDA, however,
could take a contrary position, and we could be required to seek FDA approval of those products and
the marketing of those products. We could also be required to withdraw those products from the
market.
Sales representative activities may also be subject to the Voluntary Compliance Guidance
issued for pharmaceutical manufacturers by the Office of Inspector General (“OIG”) of the
Department of Health and Human Services, as well as state laws and regulations. We have
established compliance program policies and training programs for our sales force, which we believe
are appropriate. The OIG and/or state law enforcement entities, however, could take a contrary
position, and we could be required to modify our sales representative activities.
Item 1B. Unresolved Staff Comments
We have received no written comments regarding our periodic or current reports from the Staff
of the SEC that were issued 180 days or more preceding the end of 2008 and that remain unresolved.
Item 2. Properties
During July 2006, we executed a lease agreement for new headquarter office space to
accommodate our expected long-term growth. The first phase is for approximately 150,000 square
feet with the right to expand. We occupied the new headquarter office space, which is located
approximately one mile from our previous headquarter office space in Scottsdale, Arizona, during
the second quarter of 2008. There is no cash obligation for lease payments until May 2009. We
obtained possession of the leased premises and therefore began accruing rent expense during the
first quarter of 2008. The term of the lease is twelve years. The average annual expense under
the amended lease agreement is approximately $3.9 million. During the first quarter of 2008, we
received approximately $6.7 million in tenant improvement incentives from the landlord. This
amount has been capitalized into leasehold improvements and is being depreciated on a straight-line
basis over the lesser of the useful life or the term of the lease. The tenant improvement
incentives are also included in other long-term liabilities as deferred rent, and will be
recognized as a reduction of rent expense on a straight-line basis over the term of the lease. In
2008, upon vacating our previous headquarters facility, we recorded a charge for the estimated
remaining net cost for the lease, net of potential sublease income, of $4.8 million. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contingent
Convertible Senior Notes and Other Long-Term Commitments.
During October 2006, we executed a lease agreement for additional headquarter office space,
which is also located approximately one mile from our current headquarter office space in
Scottsdale, Arizona to accommodate our current needs and future growth. Under this agreement,
approximately 21,000 square feet of office space is
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being leased for a period of three years. In May 2007, we began occupancy of the additional
headquarter office space.
Medicis Aesthetics Canada Ltd., a wholly owned subsidiary, presently leases approximately
3,600 square feet of office space in Toronto, Ontario, Canada, under a lease agreement, as
extended, that expires in June 2009.
Rent expense was approximately $9.4 million, $2.5 million and $2.2 million for 2008, 2007 and
2006, respectively. Rent expense for 2008 includes a $4.8 million charge for the estimated
remaining net cost for our previous headquarters facility lease, net of potential sublease income.
Item 3. Legal Proceedings
On January 13, 2009, we filed suit against Mylan, Matrix, Matrix Laboratories Inc., Sandoz,
and Barr (collectively “Defendants”) in the United States District Court for the District of
Delaware seeking an adjudication that Defendants have infringed one or more claims of our ‘838
Patent by submitting to the FDA their respective ANDAs for generic versions of SOLODYN®.
The relief we requested includes a request for a permanent injunction preventing Defendants from
infringing the ‘838 patent by selling generic versions of SOLODYN®.
On January 21, 2009, we received a letter from a stockholder demanding that our Board of
Directors take certain actions, including potentially legal action, in connection with the
restatement of our consolidated financial statements in 2008, and threatening to pursue a
derivative claim if our Board of Directors does not comply with the stockholder’s demands. We may
receive similar letters from other stockholders. Our Board of Directors is reviewing the letter
and has established a special committee of the Board, comprised of directors who are independent
and disinterested with respect to the letter, (i) to assess whether there is any merit to the
allegations contained in the letter, (ii) if the special committee does conclude that there may be
merit to any of the allegations contained in the letter, to further assess whether it is in our
best interest to pursue litigation or other action against any or all of the persons named in the
letter or any other persons not named in the letter, and (iii) to recommend to the Board any other
appropriate action to be taken. The ultimate outcome of these potential actions could have a
material adverse effect on our business, financial condition, results of operations, cash flows and
the trading price for our securities.
As discussed elsewhere in this Form 10-K, we restated our financial statements for the annual,
transition and quarterly periods in fiscal years 2003 through 2007 and the first and second
quarters of 2008 in an amended Form 10-K/A for the year ended December 31, 2007 and amended Forms
10-Q/A for the quarterly periods ended March 31, 2008 and June 30, 2008, which were filed with the
SEC on November 10, 2008. We discussed this matter with the SEC’s Division of Enforcement and
cooperated fully with the SEC in connection with any questions they had. Consistent with good
corporate governance, the Audit Committee of our Board of Directors, working with its independent
counsel and forensic accountants, conducted an independent inquiry into the matters giving rise to
our need to restate our financial statements (the “Internal Inquiry”). After completing the
Internal Inquiry, the Audit Committee concluded that the need to restate our consolidated financial
statements was not the result of any fraud or intentional wrongdoing on the part of any of our
directors, officers or other employees. The Audit Committee also noted that our independent
registered public accounting firm, Ernst & Young LLP, was aware of and discussed with us on several
occasions in the past our methodology of accounting for sales return reserves. Neither the Company
nor Ernst & Young LLP had previously identified the misinterpretation and misapplication of
generally accepted accounting principles with respect to our sales return reserves prior to the
PCAOB review, and Ernst & Young LLP expressed unqualified opinions on our consolidated financial
statements and our internal control over financial reporting for each of the now-restated annual
and transition periods.
On October 3, 10, and 27, 2008, purported stockholder class action lawsuits styled Andrew Hall
v. Medicis Pharmaceutical Corp., et al. (Case No. 2:08-cv-01821-MHB); Steamfitters Local 449
Pension Fund v. Medicis Pharmaceutical Corp., et al. (Case No. 2:08-cv-01870-DKD); and Darlene
Oliver v. Medicis Pharmaceutical Corp., et al. (Case No. 2:08-cv-01964-JAT) were filed in the
United States District Court for the District of Arizona on behalf of stockholders who purchased
our securities during the period between October 30, 2003 and approximately September 24, 2008.
The complaints name as defendants Medicis Pharmaceutical Corp. and our Chief Executive Officer and
Chairman of the Board, Jonah Shacknai, our Chief Financial Officer, Executive Vice President and
42
Treasurer, Richard D. Peterson, and our Chief Operating Officer and Executive Vice President,
Mark A. Prygocki. Plaintiffs’ claims arise in connection with the restatement of our annual,
transition, and quarterly periods in fiscal years 2003 through 2007 and the first and second
quarters of 2008. The complaints allege violations of federal securities laws, Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5, based on alleged material
misrepresentations to the market that had the effect of artificially inflating the market price of
our stock. The plaintiffs seek to recover unspecified damages and costs, including counsel and
expert fees. We intend to vigorously defend the claims in these matters. There can be no
assurance, however, that we will be successful, and an adverse resolution of the lawsuits could
have a material adverse effect on our financial position and results of operations in the period in
which the lawsuits are resolved. We are not presently able to reasonably estimate potential
losses, if any, related to the lawsuits.
On April 30, 2008, we received notice from Perrigo Israel Pharmaceuticals Ltd. (“Perrigo
Israel”), a generic pharmaceutical company, that it had filed an ANDA with the FDA for a generic
version of our VANOS® fluocinonide cream 0.1%. Perrigo Israel’s notice indicated that
it was challenging only one of the two patents that we listed with the FDA for VANOS®
Cream. On June 6, 2008, we filed a complaint for patent infringement against Perrigo Israel and
its domestic corporate parent Perrigo Company in the United States District Court for the Western
District of Michigan, Civil Action No. 1:08-cv-0539-PLM. The complaint asserts that Perrigo Israel
and Perrigo Company have infringed both of our patents for VANOS® Cream (United States
Patent Nos. 6,765,001 and 7,220,424). Perrigo Israel and Perrigo Company filed a joint Answer on
November 4, 2008. The Court has scheduled a joint status conference for March 20, 2009.
On January 15, 2008, IMPAX filed a lawsuit against us in the United States District Court for
the Northern District of California seeking a declaratory judgment that our ‘838 Patent related to
SOLODYN® is invalid and is not infringed by IMPAX’s filing of an ANDA for a generic
version of SOLODYN®. On April 16, 2008, the Court granted Medicis’ motion to dismiss
the IMPAX complaint for lack of jurisdiction. IMPAX appealed the Court’s order dismissing the case
to the United States Court of Appeals for the Federal Circuit. On November 26, 2008, we entered
into a License and Settlement Agreement and a Joint Development Agreement with IMPAX. In
connection with the License and Settlement Agreement, Medicis and IMPAX agreed to terminate all
legal disputes between them relating to SOLODYN®. Additionally, under terms of the
License and Settlement Agreements, IMPAX has confirmed that Medicis’ patents relating to
SOLODYN® are valid and enforceable, and cover IMPAX’s activities relating to its generic
product under ANDA #90-024.
On October 27, 2005, we filed suit against Upsher-Smith Laboratories, Inc. of Plymouth,
Minnesota and against Prasco Laboratories of Cincinnati, Ohio for infringement of Patent No.
6,905,675 entitled “Sulfur Containing Dermatological Compositions and Methods for Reducing Malodors
in Dermatological Compositions” covering our sodium sulfacetamide/sulfur technology. This
intellectual property is related to our PLEXION® Cleanser product. The suit was filed
in the U.S. District Court for the District of Arizona, and seeks an award of damages, as well as a
preliminary and a permanent injunction. A hearing on our preliminary injunction motion was heard
on March 8 and March 9, 2006. On May 2, 2006, an order denying the motion for a preliminary
injunction was received by Medicis. The Court has entered an order staying the case until the
conclusion of a patent reexamination request submitted by Medicis.
On May 25, 2006, Prasco Laboratories of Cincinnati, Ohio filed suit against Imaginative
Research Associates (“IRA”) and us seeking a declaration that Prasco’s Oscion product does not
infringe certain patents owned by us or by IRA. We and IRA moved to dismiss that suit on the
grounds that the court had no jurisdiction under the Declaratory Judgment Act to hear the case.
The court granted our motion and dismissed the case. Prasco has appealed and the appeal is pending
before the U.S. Court of Appeals for the Federal Circuit. The case was argued to the U.S. Court of
Appeals on April 10, 2008. The Court of Appeals affirmed the decision to dismiss the case, and
this matter is closed.
In addition to the matters discussed above, we and certain of our subsidiaries are parties to
other actions and proceedings incident to our business, including litigation regarding our
intellectual property, challenges to the enforceability or validity of our intellectual property
and claims that our products infringe on the intellectual property rights of others. We record
contingent liabilities resulting from claims against us when it is probable (as that word is
defined in Statement of Financial Accounting Standards No. 5) that a liability has been incurred
and the amount of the loss is reasonably estimable. We disclose material contingent liabilities
when there is a reasonable
43
possibility that the ultimate loss will exceed the recorded liability. Estimating probable
losses requires analysis of multiple factors, in some cases including judgments about the potential
actions of third-party claimants and courts. Therefore, actual losses in any future period are
inherently uncertain. In all of the cases noted where we are the defendant, we believe we have
meritorious defenses to the claims in these actions and resolution of these matters will not have a
material adverse effect on our business, financial condition, or results of operation; however, the
results of the proceedings are uncertain, and there can be no assurance to that effect.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders, through the solicitation of proxies
or otherwise, in the three months ended December 31, 2008.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Description of Registrant’s Securities, Price Range of Common Stock and Dividends Declared
Our Class A common stock trades on the New York Stock Exchange under the symbol “MRX”. The
following table sets forth the high and low sale prices for our Class A common stock on the New
York Stock Exchange for the fiscal periods indicated:
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|
| |
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|
|
|
|
|
|
|
|
DIVIDENDS |
| |
|
HIGH |
|
LOW |
|
DECLARED |
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED DECEMBER 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
27.02 |
|
|
$ |
18.51 |
|
|
$ |
0.04 |
|
Second Quarter |
|
|
24.49 |
|
|
|
18.84 |
|
|
|
0.04 |
|
Third Quarter |
|
|
22.10 |
|
|
|
13.60 |
|
|
|
0.04 |
|
Fourth Quarter |
|
|
15.19 |
|
|
|
9.66 |
|
|
|
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED DECEMBER 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
39.94 |
|
|
$ |
30.11 |
|
|
$ |
0.03 |
|
Second Quarter |
|
|
34.35 |
|
|
|
29.70 |
|
|
|
0.03 |
|
Third Quarter |
|
|
31.48 |
|
|
|
26.65 |
|
|
|
0.03 |
|
Fourth Quarter |
|
|
32.18 |
|
|
|
25.37 |
|
|
|
0.03 |
|
On February 24, 2009, the last reported sale price on the New York Stock Exchange for Medicis’
Class A common stock was $12.20 per share. As of such date, there were approximately 188 holders
of record of Class A common stock.
Dividend Policy
We do not have a dividend policy. Since July 2003, we have paid quarterly cash dividends
aggregating approximately $37.2 million on our common stock. In addition, on December 17, 2008, we
declared a cash dividend of $0.04 per issued and outstanding share of common stock payable on
January 30, 2009 to our stockholders of record at the close of business on January 2, 2009. Prior
to these dividends, we had not paid a cash dividend on our common stock. Any future determinations
to pay cash dividends will be at the discretion of our Board of Directors and will be dependent
upon our financial condition, operating results, capital requirements and other factors that our
Board of Directors deems relevant.
Our 1.5% Contingent Convertible Senior Notes due 2033 require an adjustment to the conversion
price if the cumulative aggregate of all current and prior dividend increases above $0.025 per
share would result in at least a one percent (1%) increase in the conversion price. This threshold
has not been reached and no adjustment to the
44
conversion price has been made. As of December 31, 2008, $181,000 of our 1.5% Contingent
Convertible Senior Notes was outstanding.
Recent Sales of Unregistered Securities
None.
Equity Compensation Plan Information
The following table provides information as of December 31, 2008, about compensation plans
under which shares of our common stock may be issued to employees, consultants or non-employee
directors of our board of directors upon exercise of options, warrants or rights under all of our
existing equity compensation plans. Our existing equity compensation plans include our 2006
Incentive Plan, our 2004, 1998, 1996, 1995 and 1992 Stock Option Plans, in which all of our
employees and non-employee directors are eligible to participate, and our 2002 Stock Option Plan,
in which our employees are eligible to participate but our non-employee directors and officers may
not participate. Restricted stock grants may only be made from our 2006 and 2004 Plans. No
further shares are available for issuance under the 2001 Senior Executive Restricted Stock Plan.
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| |
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Number of securities |
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| |
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|
|
|
|
|
|
|
|
remaining available for |
|
| |
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|
|
|
|
Number of Securities |
|
|
Weighted-average |
|
|
future issuance under |
|
| |
|
|
|
|
|
to be issued upon |
|
|
exercise |
|
|
equity compensation |
|
| |
|
|
|
|
|
exercise of |
|
|
price of outstanding |
|
|
plans (excluding |
|
| |
|
|
|
|
|
outstanding options, |
|
|
options, warrants and |
|
|
securities reflected in |
|
| |
|
|
|
|
|
warrants and rights |
|
|
rights |
|
|
column a) |
|
| Plan Category |
|
Date |
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
Plans approved by
stockholders(1) |
|
|
12/31/2008 |
|
|
|
8,189,458 |
|
|
$ |
27.40 |
|
|
|
2,380,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plans not approved by
stockholders(2) |
|
|
12/31/2008 |
|
|
|
3,722,750 |
|
|
$ |
29.07 |
|
|
|
0 |
|
| |
|
|
Total |
|
|
|
|
|
|
11,912,208 |
|
|
$ |
27.98 |
|
|
|
2,380,544 |
|
|
|
|
| (1) |
|
Represents options outstanding and shares available for future issuance under the
2006 Incentive Plan. Also includes options outstanding under the 2004, 1998, 1996, 1995 and
1992 Stock Option Plans, which have been terminated as to future grants. |
| |
| (2) |
|
Represents the 2002 Stock Option Plan, which was implemented by our board in
November 2002. The 2002 Plan was terminated on May 23, 2006 as part of the stockholders’
approval of the 2006 Incentive Plan, and no options can be granted from the 2002 Plan after
May 23, 2006. Options previously granted from this plan remain outstanding and continue to be
governed by the rules of the plan. The 2002 Plan was a non-stockholder approved plan under
which non-qualified incentive options have been granted to our employees and key consultants
who are neither our executive officers nor our directors at the time of grant. The board
authorized 6,000,000 shares of common stock for issuance under the 2002 Plan. The option
price of the options is the fair market value, defined as the closing quoted selling price of
the common stock on the date of the grant. No option granted under the 2002 Plan has a term
in excess of ten years, and each will be subject to earlier termination within a specified
period following the optionee’s cessation of service with us. As of December 31, 2008, the
weighted average term to expiration of these options is 4.6 years. Each granted option vests
in one or more installments over a period of five years. However, the options will vest on an
accelerated basis in the event we experience a change of control (as defined in the 2002
Plan). |
As of February 24, 2009, there were 10,638,017 shares subject to issuance upon exercise of
outstanding options or awards under all of our equity compensation plans, at a weighted average
exercise price of $27.97, and
45
with a weighted average remaining life of 3.4 years. In addition, as
of February 24, 2009, there were 1,186,989 unvested shares of restricted stock outstanding under
all of our equity compensation plans. As of February 24, 2009, there were 2,450,194 shares
available for future issuance under those plans.
Repurchases of Common Stock
On August 29, 2007, our Board of Directors approved a stock trading plan to purchase up to
$200.0 million in aggregate value of shares of our Class A common stock upon satisfaction of
certain conditions. The number of shares to be repurchased and the timing of the repurchases (if
any) will depend on factors such as the market price of our Class A common stock, economic and
market conditions, and corporate and regulatory requirements. The plan terminated on August 29,
2008, as it was scheduled to terminate on the earlier of the first anniversary of the plan or at
the time when the aggregate purchase limit was reached. No shares were repurchased under this
plan.
Item 6. Selected Financial Data
The following table sets forth selected consolidated financial data for the year ended
December 31, 2008, 2007, 2006 and 2005. The data for the year ended December 31, 2008, 2007 and
2006 is derived from our audited consolidated financial statements and accompanying notes, while
the data for the year ended December 31, 2005 is derived from our unaudited consolidated financial
statements. The comparability of the periods presented is impacted by certain product rights and
business acquisitions and dispositions. Gross profit does not include amortization of our
intangible assets.
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| |
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Year |
|
|
Year |
|
|
Year |
|
|
Year |
|
| |
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
| |
|
Dec. 31, 2008 |
|
|
Dec. 31, 2007 |
|
|
Dec. 31, 2006 |
|
|
Dec. 31, 2005 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited) |
|
| |
|
(in thousands, except per share amounts) |
|
|
|
|
|
Statements of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product revenues |
|
$ |
500,977 |
|
|
$ |
441,868 |
|
|
$ |
377,548 |
|
|
$ |
306,735 |
|
Net contract revenues |
|
|
16,773 |
|
|
|
15,526 |
|
|
|
15,617 |
|
|
|
46,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
517,750 |
|
|
|
457,394 |
|
|
|
393,165 |
|
|
|
352,737 |
|
Gross profit (a) |
|
|
479,036 |
|
|
|
401,284 |
|
|
|
347,059 |
|
|
|
297,000 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
279,768 |
(b) |
|
|
242,633 |
(f) |
|
|
202,457 |
(h) |
|
|
146,158 |
(j) |
Impairment of intangible assets |
|
|
— |
|
|
|
4,067 |
|
|
|
52,586 |
|
|
|
9,171 |
|
Research and development |
|
|
99,916 |
(c) |
|
|
39,428 |
(g) |
|
|
161,837 |
(i) |
|
|
42,903 |
(k) |
In-process research and development |
|
|
30,500 |
(d) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Depreciation and amortization |
|
|
27,698 |
|
|
|
24,548 |
|
|
|
23,048 |
|
|
|
24,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
437,882 |
|
|
|
310,676 |
|
|
|
439,928 |
|
|
|
222,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
41,154 |
|
|
|
90,608 |
|
|
|
(92,869 |
) |
|
|
74,220 |
|
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income, net |
|
|
(15,470 |
)(e) |
|
|
— |
|
|
|
— |
|
|
|
59,801 |
(l) |
Interest and investment income (expense), net |
|
|
16,722 |
|
|
|
28,372 |
|
|
|
20,147 |
|
|
|
5,804 |
|
Income tax (expense) benefit |
|
|
(32,130 |
) |
|
|
(48,544 |
) |
|
|
24,570 |
|
|
|
(49,551 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
10,276 |
|
|
$ |
70,436 |
|
|
$ |
(48,152 |
) |
|
$ |
90,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
0.18 |
|
|
$ |
1.26 |
|
|
$ |
(0.88 |
) |
|
$ |
1.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share |
|
$ |
0.18 |
|
|
$ |
1.08 |
|
|
$ |
(0.88 |
) |
|
$ |
1.39 |
(m) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend declared per common share |
|
$ |
0.16 |
|
|
$ |
0.12 |
|
|
$ |
0.12 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic common shares outstanding |
|
|
56,567 |
|
|
|
55,988 |
|
|
|
54,688 |
|
|
|
54,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted common shares outstanding |
|
|
57,323 |
|
|
|
71,246 |
|
|
|
54,688 |
|
|
|
69,558 |
(m) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Amounts exclude $21.5 million, $21.6 million, $20.0 million and $21.6 million of amortization
expense related to acquired intangible assets for the year ended December 31, 2008, 2007, 2006
and 2005, respectively. |
46
|
|
|
| (b) |
|
Includes approximately $16.3 million of compensation expense related to stock options and
restricted stock and $4.8 million of lease exit costs related to our previous headquarters
facility. |
| |
| (c) |
|
Includes $40.0 million paid to IMPAX related to a development agreement and $25.0 million
paid to Ipsen upon the FDA’s acceptance of Ipsen’s BLA for RELOXIN® and
approximately $0.3 million of compensation expense related to stock options and restricted
stock. |
| |
| (d) |
|
In-process research and development expense of $30.5 million is related to our acquisition of
LipoSonix. |
| |
| (e) |
|
Represents a $9.1 million reduction in the carrying value of our investment in Revance as a
result of a reduction in the net realizable value of the investment using the hypothetical
liquidation at book value approach as of December 31, 2008, and a $6.4 million
other-than-temporary impairment loss recognized related to our auction-rate securities
investments. |
| |
| (f) |
|
Includes approximately $21.0 million of compensation expense related to stock options and
restricted stock, $2.2 million of professional fees related to a strategic collaboration with
Hyperion Therapeutics, Inc. and $1.3 million of professional fees related to a strategic
collaboration agreement with Revance. |
| |
| (g) |
|
Includes approximately $8.0 million related to our option to acquire Revance or to license
Revance’s product currently under development and approximately $0.1 million of compensation
expense related to stock options and restricted stock. |
| |
| (h) |
|
Includes approximately $24.5 million of compensation expense related to stock options and
restricted stock, $10.2 million related to a loss contingency for a legal matter and $1.8
million related to a settlement of a dispute related to our merger with Ascent. |
| |
| (i) |
|
Includes approximately $125.2 million paid to Ipsen related to the RELOXIN®
development and distribution agreement and approximately $1.6 million of compensation expense
related to stock options and restricted stock. |
| |
| (j) |
|
Includes approximately $13.9 million of compensation expense related to stock options and
restricted stock recognized during the Transition Period and approximately $6.0 million of
integration planning costs incurred related to the proposed Inamed transaction during the
three months ended June 30, 2005 and three months ended September 30, 2005. |
| |
| (k) |
|
Includes approximately $8.3 million paid to AAIPharma related to a research and development
collaboration, $11.9 million related to a research and development collaboration with Dow and
approximately $1.0 million of compensation expense related to stock options and restricted
stock. |
| |
| (l) |
|
Represents a termination fee of $90.5 million received from Inamed upon the termination of
the proposed merger with Inamed, net of a termination fee paid to an investment banker and the
expensing of accumulated transactions costs of $27.0 million, and integration costs incurred
during the three months ended December 31, 2005 of $3.7 million. |
| |
| (m) |
|
Diluted net income per common share for the unaudited year ended December 31, 2005 was
calculated by using the average of the periodic diluted common shares outstanding during the
year. For the period from January 1, 2005 to June 30, 2005, diluted common shares outstanding
was calculated using APB Opinion No. 25, while for the period from July 1, 2005 to December
31, 2005, diluted common shares outstanding was calculated using SFAS 123R. The Company
adopted SFAS No. 123R effective July 1, 2005. |
47
The cash flow data for the year ended December 31, 2005 is unaudited.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
| |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
| |
|
(in thousands) |
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term
investments |
|
$ |
343,885 |
(a) |
|
$ |
794,680 |
|
|
$ |
554,261 |
(b) |
|
$ |
742,532 |
|
Working capital |
|
|
307,635 |
|
|
|
422,971 |
|
|
|
323,070 |
|
|
|
630,951 |
|
Long-term investments |
|
|
55,333 |
|
|
|
17,072 |
|
|
|
130,290 |
|
|
|
— |
|
Total assets |
|
|
973,434 |
|
|
|
1,213,411 |
|
|
|
1,122,720 |
|
|
|
1,196,354 |
|
Current portion of long-term debt |
|
|
— |
|
|
|
283,910 |
|
|
|
169,155 |
|
|
|
— |
|
Long-term debt |
|
|
169,326 |
|
|
|
169,145 |
|
|
|
283,910 |
|
|
|
453,065 |
|
Stockholders’ equity |
|
|
603,694 |
|
|
|
583,301 |
|
|
|
475,520 |
|
|
|
481,751 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended |
| |
|
Dec. 31, 2008 |
|
Dec. 31, 2007 |
|
Dec. 31, 2006 |
|
Dec. 31, 2005 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited) |
| |
|
(in thousands) |
Cash Flow Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities |
|
$ |
45,770 |
(c) |
|
$ |
158,944 |
(d) |
|
$ |
(40,963 |
)(e) |
|
$ |
232,506 |
(f) |
Net cash (used in) provided by
investing activities |
|
|
220,091 |
(g) |
|
|
(269,486 |
)(h) |
|
|
(216,915 |
) |
|
|
187,994 |
|
Net cash provided by (used in) by
financing activities |
|
|
(287,314 |
)(i) |
|
|
14,470 |
|
|
|
14,278 |
|
|
|
(5,137 |
) |
|
|
|
| (a) |
|
Decrease in cash, cash equivalents and short-term investments from December 31, 2007 to
December 31, 2008 primarily due to the repurchase of $283.7 million of our 1.5% Contingent
Convertible Senior Notes, our $150.0 million acquisition of LipoSonix, $40.0 million paid
to IMPAX related to a development agreement, $25.0 million paid to Ipsen upon the FDA’s
acceptance of Ipsen’s BLA for RELOXIN®, and payments totaling $87.8 million for
income taxes during 2008. |
| |
| (b) |
|
Decrease in cash, cash equivalents and short-term investments from December 31, 2005 to
December 31, 2006 primarily due to payments totaling $125.2 million made to Ipsen related
to a development and distribution agreement for the development of RELOXIN®,
payment of the $27.4 million contingent payment related to the merger with Ascent, and
payments totaling $35.7 million for income taxes during 2006. In addition, approximately
$130.3 million of our available-for-sale investments have been treated as long-term assets
as of December 31, 2006, based on their expected maturities. |
| |
| (c) |
|
Net cash provided by operating activities for the year ended December 31, 2008 included
$40.0 million paid to IMPAX related to a development agreement and $25.0 million paid to
Ipsen upon the FDA’s acceptance of Ipsen’s BLA for RELOXIN®. |
| |
| (d) |
|
Net cash provided by operating activities for the year ended December 31, 2007 is net
of $8.0 million of the $20.0 million payment to Revance, representing the residual value of
the option to acquire Revance or to license Revance’s product currently under development,
included in research and development expense. |
| |
| (e) |
|
Net cash used in operating activities for the year ended December 31, 2006 included
payments totaling $125.2 million made to Ipsen related to a development and distribution
agreement for the development of RELOXIN®. |
| |
| (f) |
|
Net cash provided by operating activities for the year ended December 31, 2005 included
a $90.5 million termination received from Inamed related to the termination of a proposed
merger. |
| |
| (g) |
|
Net cash provided by investing activities for the year ended December 31, 2008 is net
of $150.0 million of cash used for our acquisition of LipoSonix. |
48
|
|
|
| (h) |
|
Net cash used in investing activities for the year ended December 31, 2007 includes a
$12.0 million investment in Revance, representing the fair value of the investment in
Revance at the time of the investment. |
| |
| (i) |
|
Net cash used in financing activities for the year ended December 31, 2008 includes the
repurchase of $283.7 million of our 1.5% Contingent Convertible Senior Notes. |
The following table sets forth selected consolidated financial data for the Transition Period,
the corresponding six-month period in 2004, and the year ended June 30, 2005 and 2004. The data
for the Transition Period and the year ended June 30, 2005 and 2004 is derived from our audited
consolidated financial statements and accompanying notes, while the data for the six-month period
ended December 31, 2004 is derived from our unaudited consolidated financial statements. The
comparability of the periods presented is impacted by certain product rights and business
acquisitions and dispositions. Gross profit does not include amortization of our intangible
assets.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Transition |
|
|
Six Months |
|
|
Fiscal Year Ended |
|
| |
|
Period Ended |
|
|
Ended |
|
|
June 30, |
|
| |
|
Dec. 31, 2005 |
|
|
Dec. 31, 2004 |
|
|
2005 |
|
|
2004 |
|
| |
|
|
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
| |
|
(in thousands, except per share amounts) |
|
Statements of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product revenues |
|
$ |
156,963 |
|
|
$ |
144,116 |
|
|
$ |
293,888 |
|
|
$ |
303,056 |
|
Net contract revenues |
|
|
8,385 |
|
|
|
34,168 |
|
|
|
71,785 |
|
|
|
12,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
165,348 |
|
|
|
178,284 |
|
|
|
365,673 |
|
|
|
315,171 |
|
Gross profit (a) |
|
|
139,583 |
|
|
|
148,859 |
|
|
|
307,548 |
|
|
|
263,994 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
78,535 |
(b) |
|
|
63,305 |
(e) |
|
|
130,927 |
(g) |
|
|
114,231 |
|
Impairment of intangible assets |
|
|
9,171 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Research and development |
|
|
22,367 |
(c) |
|
|
45,140 |
(f) |
|
|
65,676 |
(h) |
|
|
16,494 |
(i) |
Depreciation and amortization |
|
|
12,420 |
|
|
|
10,222 |
|
|
|
22,350 |
|
|
|
16,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
122,493 |
|
|
|
118,667 |
|
|
|
218,953 |
|
|
|
147,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
17,090 |
|
|
|
30,192 |
|
|
|
88,595 |
|
|
|
116,475 |
|
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net |
|
|
59,801 |
(d) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Interest and investment income (expense), net |
|
|
4,726 |
|
|
|
(248 |
) |
|
|
830 |
|
|
|
(758 |
) |
Loss on early extinguishment of debt |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(58,660 |
) |
Income tax expense |
|
|
(29,811 |
) |
|
|
(10,377 |
) |
|
|
(30,996 |
) |
|
|
(21,877 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
51,806 |
|
|
$ |
19,567 |
|
|
$ |
58,429 |
|
|
$ |
35,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.95 |
|
|
$ |
0.35 |
|
|
$ |
1.06 |
|
|
$ |
0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
0.79 |
|
|
$ |
0.32 |
|
|
$ |
0.92 |
|
|
$ |
0.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend declared per common share |
|
$ |
0.06 |
|
|
$ |
0.06 |
|
|
$ |
0.12 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic common shares outstanding |
|
|
54,323 |
|
|
|
55,972 |
|
|
|
55,196 |
|
|
|
55,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted common shares outstanding |
|
|
69,772 |
|
|
|
72,160 |
|
|
|
70,909 |
|
|
|
72,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Amounts exclude $10.9 million, $8.9 million, $19.6 million and $14.9 million for amortization
expense related to acquired intangible assets in the Transition Period, the six months ended
December 31, 2004, fiscal 2005 and 2004, respectively. |
| |
| (b) |
|
Includes approximately $13.9 million of compensation expense related to stock options and
restricted stock recognized during the Transition Period and approximately $0.7 million of
integration planning costs incurred related to the proposed Inamed transaction during the
three months ended September 30, 2005. |
| |
| (c) |
|
Includes approximately $11.9 million related to a research and development collaboration with
Dow and approximately $1.0 million of compensation expense related to stock options and
restricted stock. |
49
|
|
|
| (d) |
|
Represents a termination fee of $90.5 million received from Inamed upon the termination of
the proposed merger with Inamed, net of a termination fee paid to an investment banker and the
expensing of accumulated transactions costs of $27.0 million, and integration costs incurred
during the three months ended December 31, 2005 of $3.7 million. |
| |
| (e) |
|
Includes approximately $1.3 million of professional fees related to research and development
collaborations with Ansata and Q-Med. |
| |
| (f) |
|
Includes $5.0 million paid to Ansata related to an exclusive development and license
agreement and $30.0 million paid to Q-Med related to an exclusive license agreement for the
development of RESTYLANE SUBQTM. |
| |
| (g) |
|
Includes approximately $5.3 million of business integration planning costs related to the
proposed merger with Inamed, and approximately $1.3 million of professional fees related to
research and development collaborations with AAIPharma, Ansata and Q-Med. |
| |
| (h) |
|
Includes approximately $8.3 million paid to AAIPharma related to a research and development
collaboration, $5.0 million paid to Ansata related to an exclusive development and license
agreement and $30.0 million paid to Q-Med related to an exclusive license agreement for the
development of RESTYLANE SUBQTM. |
| |
| (i) |
|
Includes approximately $2.4 million paid to Dow for a research and development collaboration. |
The cash flow data for the six months ended December 31, 2004, is unaudited.
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
| |
|
2005 |
|
2004 |
| |
|
(in thousands) |
Balance Sheet Data: |
|
|
|
|
|
|
|
|
Cash, cash equivalents, restricted cash
and short-term investments |
|
$ |
603,568 |
|
|
$ |
634,040 |
|
Working capital |
|
|
530,850 |
|
|
|
604,564 |
|
Total assets |
|
|
1,095,087 |
|
|
|
1,116,396 |
|
Long-term debt |
|
|
453,065 |
|
|
|
453,067 |
|
Stockholders’ equity |
|
|
416,891 |
|
|
|
492,892 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Six Months |
|
|
|
|
| |
|
Transition |
|
|
Ended |
|
|
Fiscal Year Ended June 30, |
|
| |
|
Period |
|
|
Dec. 31, 2004 |
|
|
2005 |
|
|
2004 |
|
| |
|
|
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Cash Flow Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
147,990 |
(a) |
|
$ |
45,465 |
|
|
$ |
129,981 |
|
|
$ |
127,964 |
|
Net cash provided by (used in) investing
activities |
|
|
123,665 |
|
|
|
76,158 |
|
|
|
140,487 |
|
|
|
(166,341 |
) |
Net cash (used in) provided by financing
activities |
|
|
(2,792 |
) |
|
|
(137,447 |
) |
|
|
(139,793 |
) |
|
|
40,621 |
|
|
|
|
| (a) |
|
Net cash provided by operating activities for the Transition Period included a $90.5 million
termination fee received from Inamed related to the termination of a proposed merger. |
50
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”) summarizes the significant factors affecting our results of operations,
liquidity, capital resources and contractual obligations, as well as discusses our critical
accounting policies and estimates. You should read the following discussion and analysis together
with our consolidated financial statements, including the related notes, which are included in this
Form 10-K. Certain information contained in the discussion and analysis set forth below and
elsewhere in this report, including information with respect to our plans and strategy for our
business and related financing, includes forward-looking statements that involve risks and
uncertainties. See “Risk Factors” in Item 1A of this Form 10-K for a discussion of important
factors that could cause actual results to differ materially from the results described in or
implied by the forward-looking statements in this report. Our MD&A is composed of four major
sections; Executive Summary, Results of Operations, Liquidity and Capital Resources and Critical
Accounting Policies and Estimates.
Restatement
On November 10, 2008, we restated our financial statements for the annual, transition and
quarterly periods in fiscal years 2003 through 2007 and the first and second quarters of 2008 in
our amended Form 10-K/A for the year ended December 31, 2007 and our amended Forms 10-Q/A for the
quarterly periods ended March 31, 2008 and June 30, 2008.
The restatement principally related to an error in our interpretation and application of
Statement of Financial Accounting Standards No. 48, Revenue Recognition When Right of Return Exists
(“SFAS 48”), as it applied to a component of our sales return reserve calculations. During the
third quarter of 2008, management commenced a review and analysis of its accounting for sales
return reserves after the Public Company Accounting Oversight Board’s (the “PCAOB”) inspection of
our independent public accounting firm’s, Ernst & Young LLP’s, audit of our 2007 financial
statements. Based on the PCAOB inspection, Ernst & Young LLP informed management that the method
of accounting for returns of short dated and expired goods in the periods covered by the financial
statements was not in conformity with generally accepted accounting principles, as the returns for
expired product did not qualify for warranty or exchange accounting and, accordingly, under SFAS
48, the Company should have deferred the full sales price of the product for the amount of
estimated returns. Management conducted a review of whether the reserve complied with SFAS 48 and
whether the amounts involved were material under SAB 99 and SAB 108 for one or more periods.
Management determined that there was an error in our interpretation and application of SFAS 48 and
that the adjustments necessary to properly state the sales returns reserve were material for the
annual, transition, and quarterly periods in fiscal 2003 through 2007 and the first and second
quarters of 2008. Accordingly, management recommended to the Audit Committee that a restatement
was required.
Our prior accounting method with respect to sales return reserves accrued estimated future
returns of short-dated and expired products, which were expected to be replaced with similar
products, at replacement cost, based on our view of the economic impact of returns on our business,
rather than deferring the gross sales price. The replacement of short-dated and expired products,
which was treated as a warranty or an exchange, was reserved for based on the estimated cost
associated with the exchange. In the course of our review and analysis, we determined that,
although the exchanged product was similar, it was not of the same quality, strictly due to dating,
as we were replacing nearly-expired or expired product with newer, fresher product. Therefore, in
accordance with SFAS 48, we revised our reserve calculations to defer the gross sales value of the
estimated product returns that were expected to be replaced with similar products. The revised
reserve calculations were developed based on conditions that existed at the end of each reporting
period and in certain cases were revised based on the Company’s actual return experience.
Additionally, because of the impact of the changes in the sales returns reserve, we recorded
adjustments to certain managed care, Medicaid and consumer rebate accruals and also reflected the
related income tax effects of these adjustments. In addition, related to the modification of the
reserve calculation methodology, the reserve for estimated future returns was classified within
current liabilities rather than as an allowance reducing accounts receivable.
51
The restatement of our consolidated financial statements included other adjustments, including
adjustments related to conforming our historical accounting policies to current accounting policies
that were previously
identified, but not previously recorded, as they were not material, either individually or in
the aggregate. While none of these other adjustments were individually material, they were made as
part of the restatement process. These other adjustments included the reclassification of certain
amounts in prior year financial statements to conform to the 2007 financial statement presentation,
including the reclassification of donated product to charitable organizations from selling, general
and administrative expenses to cost of product revenues.
Throughout the following MD&A, all referenced amounts for prior periods and prior period
comparisons reflect the balances and amounts on a restated basis.
Executive Summary
We are a leading independent specialty pharmaceutical company focused primarily on helping
patients attain a healthy and youthful appearance and self-image through the development and
marketing in the U.S. of products for the treatment of dermatological, aesthetic and podiatric
conditions. We also market products in Canada for the treatment of dermatological and aesthetic
conditions and began commercial efforts in Europe with our acquisition of LipoSonix in July 2008.
We offer a broad range of products addressing various conditions or aesthetics improvements,
including facial wrinkles, acne, fungal infections, rosacea, hyperpigmentation, photoaging,
psoriasis, seborrheic dermatitis and cosmesis (improvement in the texture and appearance of skin).
Our current product lines are divided between the dermatological and non-dermatological
fields. The dermatological field represents products for the treatment of acne and acne-related
dermatological conditions and non-acne dermatological conditions. The non-dermatological field
represents products for the treatment of urea cycle disorder and contract revenue. Our acne and
acne-related dermatological product lines include DYNACIN®, PLEXION®,
SOLODYN®, TRIAZ® and ZIANA®. Our non-acne dermatological product
lines include LOPROX®, PERLANE®, RESTYLANE® and VANOS®.
Our non-dermatological product lines include AMMONUL® and BUPHENYL®. Our
non-dermatological field also includes contract revenues associated with licensing agreements and
authorized generic agreements, and LipoSonix revenues.
Financial Information About Segments
We operate in one significant business segment: Pharmaceuticals. Our current pharmaceutical
franchises are divided between the dermatological and non-dermatological fields. Information on
revenues, operating income, identifiable assets and supplemental revenue of our business franchises
appears in the consolidated financial statements included in Item 8 hereof.
Key Aspects of Our Business
We derive a majority of our revenue from our primary products: PERLANE®,
RESTYLANE®, SOLODYN®, TRIAZ®, VANOS® and
ZIANA®. We believe that sales of our primary products will constitute a significant
portion of our revenue for 2009.
We have built our business by executing a four-part growth strategy: promoting existing
brands, developing new products and important product line extensions, entering into strategic
collaborations and acquiring complementary products, technologies and businesses. Our core
philosophy is to cultivate high integrity relationships of trust and confidence with the foremost
dermatologists and podiatrists and the leading plastic surgeons in the U.S. We rely on third
parties to manufacture our products.
We estimate customer demand for our prescription products primarily through use of third party
syndicated data sources which track prescriptions written by health care providers and dispensed by
licensed pharmacies. The data represents extrapolations from information provided only by certain
pharmacies and are estimates of historical demand levels. We estimate customer demand for our
non-prescription products primarily through internal data that we compile. We observe trends from
these data and, coupled with certain proprietary information, prepare demand forecasts that are the
basis for our purchase orders for finished and component inventory from our third party
manufacturers and suppliers. Our forecasts may fail to accurately anticipate ultimate customer
demand for our
52
products. Overestimates of demand and sudden changes in market conditions may result in
excessive inventory production and underestimates may result in inadequate supply of our products
in channels of distribution.
We schedule our inventory purchases to meet anticipated customer demand. As a result,
miscalculation of customer demand or relatively small delays in our receipt of manufactured
products could result in revenues being deferred or lost. Our operating expenses are based upon
anticipated sales levels, and a high percentage of our operating expenses are relatively fixed in
the short term.
We sell our products primarily to major wholesalers and retail pharmacy chains. Approximately
65-75% of our gross revenues are typically derived from two major drug wholesale concerns.
Depending on the customer, we recognize revenue at the time of shipment to the customer, or at the
time of receipt by the customer, net of estimated provisions. Consequently, variations in the
timing of revenue recognition could cause significant fluctuations in operating results from period
to period and may result in unanticipated periodic earnings shortfalls or losses. We have recently
entered into distribution services agreements with our two largest wholesale customers. We review
the supply levels of our significant products sold to major wholesalers by reviewing periodic
inventory reports that are supplied to us by our major wholesalers in accordance with the
distribution services agreements. We rely wholly upon our wholesale and drug chain customers to
effect the distribution allocation of substantially all of our prescription products. We believe
our estimates of trade inventory levels of our products, based on our review of the periodic
inventory reports supplied by our major wholesalers and the estimated demand for our products based
on prescription and other data, are reasonable. We further believe that inventories of our
products among wholesale customers, taken as a whole, are similar to those of other specialty
pharmaceutical companies, and that our trade practices, which periodically involve volume discounts
and early payment discounts, are typical of the industry.
We periodically offer promotions to wholesale and chain drugstore customers to encourage
dispensing of our prescription products, consistent with prescriptions written by licensed health
care providers. Because many of our prescription products compete in multi-source markets, it is
important for us to ensure the licensed health care providers’ dispensing instructions are
fulfilled with our branded products and are not substituted with a generic product or another
therapeutic alternative product which may be contrary to the licensed health care providers’
recommended and prescribed Medicis brand. We believe that a critical component of our brand
protection program is maintenance of full product availability at drugstore and wholesale
customers. We believe such availability reduces the probability of local and regional product
substitutions, shortages and backorders, which could result in lost sales. We expect to continue
providing favorable terms to wholesale and retail drug chain customers as may be necessary to
ensure the fullest possible distribution of our branded products within the pharmaceutical chain of
commerce. From time to time we may enter into business arrangements (e.g. loans or investments)
involving our customers and those arrangements may be reviewed by federal and state regulators.
Purchases by any given customer, during any given period, may be above or below actual
prescription volumes of any of our products during the same period, resulting in fluctuations of
product inventory in the distribution channel.
53
As described in more detail below, the following significant events and transactions occurred
during 2008, and affected our results of operations, our cash flows and our financial condition:
| |
• |
|
Reduction in the carrying value of our investment in Revance; |
| |
| |
• |
|
Acceptance of RELOXIN® BLA by the FDA; |
| |
| |
• |
|
Repurchase of our 1.5% Contingent Convertible Senior Notes Due 2033; |
| |
| |
• |
|
Acquisition of LipoSonix; |
| |
| |
• |
|
Lease exit costs related to our previous headquarters facility; |
| |
| |
• |
|
Strategic collaboration with IMPAX; and |
| |
| |
• |
|
Other-than-temporary impairment of auction rate securities investments. |
Reduction in the carrying value of our investment in Revance
On December 11, 2007, we announced a strategic collaboration with Revance, a privately-held,
venture-backed development-stage company, whereby we made an equity investment in Revance and
purchased an option to acquire Revance or to license exclusively in North America Revance’s novel
topical botulinum toxin type A product currently under clinical development. The consideration to
be paid to Revance upon our exercise of the option will be at an amount that will approximate the
then fair value of Revance or the license of the product under development, as determined by an
independent appraisal. The option period will extend through the end of Phase 2 testing in the
United States. In consideration for our $20.0 million payment, we received preferred stock
representing an approximate 13.7 percent ownership in Revance, or approximately 11.7 percent on a
fully diluted basis, and the option to acquire Revance or to license the product under development.
The $20.0 million is expected to be used by Revance primarily for the development of the product.
Approximately $12.0 million of the $20.0 million payment represents the fair value of the
investment in Revance at the time of the investment and was included in other long-term assets in
our consolidated balance sheets as of December 31, 2007. The remaining $8.0 million, which is
non-refundable and is expected to be utilized in the development of the new product, represents the
residual value of the option to acquire Revance or to license the product under development and was
recognized as research and development expense during the three months ended December 31, 2007.
We estimate the net realizable value of the Revance investment based on a hypothetical
liquidation at book value approach as of the reporting date, unless a quantitative valuation metric
is available for these purposes (such as the completion of an equity financing by Revance). The
amount or our investment that will be expensed periodically is uncertain due to the timing of
Revance’s expenditures for research and development of the product, and any charges will not be
immediately, if ever, deductible for income tax purposes and will increase our effective tax rate.
Further equity investments, if any, will also be subject to the same accounting treatment as our
original equity investment.
During 2008, we reduced the carrying value of our investment in Revance and recorded a related
charge to earnings of approximately $9.1 million as a result of a reduction in the estimated net
realizable value of the investment using the hypothetical liquidation at book value approach as of
December 31, 2008.
Acceptance of RELOXIN® BLA by the FDA
On March 17, 2006, we entered into a development and distribution agreement with Ipsen,
whereby Ipsen granted to one of our wholly-owned subsidiaries the rights to develop, distribute and
commercialize Ipsen’s botulinum toxin type A product in the United States, Canada and Japan for
aesthetic use by physicians. The product is commonly referred to as RELOXIN® in the
U.S. aesthetic market and DYSPORT® in medical and aesthetic markets outside the U.S.
The product is not currently approved for use in the U.S., Canada or Japan.
In May 2008, the FDA accepted the filing of Ipsen’s BLA for RELOXIN®, and in
accordance with the agreement, we paid Ipsen $25.0 million during the three months ended June 30,
2008 upon achievement of this milestone. The $25.0 million was recognized as a charge to research
and development expense in our consolidated statement of operations during the three months ended
June 30, 2008.
54
Additionally, during the three months ended December 31, 2008, we paid Ipsen $1.5 million upon
the successful completion of an additional regulatory milestone. The $1.5 million was recognized
as a charge to research and development expense in our consolidated statement of operations during
the three months ended December 31, 2008.
We will pay Ipsen an additional $75.0 million upon the product’s approval by the FDA and $2.0
million upon regulatory approval of the product in Japan.
Repurchase of our 1.5% Contingent Convertible Senior Notes Due 2033
In accordance with the terms of our 1.5% Contingent Convertible Senior Notes Due 2033 (the
“New Notes”), holders of the New Notes were able to require us to repurchase all or a portion of
their New Notes on June 4, 2008, at 100% of the principal amount of the New Notes, plus accrued and
unpaid interest, including contingent interest, if any, to the date of the repurchase, payable in
cash. Prior to June 4, 2008, approximately $283.9 million in principal amount of the New Notes was
outstanding. Holders of approximately $283.7 million of New Notes elected to require us to
repurchase their New Notes on June 4, 2008. We paid $283.7 million, plus accrued and unpaid
interest of approximately $2.2 million, to the holders of New Notes that elected to require us to
repurchase their New Notes. We also were required to pay an accumulated deferred tax liability of
approximately $34.9 million related to the repurchased New Notes. This $34.9 million deferred tax
liability was paid during the second half of 2008. Following the repurchase of these New Notes,
$181,000 of principal amount of New Notes remained outstanding as of December 31, 2008.
Acquisition of LipoSonix
On July 1, 2008, we, through our wholly-owned subsidiary Donatello, Inc., acquired LipoSonix,
an independent, privately-held company that employs a staff of approximately 40 scientists,
engineers and clinicians located near Seattle, Washington. LipoSonix is a medical device company
developing non-invasive body sculpting technology, and recently launched its first product in
Europe, where it is being marketed and sold through distributors. The LipoSonix technology is
currently not approved for sale or use in the U.S. Under terms of the transaction, we paid $150.0
million in cash for all of the outstanding shares of LipoSonix. In addition, we will pay LipoSonix
stockholders certain milestone payments up to an additional $150.0 million upon FDA approval of the
LipoSonix technology and if various commercial milestones are achieved on a worldwide basis. As
part of the acquisition of LipoSonix, the estimated fair value of LipoSonix’ in-process research
and development was determined to be $30.5 million. This $30.5 million amount was recognized as
in-process research and development expense during the three months ended September 30, 2008. The
operating results of LipoSonix for the six months ended December 31, 2008 are included in our
consolidated statement of operations for the full six-month period, as the acquisition closed on
July 1, 2008. The operating results of LipoSonix are not included in our consolidated statement of
operations for any other periods.
Lease exit costs related to our previous headquarters facility
In connection with occupancy of our new headquarter office, we ceased use of the prior
headquarter office, which consists of approximately 75,000 square feet of office space, at an
average annual expense of approximately $2.1 million, under an amended lease agreement that expires
in December 2010. Under SFAS 146, Accounting for Costs Associated with Exit or Disposal
Activities, a liability for the costs associated with an exit or disposal activity is recognized
when the liability is incurred. In accordance with SFAS 146, we recorded lease exit costs of
approximately $4.8 million during the three months ended September 30, 2008 consisting of the
initial liability of $4.7 million and accretion expense of $0.1 million. No costs related to this
lease were recorded during the three months ended December 31, 2008. These amounts were recorded
as selling, general and administrative expenses in our consolidated statements of operations.
Strategic collaboration with IMPAX
On November 26, 2008, we entered into a License and Settlement Agreement and a Joint
Development Agreement with IMPAX. In connection with the License and Settlement Agreement, we and
IMPAX agreed to
terminate all legal disputes between us relating to SOLODYN®. Additionally, under
terms of the License and
55
Settlement Agreement, IMPAX confirmed that our patents relating to
SOLODYN® are valid and enforceable, and cover IMPAX’s activities relating to its generic
product under ANDA #90-024. Under the terms of the License and Settlement Agreement, IMPAX has a
license to market its generic versions of SOLODYN® 45mg, 90mg and 135mg under the
SOLODYN® intellectual property rights belonging to us upon the occurrence of specific
events. Upon launch of its generic formulations of SOLODYN®, IMPAX may be required to
pay us a royalty, based on sales of those generic formulations by IMPAX under terms described in
the License and Settlement Agreement. Under the Joint Development Agreement, we and IMPAX will
collaborate on the development of five strategic dermatology product opportunities, including an
advanced-form SOLODYN® product. Under terms of the agreement, we made an initial
payment of $40.0 million upon execution of the agreement. In addition, we are required to pay up
to $23.0 million upon successful completion of certain clinical and commercial milestones. We will
also make royalty payments based on sales of the advanced-form SOLODYN® product if and
when it is commercialized by us upon approval by the FDA. We will share equally in the gross profit
of the other four development products if and when they are commercialized by IMPAX upon approval
by the FDA. The $40.0 million payment was recognized as a charge to research and development
expense during the three months ended December 31, 2008.
Other-than-temporary impairment of auction rate securities investments
As of December 31, 2008, our investments included auction rate floating securities with a fair
value of $38.2 million. Our auction rate floating securities are debt instruments with a long-term
maturity and with an interest rate that is reset in short intervals through auctions. During the
three months ended March 31, 2008, we were informed that there was insufficient demand at auction
for the auction rate floating securities, and since that time we have been unable to liquidate our
holdings in such securities. As a result, these affected auction rate floating securities are now
considered illiquid, and we could be required to hold them until they are redeemed by the holder at
maturity or until a future auction on these investments is successful. As a result of the
continued lack of liquidity of these investments, we recorded an other-than-temporary impairment
loss of $6.4 million during 2008 on our auction rate floating securities, based on our estimate of
the fair value of these investments, which is reflected as a charge to other expense during the
three months ended December 31, 2008.
Global economic conditions
Recent global market and economic conditions have been unprecedented and challenging with
tighter credit conditions and recession in most major economies continuing into 2009. As a result
of these market conditions, the cost and availability of credit has been and may continue to be
adversely affected by illiquid credit markets and wider credit spreads. Concern about the
stability of the markets generally and the strength of counterparties specifically has led many
lenders and institutional investors to reduce, and in some cases, cease to provide credit to
businesses and consumers. These factors have lead to a decrease in spending by consumers.
Continued turbulence in the U.S. and international markets and economies and prolonged declines in
business and consumer spending may adversely affect our liquidity and financial condition,
including our ability to refinance maturing liabilities and access the capital markets to meet
liquidity needs, and the liquidity and financial condition of our customers.
56
Results of Operations
The following table sets forth certain data as a percentage of net revenues for the periods
indicated.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year |
|
Year |
|
Year |
| |
|
Ended |
|
Ended |
|
Ended |
| |
|
Dec. 31, |
|
Dec. 31, |
|
Dec. 31, |
| |
|
2008(a) |
|
2007(b) |
|
2006(c) |
Net revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Gross profit (d) |
|
|
92.5 |
|
|
|
87.7 |
|
|
|
88.3 |
|
Operating expenses |
|
|
84.6 |
|
|
|
67.9 |
|
|
|
111.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
7.9 |
|
|
|
19.8 |
|
|
|
(23.6 |
) |
Other expense |
|
|
(3.0 |
) |
|
|
— |
|
|
|
— |
|
Interest and investment income (expense), net |
|
|
3.3 |
|
|
|
6.2 |
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax (expense)
benefit |
|
|
8.2 |
|
|
|
26.0 |
|
|
|
(18.5 |
) |
Income tax (expense) benefit |
|
|
(6.2 |
) |
|
|
(10.6 |
) |
|
|
6.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
2.0 |
% |
|
|
15.4 |
% |
|
|
(12.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Included in operating expenses is $40.0 million (7.8% of net revenues) paid to IMPAX related
to a development agreement, $30.5 million (5.9% of net revenues) of acquired in-process
research and development expense related to our acquisition of LipoSonix, $25.0 million (4.9%
of net revenues) paid to Ipsen upon the FDA’s acceptance of Ipsen’s BLA for
RELOXIN®, $16.6 million (3.2% of net revenues) of compensation expense related to
stock options and restricted stock and $4.8 million (0.9% of net revenues) of lease exit costs
related to our previous headquarters facility. |
| |
| (b) |
|
Included in operating expense is $21.1 million (4.6% of net revenues) of share-based
compensation expense, $9.3 million (2.0% of net revenues) related to our option to acquire
Revance or to license Revance’s product currently under development (including $1.3 million of
professional fees incurred related to the agreement), $4.1 million (0.9% of net revenues) for
the write-down of an intangible asset related to OMNICEF® and $2.2 million (0.5% of
net revenues) of professional fees related to a strategic collaboration with Hyperion. |
| |
| (c) |
|
Included in operating expenses is $125.2 million (31.8% of net revenues) related to our
development and distribution agreement with Ipsen for the development of RELOXIN®,
$52.6 million (13.4% of net revenues) for the write-down of intangible assets, $26.1 million
(6.6% of net revenues) of share-based compensation expense, $10.2 million (2.6% of net
revenues) related to a loss contingency for a legal matter and $1.8 million (0.5% of net
revenues) related to a settlement of a dispute related to our merger with Ascent. |
| |
| (d) |
|
Gross profit does not include amortization of the related intangibles as such expense is
included in operating expenses. |
57
Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007
Net Revenues
The following table sets forth the net revenues for the year ended December 31, 2008 and the
year ended December 31, 2007, along with the percentage of net revenues and percentage point change
for each of our product categories (dollar amounts in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product revenues |
|
$ |
501.0 |
|
|
$ |
441.9 |
|
|
$ |
59.1 |
|
|
|
13.4 |
% |
Net contract revenues |
|
|
16.8 |
|
|
|
15.5 |
|
|
|
1.3 |
|
|
|
8.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
517.8 |
|
|
$ |
457.4 |
|
|
$ |
60.4 |
|
|
|
13.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acne and acne-related
dermatological products |
|
$ |
325.0 |
|
|
$ |
243.4 |
|
|
$ |
81.6 |
|
|
|
33.5 |
% |
Non-acne dermatological
products |
|
|
148.0 |
|
|
|
172.9 |
|
|
|
(24.9 |
) |
|
|
(14.4 |
)% |
Non-dermatological products
(including contract revenues) |
|
|
44.8 |
|
|
|
41.1 |
|
|
|
3.7 |
|
|
|
9.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
517.8 |
|
|
$ |
457.4 |
|
|
$ |
60.4 |
|
|
|
13.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Percentage |
| |
|
|
|
|
|
|
|
|
|
Point |
| |
|
2008 |
|
2007 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
Acne and acne-related
dermatological products |
|
|
62.8 |
% |
|
|
53.2 |
% |
|
|
9.6 |
|
Non-acne dermatological
products |
|
|
28.6 |
% |
|
|
37.8 |
% |
|
|
(9.2 |
) |
Non-dermatological products
(including contract revenues) |
|
|
8.6 |
% |
|
|
9.0 |
% |
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our total net revenues increased during 2008 primarily as a result of an increase in sales of
SOLODYN®. Net revenues associated with our acne and acne-related dermatological
products increased by $81.6 million, or 33.5%, and by 9.6 percentage points as a percentage of net
revenues during 2008 as compared to 2007 primarily as a result of the increased sales of
SOLODYN®. Net revenues associated with our non-acne dermatological products decreased
as a percentage of net revenues, and decreased in net dollars by 14.4% during 2008 as compared to
2007. This decrease is a result of the non-acne dermatological product category being more
sensitive to weakness in the U.S. economy than the acne and acne-related dermatological product
category. Net revenues associated with our non-dermatological products increased by $3.7 million,
or 9.0%, during 2008 as compared to 2007, primarily due to an increase in sales of
BUPHENYL® and AMMONUL® and an increase in contract revenue.
58
Gross Profit
Gross profit represents our net revenues less our cost of product revenue. Our cost of
product revenue includes our acquisition cost for the products we purchase from our third party
manufacturers and royalty payments made to third parties. Amortization of intangible assets
related to products sold is not included in gross profit. Amortization expense related to these
intangible assets for 2008 and 2007 was approximately $21.5 million and $21.6 million,
respectively. Product mix plays a significant role in our quarterly and annual gross profit as a
percentage of net revenues. Different products generate different gross profit margins, and the
relative sales mix of higher gross profit products and lower gross profit products can affect our
total gross profit.
The following table sets forth our gross profit for 2008 and 2007, along with the percentage
of net revenues represented by such gross profit (dollar amounts in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
479.0 |
|
|
$ |
401.3 |
|
|
$ |
77.7 |
|
|
|
19.4 |
% |
% of net revenues |
|
|
92.5 |
% |
|
|
87.7 |
% |
|
|
|
|
|
|
|
|
The increase in gross profit during 2008, compared to 2007, was due to the increase in our net
revenues and the increase in gross profit as a percentage of net revenues was primarily due to the
different mix of high gross margin products sold during 2008 as compared to 2007. Increased sales
of SOLODYN®, a higher margin product, during 2008, was the primary change in the mix of
products sold during the comparable periods that affected gross profit as a percentage of net
revenues. In addition, gross margin for 2007 included a charge for the write-off of $6.1 million
of certain inventories that, during the third quarter of 2007, were determined to be unsaleable,
and a $2.5 million increase in our inventory valuation reserve recorded during 2007, as compared to
a $2.4 million decrease in our inventory valuation reserve during 2008. The change in the
inventory valuation reserve during 2008 was due to a decrease in the amount of inventory projected
to not be sold by expiry dates.
Selling, General and Administrative Expenses
The following table sets forth our selling, general and administrative expenses for 2008 and
2007, along with the percentage of net revenues represented by selling, general and administrative
expenses (dollar amounts in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
$ |
279.8 |
|
|
$ |
242.6 |
|
|
$ |
37.2 |
|
|
|
15.3 |
% |
% of net revenues |
|
|
54.0 |
% |
|
|
53.0 |
% |
|
|
|
|
|
|
|
|
Share-based compensation expense
included in selling, general and
administrative |
|
$ |
16.3 |
|
|
$ |
21.0 |
|
|
$ |
(4.7 |
) |
|
|
(22.7 |
)% |
The increase in selling, general and administrative expenses during 2008 from 2007 was
attributable to approximately $19.0 million of increased personnel costs, primarily related to an
increase in the number of employees from 472 as of December 31, 2007 to 587 as of December 31, 2008
and the effect of the annual salary increase that occurred during February 2008, $19.7 million of
increased professional and consulting expenses, including costs related to patent litigation
associated with our SOLODYN® product, business development costs, costs related to the
restatement of our 2007 Form 10-K and our Form 10-Q’s for the first and second quarters of 2008 and
the implementation of our new enterprise resource planning (ERP) system, and $4.8 million related
to a lease retirement obligation recorded during the third quarter of 2008 related to our prior
headquarters location, partially offset by a $4.5 million decrease in promotion costs and a $1.8
million decrease in other selling, general and administrative costs during 2008.
Impairment of Intangible Assets
During the second quarter of 2007, an intangible asset related to OMNICEF® was
determined to be impaired based on our analysis of the intangible asset’s carrying value and
projected future cash flows. As a result of the impairment analysis, we recorded a write-down of
approximately $4.1 million related to this intangible asset.
59
Factors affecting the future cash flows of the OMNICEF® intangible asset included
an early termination letter received during May 2007 from Abbott Laboratories, Inc. (“Abbott”),
which transitioned our co-promotion agreement with Abbott for OMNICEF® into a two-year
residual period, and competitive pressures in the marketplace, including generic competition.
Research and Development Expenses
The following table sets forth our research and development expenses for 2008 and 2007 (dollar
amounts in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
Research and development |
|
$ |
99.9 |
|
|
$ |
39.4 |
|
|
$ |
60.5 |
|
|
|
153.4 |
% |
Charges included in research
and development |
|
$ |
65.0 |
|
|
$ |
8.0 |
|
|
$ |
57.0 |
|
|
|
708.1 |
% |
Share-based compensation
expense included in
research and development |
|
$ |
0.3 |
|
|
$ |
0.1 |
|
|
$ |
0.2 |
|
|
|
196.6 |
% |
Included in research and development expenses for 2008 was a $40.0 million payment to IMPAX
related to a development agreement and a $25.0 million milestone payment made to Ipsen after the
FDA’s May 19, 2008 acceptance of the filing of Ipsen’s BLA for RELOXIN®. Included in
research and development expense for 2007 was $8.0 million related to our option to acquire Revance
or to license Revance’s product currently under development. The primary product under development
during 2008 and 2007 was RELOXIN®. We expect research and development expenses to
continue to fluctuate from quarter to quarter based on the timing of the achievement of development
milestones under license and development agreements, as well as the timing of other development
projects and the funds available to support these projects.
In-Process Research and Development Expense
On July 1, 2008, we acquired LipoSonix, a medical device company developing non-invasive body
sculpting technology. As part of the acquisition, we recorded a $30.5 million charge for acquired
in-process research and development during the third quarter of 2008. No income tax benefit was
recognized related to this charge. See Note 5 in our accompanying consolidated financial
statements for further discussion on our acquisition of LipoSonix.
Depreciation and Amortization Expenses
Depreciation and amortization expenses during 2008 increased $3.2 million, or 12.8%, to $27.7
million from $24.5 million during 2007. This increase was primarily due to amortization related to
a $29.1 million milestone payment made to Q-Med related to the FDA approval of PERLANE®
capitalized during the second quarter of 2007 and depreciation incurred in 2008 related to our new
ERP system and our new headquarters facility.
Other Expense
Other expense of $15.5 million recognized during 2008 represented a $9.1 million reduction in
the carrying value of our investment in Revance as a result of a reduction in the estimated net
realizable value of the investment using the hypothetical liquidation at book value approach as of
December 31, 2008, and a $6.4 million other-than-temporary impairment loss recognized related to
our auction-rate securities investments.
60
Interest and Investment Income
Interest and investment income during 2008 decreased $15.0 million, or 39.1%, to $23.4 million
from $38.4 million during 2007, due to an decrease in the funds available for investment due to the
repurchase of $283.7 million of our New Notes in June 2008 and our $150.0 million acquisition of
LipoSonix in July 2008, and a decrease in the interest rates achieved by our invested funds during
2008. We expect interest and investment income to be lower in the first half of 2009 as compared
to the first half of 2008 due to the decrease in funds available for investment due to the
repurchase of $283.7 million of our New Notes in June 2008 and our $150.0 million acquisition of
LipoSonix in July 2008. See Note 13 in our accompanying consolidated financial statements for
further discussion on the New Notes.
Interest Expense
Interest expense during 2008 decreased $3.3 million, or 33.4%, to $6.7 million from $10.0
million during 2007. Our interest expense during 2008 and 2007 consisted of interest expense on
our Old Notes, which accrue interest at 2.5% per annum, our New Notes, which accrue interest at
1.5% per annum, and amortization of fees and other origination costs related to the issuance of the
Old Notes and New Notes. The decrease in interest expense during 2008 as compared to 2007 was
primarily due to the repurchase of $283.7 million of our New Notes in June 2008, the fees and
origination costs related to the issuance of the Old Notes becoming fully amortized during the
second quarter of 2007, and the fees and origination costs related to the issuance of the New Notes
becoming fully amortized during the second quarter of 2008. See Note 13 in our accompanying
consolidated financial statements for further discussion on the Old Notes and New Notes. We expect
interest expense to be lower in the first half of 2009 as compared to the first half of 2007 due to
the impact of the repurchase of $283.7 million of our New Notes in June 2008 and the impact of the
origination costs of the New Notes being fully amortized as of June 30, 2008.
Income Tax Expense
The following table sets forth our income tax expense and the resulting effective tax rate
stated as a percentage of pre-tax income for 2008 and 2007 (dollar amounts in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
$ |
32.1 |
|
|
$ |
48.5 |
|
|
$ |
(16.4 |
) |
|
|
(33.8 |
)% |
Effective tax rate |
|
|
75.8 |
% |
|
|
40.8 |
% |
|
|
|
|
|
|
|
|
Income tax expense during 2008 was $32.1 million compared to income tax expense during 2007 of
$48.5 million. Our effective tax rate was 75.8% for 2008 as compared to 40.8% for 2007. Our
effective rate was higher during 2008 as compared to 2007 as no tax benefits were recorded related
to the charge associated with the reduction in carrying value of our investment in Revance and on
the in-process research and development charge related to our acquisition of LipoSonix. Without
these charges, our effective tax rate for 2008 was 39.2%. The effective tax rate for 2007 of 40.8%
includes a $3.3 million tax charge recorded during the fourth quarter of 2007 relating to a
valuation allowance recorded against the deferred tax asset associated with the expensing of the
option to acquire Revance or license Revance’s product that is under development. Without this
charge, our effective tax rate for 2007 was 37.9%. As of December 31, 2008, the cumulative $18.1
million reduction in the carrying value of the Revance investment is currently an unrealized loss
for tax purposes. The Company will not be able to determine the character of the loss until the
Company exercises or fails to exercise its option. A realized loss characterized as a capital loss
can only be utilized to offset capital gains. The Company recorded a
valuation allowance against the
deferred tax asset associated with this unrealized tax loss to reduce the carrying value to $0,
which is the amount that management believes is more likely than not to be realized.
61
Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
Net Revenues
The following table sets forth the net revenues for the year ended December 31, 2007 and the
year ended December 31, 2006, along with the percentage of net revenues and percentage point change
for each of our product categories (dollar amounts in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product revenues |
|
$ |
441.9 |
|
|
$ |
377.6 |
|
|
$ |
64.3 |
|
|
|
17.0 |
% |
Net contract revenues |
|
|
15.5 |
|
|
|
15.6 |
|
|
|
(0.1 |
) |
|
|
(0.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
457.4 |
|
|
$ |
393.2 |
|
|
$ |
64.2 |
|
|
|
16.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acne and acne-related
dermatological products |
|
$ |
243.4 |
|
|
$ |
159.8 |
|
|
$ |
83.6 |
|
|
|
52.3 |
% |
Non-acne dermatological
products |
|
|
172.9 |
|
|
|
199.6 |
|
|
|
(26.7 |
) |
|
|
(13.4 |
)% |
Non-dermatological products
(including contract revenues) |
|
|
41.1 |
|
|
|
33.8 |
|
|
|
7.3 |
|
|
|
21.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
457.4 |
|
|
$ |
393.2 |
|
|
$ |
64.2 |
|
|
|
16.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Percentage |
| |
|
|
|
|
|
|
|
|
|
Point |
| |
|
2007 |
|
2006 |
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
Acne and acne-related
dermatological products |
|
|
53.2 |
% |
|
|
40.6 |
% |
|
|
12.6 |
|
Non-acne dermatological
products |
|
|
37.8 |
% |
|
|
50.8 |
% |
|
|
(13.0 |
) |
Non-dermatological products
(including contract revenues) |
|
|
9.0 |
% |
|
|
8.6 |
% |
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our total net revenues increased during 2007 primarily as a result of an increase in sales of
SOLODYN®, which was approved by the FDA during the second quarter of 2006,
ZIANA®, which was approved by the FDA during the fourth quarter of 2006, and
PERLANE®, which was approved by the FDA during the second quarter of 2007. Net revenues
associated with our acne and acne-related dermatological products increased by $83.6 million, or
52.3%, and by 12.6 percentage points as a percentage of net revenues during 2007 as compared to
2006 as a result of the increased sales of SOLODYN® and ZIANA®. Net revenues
associated with our non-acne dermatological products decreased in net dollars by $26.7 million, or
13.4% and decreased as a percentage of net revenues by 13.0 percentage points during 2007 as
compared to 2006, primarily due to decreased sales of LOPROX®, OMNICEF®, and
RESTYLANE®, partially offset by increased sales of PERLANE®. Net revenues
associated with our non-dermatological increased in net dollars by $7.3 million, or 21.6%, and
increased as a percentage of net revenues from 8.6% to 9.0% during 2007 as compared to 2006,
primarily due to increased sales of BUPHENYL®.
Gross Profit
Gross profit represents our net revenues less our cost of product revenues. Our cost of
product revenues includes our acquisition cost for the products we purchase from our third party
manufacturers and royalty payments made to third parties. Amortization of intangible assets
related to products sold is not included in gross profit. Amortization expense related to these
intangible assets for 2007 and 2006 was approximately $21.6 million and
62
$20.0 million, respectively. Product mix plays a significant role in our quarterly and annual
gross profit as a percentage of net revenues. Different products generate different gross profit
margins, and the relative sales mix of higher gross profit products and lower gross profit products
can affect our total gross profit.
The following table sets forth our gross profit for 2007 and 2006, along with the percentage
of net revenues represented by such gross profit (dollar amounts in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
2006 |
|
$ Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
401.3 |
|
|
$ |
347.1 |
|
|
$ |
54.2 |
|
|
|
15.6 |
% |
% of net revenues |
|
|
87.7 |
% |
|
|
88.3 |
% |
|
|
|
|
|
|
|
|
The increase in gross profit during 2007, compared to 2006, was due to the increase in our net
revenues. Gross profit as a percentage of net revenues was affected by the different mix of high
gross margin products sold during 2007 as compared to 2006. The launch of SOLODYN®, a
higher margin product, during the second quarter of 2006, was the primary change in the mix of
products sold during the comparable periods that affected gross profit as a percentage of net
revenues. The impact of the mix of higher margin products being sold during 2007 as compared to
2006 was offset by the write-off of $6.1 million of certain inventories that, during the third
quarter of 2007, were determined to be unsalable, and a $2.5 million increase in our inventory
valuation reserve recorded during 2007, as compared to a $0.1 million increase in our inventory
valuation reserve during 2006. The change in the inventory valuation reserve was due to an
increase in inventory during 2007 projected to not be sold by expiry dates.
Selling, General and Administrative Expenses
The following table sets forth our selling, general and administrative expenses for 2007 and
2006, along with the percentage of net revenues represented by selling, general and administrative
expenses (dollar amounts in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
2006 |
|
$ Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
$ |
242.6 |
|
|
$ |
202.5 |
|
|
$ |
40.1 |
|
|
|
19.8 |
% |
% of net revenues |
|
|
53.0 |
% |
|
|
51.5 |
% |
|
|
|
|
|
|
|
|
Share-based compensation expense
included in selling, general and
administrative |
|
$ |
21.0 |
|
|
$ |
24.5 |
|
|
$ |
(3.5 |
) |
|
|
(14.0 |
)% |
The increase in selling, general and administrative expenses during 2007 from 2006 was
attributable to approximately $16.3 million of increased personnel costs, primarily related to an
increase in the number of employees (increasing from 407 as of December 31, 2006 to 472 as of
December 31, 2007) and the effect of the annual salary increase that occurred during February 2007,
$11.5 million of increased promotion expense, primarily related to the promotion of
RESTYLANE® and our new products SOLODYN®, ZIANA® and
PERLANE®, $14.7 million of increased professional and consulting expenses, including
$2.2 million and $1.3 million of professional fees related to our strategic collaboration with
Hyperion and equity investment in Revance, respectively, and costs related to our new enterprise
resource planning (ERP) system, and $10.6 million of other additional selling, general and
administrative expenses incurred during 2007. These increases were partially offset by certain
costs incurred during 2006 that were not incurred during 2007, including $10.2 million related to a
loss contingency for a legal matter related to our marketing of LOPROX® to
pediatricians, $1.8 million related to a settlement of a dispute related to our merger with Ascent
and approximately $1.0 million of professional and other expenses related to our development and
distribution agreement with Ipsen for the development of RELOXIN®.
Impairment of Intangible Assets
During the second quarter of 2007, an intangible asset related to OMNICEF® was
determined to be impaired based on our analysis of the intangible asset’s carrying value and
projected future cash flows. As a result of the impairment analysis, we recorded a write-down of
approximately $4.1 million related to this intangible asset.
63
Factors affecting the future cash flows of the OMNICEF® intangible asset included
an early termination letter received during May 2007 from Abbott, which transitions our
co-promotion agreement with Abbott into a two-year residual period, and competitive pressures in
the marketplace, including generic competition.
During the third quarter of 2006, intangible assets related to certain of our products were
determined to be impaired based on our analysis of the intangible assets’ carrying value and
projected future cash flows. As a result of the impairment analysis, we recorded a write-down of
approximately $52.6 million related to these intangible assets. This write-down included the
following (in thousands):
| |
|
|
|
|
Intangible asset related to LOPROX® products |
|
$ |
49,163 |
|
Intangible asset related to ESOTERICA® products |
|
|
3,267 |
|
Other intangible asset |
|
|
156 |
|
|
|
|
|
|
|
$ |
52,586 |
|
|
|
|
|
Factors affecting the future cash flows of the LOPROX® intangible asset included
competitive pressures in the marketplace and the cancellation of the development plan to support
future forms of LOPROX®. Factors affecting the future cash flows of the
ESOTERICA® intangible asset included a notice of proposed rulemaking by the FDA for an
NDA to be required for continued marketing of hydroquinone products, such as ESOTERICA®.
ESOTERICA® is currently an over-the-counter product line, and we do not plan to invest
in obtaining an approved NDA for this product line if this proposed rule is made final without
change.
Research and Development Expenses
The following table sets forth our research and development expenses for 2007 and 2006 (dollar
amounts in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
2006 |
|
$ Change |
|
% Change |
Research and development |
|
$ |
39.4 |
|
|
$ |
161.8 |
|
|
$ |
(122.4 |
) |
|
|
(75.6 |
)% |
Charges included in research
and development |
|
$ |
8.0 |
|
|
$ |
125.2 |
|
|
$ |
(117.2 |
) |
|
|
(93.6 |
)% |
Share-based compensation
expense included in
research and development |
|
$ |
0.1 |
|
|
$ |
1.6 |
|
|
$ |
(1.5 |
) |
|
|
(93.1 |
)% |
Included in research and development expense for 2007 was $8.0 million related to our option
to acquire Revance or to license Revance’s product currently under development and $0.1 million of
share-based compensation, which included a reversal of previously recognized share-based
compensation expense of approximately $0.3 million due to the cancellation of share-based awards
during the third quarter of 2007. Included in research and development expense for 2006 was $125.2
million related to the development and distribution agreement with Ipsen for the development of
RELOXIN® and approximately $1.6 million of share-based compensation expense. The
primary product under development during 2007 and 2006 was RELOXIN®. We expect research
and development expenses to continue to fluctuate from quarter to quarter based on the timing of
the achievement of development milestones under license and development agreements, as well as the
timing of other development projects and the funds available to support these projects. We expect
to incur significant research and development expenses related to the development of
RELOXIN® each quarter throughout the development process.
64
Depreciation and Amortization Expenses
Depreciation and amortization expenses during 2007 increased $1.5 million, or 6.5%, to $24.5
million from $23.0 million during 2006. This increase included amortization related to a $29.1
million milestone payment made to Q-Med related to the FDA approval of PERLANE®
capitalized during the second quarter of 2007. This increase in amortization was partially offset
by a decrease in amortization due to the write-down of intangible assets due to impairment during
the third quarter of 2006. The remaining amortizable lives of these intangible assets were also
shortened. These intangible assets had an aggregate cost basis of approximately $76.6 million and
were being amortized at a rate of approximately $0.4 million per quarter. These intangible assets
were written-down to an aggregate new cost basis of approximately $3.6 million, and are being
amortized at an aggregate rate of approximately $0.1 million per quarter.
Interest and Investment Income
Interest and investment income during 2007 increased $7.6 million, or 24.7%, to $38.4 million
from $30.8 million during 2006, due to an increase in the funds available for investment and an
increase in the interest rates achieved by our invested funds during 2007.
Interest Expense
Interest expense during 2007 decreased $0.6 million, to $10.0 million in 2007 from $10.6
million in 2006. Our interest expense in 2007 and 2006 consisted of interest expense on our Old
Notes, which accrue interest at 2.5% per annum, our New Notes, which accrue interest at 1.5% per
annum, and amortization of fees and other origination costs related to the issuance of the Old
Notes and New Notes. The decrease in interest expense during 2007 as compared to 2006 was due to
the fees and origination costs related to the issuance of the Old Notes becoming fully amortized
during the second quarter of 2007. See Note 13 in our accompanying consolidated financial
statements for further discussion on the Old Notes and New Notes.
Income Tax Expense
The following table sets forth our income tax expense and the resulting effective tax rate
stated as a percentage of pre-tax income for 2007 and 2006 (dollar amounts in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
2006 |
|
$ Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense |
|
$ |
48.5 |
|
|
$ |
(24.6 |
) |
|
$ |
73.1 |
|
|
|
297.2 |
% |
Effective tax rate |
|
|
40.8 |
% |
|
|
(33.8 |
)% |
|
|
|
|
|
|
|
|
Income tax expense during 2007 was $48.5 million compared to an income tax benefit during 2006
of $24.6 million. The income tax benefit recorded in 2006 is primarily due to our pre-tax loss
recognized during 2006. The effective tax rate for 2007 of 40.8% includes a $3.3 million tax charge
recorded during the fourth quarter of 2007 relating to a valuation allowance recorded against the
deferred tax asset associated with the expensing of the option to acquire Revance or license
Revance’s product that is under development. The expense is currently an unrealized loss for tax
purposes. The Company will not be able to determine the character of the loss until the Company
exercises or fails to exercise its option. A realized loss characterized as a capital loss can
only be utilized to offset capital gains. The Company recorded a
valuation allowance against the
deferred tax asset associated with this unrealized tax loss to reduce the carrying value to $0,
which is the amount that management believes is more likely than not to be realized. The effective
tax rate for 2007 absent this $3.3 million charge is 37.9%.
65
Liquidity and Capital Resources
Overview
The following table highlights selected cash flow components for the year ended December 31,
2008 and 2007, and selected balance sheet components as of December 31, 2008 and 2007 (dollar
amounts in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
45.8 |
|
|
$ |
158.9 |
|
|
$ |
(113.1 |
) |
|
|
(71.2 |
)% |
Investing activities |
|
|
220.1 |
|
|
|
(269.5 |
) |
|
|
489.6 |
|
|
|
181.7 |
% |
Financing activities |
|
|
(287.3 |
) |
|
|
14.5 |
|
|
|
(301.8 |
) |
|
|
(2,085.6 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Dec. 31, 2008 |
|
Dec. 31, 2007 |
|
$ Change |
|
% Change |
Cash, cash equivalents and
short-term investments |
|
$ |
343.9 |
|
|
$ |
794.7 |
|
|
$ |
(450.8 |
) |
|
|
(56.7 |
)% |
Working capital |
|
|
307.6 |
|
|
|
423.0 |
|
|
|
(115.4 |
) |
|
|
(27.3 |
)% |
Long-term investments |
|
|
55.3 |
|
|
|
17.1 |
|
|
|
38.2 |
|
|
|
224.1 |
% |
2.5% contingent convertible senior
notes due 2032 |
|
|
169.2 |
|
|
|
169.2 |
|
|
|
— |
|
|
|
— |
|
1.5% contingent convertible senior
notes due 2033 |
|
|
0.2 |
|
|
|
283.9 |
|
|
|
(283.7 |
) |
|
|
(99.9 |
)% |
Working Capital
Working capital as of December 31, 2008 and 2007 consisted of the following (dollar amounts in
millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Dec. 31, 2008 |
|
|
Dec. 31, 2007 |
|
|
$Change |
|
|
% Change |
|
Cash, cash equivalents and
short-term investments |
|
$ |
343.9 |
|
|
$ |
794.7 |
|
|
$ |
(450.8 |
) |
|
|
(56.7 |
)% |
Accounts receivable, net |
|
|
52.6 |
|
|
|
22.2 |
|
|
|
30.4 |
|
|
|
136.9 |
% |
Inventories, net |
|
|
24.2 |
|
|
|
30.0 |
|
|
|
(5.8 |
) |
|
|
(19.3 |
)% |
Deferred tax assets, net |
|
|
53.2 |
|
|
|
9.2 |
|
|
|
44.0 |
|
|
|
478.3 |
% |
Other current assets |
|
|
19.6 |
|
|
|
18.0 |
|
|
|
1.6 |
|
|
|
8.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
493.5 |
|
|
|
874.1 |
|
|
|
(380.6 |
) |
|
|
(43.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
39.0 |
|
|
|
34.9 |
|
|
|
4.1 |
|
|
|
11.7 |
% |
Current portion of long-term debt |
|
|
— |
|
|
|
283.9 |
|
|
|
(283.9 |
) |
|
|
(100.0 |
)% |
Reserve for sales returns |
|
|
59.6 |
|
|
|
68.8 |
|
|
|
(9.2 |
) |
|
|
(13.4 |
)% |
Income taxes payable |
|
|
— |
|
|
|
7.7 |
|
|
|
(7.7 |
) |
|
|
(100.0 |
)% |
Other current liabilities |
|
|
87.3 |
|
|
|
55.8 |
|
|
|
31.5 |
|
|
|
56.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
185.9 |
|
|
|
451.1 |
|
|
|
(265.2 |
) |
|
|
(58.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
307.6 |
|
|
$ |
423.0 |
|
|
$ |
(115.4 |
) |
|
|
(27.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
We had cash, cash equivalents and short-term investments of $343.9 million and working capital
of $307.6 million at December 31, 2008, as compared to $794.7 million and $423.0 million,
respectively, at December 31, 2007. The decrease in cash, cash equivalents and short-term
investments was primarily due to the repurchase of $283.7 million of our New Notes during June
2008, the $150.0 million acquisition of LipoSonix, and by a net transfer of $38.3 million of our
short-term investments into long-term investments, partially offset by the generation of $45.8
million of operating cash flow during 2008. The decrease in working capital was primarily due to
the $150.0 million acquisition of LipoSonix and a net transfer of $38.3 million of our short-term
investments into long-term investments, partially offset by the generation of $45.8 million of
operating cash flow during 2008.
Management believes existing cash and short-term investments, together with funds generated
from operations, should be sufficient to meet operating requirements for the foreseeable future.
Our cash and short-term investments are available for dividends, milestone payments related to our
product development collaborations,
66
including $75.0 million that we will pay to Ipsen upon the FDA’s approval of RELOXIN®,
strategic investments, acquisitions of companies or products complimentary to our business, the
repayment of outstanding indebtedness, repurchases of our outstanding securities and other
potential large-scale needs. In addition, we may consider incurring additional indebtedness and
issuing additional debt or equity securities in the future to fund potential acquisitions or
investments, to refinance existing debt or for general corporate purposes. If a material
acquisition or investment is completed, our operating results and financial condition could change
materially in future periods. However, no assurance can be given that additional funds will be
available on satisfactory terms, or at all, to fund such activities.
On July 1, 2008, we acquired LipoSonix, an independent, privately-held company that employs a
staff of approximately 40 scientists, engineers and clinicians located near Seattle, Washington.
LipoSonix is a medical device company developing non-invasive body sculpting technology, and
recently launched its first product in Europe, where it is being marketed and sold through
distributors. The LipoSonix technology is currently not approved for sale or use in the United
States. Under terms of the transaction, we paid $150 million in cash for all of the outstanding
shares of LipoSonix. In addition, we will pay LipoSonix stockholders certain milestone payments up
to an additional $150 million upon FDA approval of the LipoSonix technology and if various
commercial milestones are achieved on a worldwide basis.
As of December 31, 2008, our short-term investments included $38.2 million of auction rate
floating securities. Our auction rate floating securities are debt instruments with a long-term
maturity and with an interest rate that is reset in short intervals through auctions. During the
three months ended March 31, 2008, we were informed that there was insufficient demand at auction
for the auction rate floating securities, and since that time we have been unable to liquidate our
holdings in such securities. As a result, these affected auction rate floating securities are now
considered illiquid, and we could be required to hold them until they are redeemed by the holder at
maturity or until a future auction on these investments is successful. As a result of the
continued lack of liquidity of these investments, we recorded an other-than-temporary impairment
loss of $6.4 million during 2008 on our auction rate floating securities, based on our estimate of
the fair value of these investments.
During July 2006, we executed a lease agreement for new headquarter office space to
accommodate our expected long-term growth. The first phase is for approximately 150,000 square
feet with the right to expand. We occupied the new headquarter office space, which is located
approximately one mile from our previous headquarter office space in Scottsdale, Arizona, during
the second quarter of 2008. There is no cash obligation for lease payments until 2009. We
obtained possession of the leased premises and therefore began accruing rent expense during the
first quarter of 2008. Rent expense recognized during 2008 related to this property was
approximately $2.8 million. During the first quarter of 2008, we received approximately $6.7
million in tenant improvement incentives from the landlord. This amount has been capitalized into
leasehold improvements and is being depreciated on a straight-line basis over the lesser of the
useful life or the term of the lease. The tenant improvement incentives are also included in other
long-term liabilities as deferred rent, and will be recognized as a reduction of rent expense on a
straight-line basis over the term of the lease. In 2008, upon vacating our previous headquarters
facility, we recorded a charge for the estimated remaining net cost for the lease, net of potential
sublease income, of $4.8 million. See “—Contingent Convertible Senior Notes and Other Long-Term
Commitments.”
During 2007, we began designing and implementing a new enterprise resource planning (ERP)
system to integrate and improve the financial and operational aspects of our business. During 2007
and 2008, we paid approximately $9.5 million and $4.6 million, respectively, related to this
project.
67
Operating Activities
Net cash provided by operating activities during the year ended December 31, 2008 was
approximately $45.8 million, compared to net cash provided by operating activities of approximately
$158.9 million during the year ended December 31, 2007. The following is a summary of the primary
components of cash provided by (used in) operating activities during the year ended December 31,
2008 and 2007 (in millions):
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
Payment made to IMPAX related to development agreement |
|
$ |
(40.0 |
) |
|
$ |
— |
|
Payments made to Ipsen related to development of RELOXIN® |
|
|
(25.0 |
) |
|
|
(29.1 |
) |
Payment made to Revance related to our option to acquire
Revance or to license Revance’s product currently
under development |
|
|
— |
|
|
|
(8.0 |
) |
Income taxes paid |
|
|
(87.8 |
) |
|
|
(35.4 |
) |
Payment received from Hyperion related to strategic collaboration |
|
|
— |
|
|
|
10.0 |
|
Other cash provided by operating activities |
|
|
198.6 |
|
|
|
221.4 |
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
$ |
45.8 |
|
|
$ |
158.9 |
|
|
|
|
|
|
|
|
Investing Activities
Net cash provided by investing activities during the year ended December 31, 2008 was
approximately $220.1 million, compared to net cash used in investing activities during the year
ended December 31, 2007 of $269.5 million. The change was primarily due to the net sales or
purchases of our short-term and long-term investments during the respective periods. During 2008,
$150.0 million was used for the acquisition of LipoSonix and during 2007, $29.1 million was paid to
Q-Med upon the FDA’s approval of PERLANE® and $20.0 million was paid to Revance related
to our investment in Revance ($12.0 million classified as a long-term asset, $8.0 million
recognized as research and development expense).
Financing Activities
Net cash used in financing activities during the year ended December 31, 2008 was $287.3
million, compared to net cash provided by financing activities of $14.5 million during the year
ended December 31, 2007. Cash used in financing activities during 2008 included the repurchase of
$283.7 million of New Notes during June 2008. Proceeds from the exercise of stock options were
$4.8 million during 2008 compared to $19.7 million during 2007. Dividends paid during 2008 were
$8.6 million compared to $6.8 million during 2007.
Contingent Convertible Senior Notes and Other Long-Term Commitments
We have two outstanding series of Contingent Convertible Senior Notes, consisting of $169.2
million principal amount of 2.5% Contingent Convertible Senior Notes due 2032 (the “Old Notes”) and
$0.2 million principal amount of 1.5% Contingent Convertible Senior Notes due 2033 (the “New
Notes”). In accordance with the terms of our New Notes, holders of the New Notes were able to
require us to repurchase all or a portion of their New Notes on June 4, 2008, at 100% of the
principal amount of the New Notes, plus accrued and unpaid interest, including contingent interest,
if any, to the date of the repurchase, payable in cash. Prior to June 4, 2008, approximately
$283.9 million in principal amount of the New Notes was outstanding. Holders of approximately
$283.7 million of New Notes elected to require us to repurchase their New Notes on June 4, 2008.
We paid $283.7 million, plus accrued and unpaid interest of approximately $2.2 million, to the
holders of New Notes that elected to require us to repurchase their New Notes. We also were
required to pay an accumulated deferred tax liability of approximately $34.9 million related to the
repurchased New Notes. This $34.9 million deferred tax liability was paid during the second half
of 2008. Following the repurchase of these New Notes, $181,000 of principal amount of New Notes
remained outstanding as of December 31, 2008.
The New Notes and the Old Notes are unsecured and do not contain any restrictions on the
incurrence of additional indebtedness or the repurchase of our securities, and do not contain any
financial covenants. The Old
68
Notes do not contain any restrictions on the payment of dividends. The New Notes require an
adjustment to the conversion price if the cumulative aggregate of all current and prior dividend
increases above $0.025 per share would result in at least a one percent (1%) increase in the
conversion price. This threshold has not been reached and no adjustment to the conversion price
has been made. On June 4, 2012 and 2017 or upon the occurrence of a change in control, holders of
the Old Notes may require us to offer to repurchase their Old Notes for cash. On June 4, 2013 and
2018 or upon the occurrence of a change in control, holders of the New Notes may require us to
offer to repurchase their New Notes for cash.
Except for the New Notes and Old Notes, we had only $14.5 million of long-term liabilities at
December 31, 2008 and we had only $185.9 million of current liabilities at December 31, 2008. Our
other commitments and planned expenditures consist principally of payments we will make in
connection with strategic collaborations and research and development expenditures, and we will
continue to invest in sales and marketing infrastructure.
We have made available to BioMarin the ability to draw down on a Convertible Note up to $25.0
million beginning July 1, 2005 (the “Convertible Note”). The Convertible Note is convertible based
on certain terms and conditions including a change of control provision. Money advanced under the
Convertible Note is convertible into BioMarin shares at a strike price equal to the BioMarin
average closing price for the 20 trading days prior to such advance. The Convertible Note matures
on the option purchase date in 2009 as defined in the securities purchase agreement entered into on
May 18, 2004, but may be repaid by BioMarin at any time prior to the option purchase date. As of
March 2, 2009, BioMarin has not requested any monies to be advanced under the Convertible Note, and
no amounts are outstanding.
In connection with occupancy of the new headquarter office, we ceased use of the prior
headquarter office, which consists of approximately 75,000 square feet of office space, at an
average annual expense of approximately $2.1 million, under an amended lease agreement that expires
in December 2010. Under SFAS 146, a liability for the costs associated with an exit or disposal
activity is recognized when the liability is incurred. In accordance with SFAS 146, we recorded
lease exit costs of approximately $4.8 million during the three months ended September 30, 2008
consisting of the initial liability of $4.7 million and accretion expense of $0.1 million. These
amounts were recorded as selling, general and administrative expenses in our condensed consolidated
statements of operations. We have not recorded any other costs related to the lease for the prior
headquarters.
As of December 31, 2008, approximately $4.0 million of lease exit costs remain accrued and are
expected to be paid by December 2010 of which $1.9 million is classified in other current
liabilities and $2.1 million is classified in other liabilities. Although we no longer use the
facilities, the lease exit cost accrual has not been offset by an adjustment for estimated sublease
rentals. After considering sublease market information as well as factors specific to the lease,
we concluded it was probable we would be unable to reasonably obtain sublease rentals for the prior
headquarters and therefore we would not be subleased for the remaining lease term. We will
continue to monitor the sublease market conditions and reassess the impact on the lease exit cost
accrual.
The following is a summary of the activity in the liability for lease exit costs for the year
ended December 31, 2008:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Liability as of |
|
Amounts Charged |
|
Cash Payments |
|
Cash Received |
|
Liability as of |
| |
|
Dec. 31, 2007 |
|
to Expense |
|
Made |
|
from Sublease |
|
Dec. 31, 2008 |
Lease exit costs
liability |
|
$ |
— |
|
|
$ |
4,812,928 |
|
|
$ |
(816,826 |
) |
|
$ |
— |
|
|
$ |
3,996,102 |
|
69
Repurchases of Common Stock
On August 29, 2007, our Board of Directors approved a stock trading plan to purchase up to
$200.0 million in aggregate value of shares of our Class A common stock upon satisfaction of
certain conditions. The number of shares to be repurchased and the timing of the repurchases (if
any) will depend on factors such as the market price of our Class A common stock, economic and
market conditions, and corporate and regulatory requirements. The plan terminated on August 29,
2008, as it was scheduled to terminate on the earlier of the first anniversary of the plan or at
the time when the aggregate purchase limit was reached. No shares were repurchased under this
plan.
Dividends
We do not have a dividend policy. Since July 2003, we have paid quarterly cash dividends
aggregating approximately $37.2 million on our common stock. In addition, on December 17, 2008, we
declared a cash dividend of $0.04 per issued and outstanding share of common stock payable on
January 30, 2009 to our stockholders of record at the close of business on January 2, 2009. Prior
to these dividends, we had not paid a cash dividend on our common stock. Any future determinations
to pay cash dividends will be at the discretion of our Board of Directors and will be dependent
upon our financial condition, operating results, capital requirements and other factors that our
Board of Directors deems relevant.
Fair Value Measurements
As discussed in Note 12 to our consolidated financial statements, we adopted the provisions of
SFAS No. 157 as of January 1, 2008. We determined that we utilize unobservable (Level 3) inputs in
determining the fair value of our auction rate floating security investments, which totaled $38.2
million at December 31, 2008. These securities were included in long-term investments at December
31, 2008. We also utilize unobservable (Level 3) inputs to value our investment in Revance, which
totaled $2.9 million at December 31, 2008, and is included in other assets.
Our auction rate floating securities are classified as available for sale securities and are
reflected at fair value. In prior periods, due to the auction process which took place every 30-35
days for most securities, quoted market prices were readily available, which would qualify as Level
1 under SFAS No. 157. However, due to events in credit markets during the first quarter of 2008,
the auction events for most of these instruments failed, and, therefore, we determined the
estimated fair values of these securities utilizing a discounted cash flow analysis as of December
31, 2008. These analyses consider, among other items, the collateralization underlying the
security investments, the expected future cash flows, including the final maturity, associated with
the securities, and the expectation of the next time the security is expected to have a successful
auction. These securities were also compared, when possible, to other observable market data with
similar characteristics to the securities held by us. Due to these events, we reclassified these
instruments as Level 3 during the first quarter of 2008 and have recorded an other-than-temporary
impairment loss of $6.4 million during 2008 on our auction rate floating securities, based on our
estimate of the fair value of these investments. Our estimate of fair value of our auction-rate
floating securities was based on market information and estimates determined by our management,
which could change in the future based on market conditions.
In November 2008, we entered into a settlement agreement with the broker through which we
purchased auction rate floating securities. The settlement agreement provides us with the right to
put an auction rate floating security currently held by us back to the broker beginning on June 30,
2010. At December 31, 2008, we held one auction rate floating security with a par value of $1.3
million that was subject to the settlement agreement. We elected the irrevocable Fair Value Option
treatment under SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities,
and adjusted the put option to fair value. We reclassified this auction rate floating security
from available-for-sale to trading securities as of December 31, 2008, and future changes in fair
value related to this investment and the related put right will be recorded in earnings.
70
Off-Balance Sheet Arrangements
As of December 31, 2008, we are not involved in any off-balance sheet arrangements, as defined
in Item 3(a)(4)(ii) of SEC Regulation S-K.
Contractual Obligations
The following table summarizes our significant contractual obligations at December 31, 2008,
and the effect such obligations are expected to have on our liquidity and cash flows in future
periods. This table excludes certain other purchase obligations as discussed below (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due By Period |
|
| |
|
|
|
|
|
|
|
|
|
More Than |
|
|
More Than |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
1 Year and |
|
|
3 Years and |
|
|
|
|
| |
|
|
|
|
|
Less Than |
|
|
Less Than |
|
|
Less Than |
|
|
More Than |
|
| |
|
Total |
|
|
1 Year |
|
|
3 Years |
|
|
5 Years |
|
|
5 Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
169,326 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
169,326 |
|
|
$ |
— |
|
Interest on long-term debt |
|
|
99,439 |
|
|
|
4,231 |
|
|
|
8,463 |
|
|
|
8,463 |
|
|
|
78,282 |
|
Operating leases |
|
|
53,417 |
|
|
|
4,906 |
|
|
|
10,337 |
|
|
|
8,582 |
|
|
|
29,592 |
|
Other purchase obligations
and commitments |
|
|
867 |
|
|
|
173 |
|
|
|
347 |
|
|
|
347 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
323,049 |
|
|
$ |
9,310 |
|
|
$ |
19,147 |
|
|
$ |
186,718 |
|
|
$ |
107,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The long-term debt consists of our Old Notes and New Notes. We may redeem some or all of the
Old Notes and New Notes at any time on or after June 11, 2007 and June 11, 2008, respectively, at a
redemption price, payable in cash, of 100% of the principal amount, plus accrued and unpaid
interest, including contingent interest, if any. Holders of the Old Notes and New Notes may
require us to repurchase all or a portion of their Old Notes on June 4, 2012 and 2017 and New Notes
on June 4, 2013 and 2018, or upon a change in control, as defined in the indenture agreements
governing the Old Notes and New Notes, at 100% of the principal amount of the Old Notes and New
Notes, plus accrued and unpaid interest to the date of the repurchase, payable in cash. As of
December 31, 2008, $169.1 million of the Old Notes and $0.2 million of New Notes were classified in
the “More than 3 years and less than 5 years” category as the holders of the Old Notes and New
Notes may require us to repurchase all or a portion of their Old Notes and New Notes on June 4,
2012, and June 4, 2013, respectively, each of which is more than 3 years but less than 5 years from
the December 31, 2008 balance sheet date.
Interest on long-term debt includes interest payable on our Old Notes and New Notes, assuming
the Old Notes and New Notes will not have any redemptions or conversions into shares of our Class A
common stock until their respective maturities in 2032 and 2033, but does not include any
contingent interest. The amount of interest ultimately paid in future years could change if any of
the Old Notes or New Notes are converted or redeemed and/or if contingent interest becomes payable
if certain future criteria are met.
Other purchase obligations and commitments include payments due under research and development
and consulting contracts.
We have committed to make potential future “milestone” payments to third-parties as part of
certain product development and license agreements. Payments under these agreements generally
become due and payable only upon achievement of certain developmental, regulatory and/or commercial
milestones. Because the achievement and timing of these milestones are not fixed or reasonably
determinable, such contingencies have not been recorded on our consolidated balance sheets and are
not included in the above table. The total amount of potential future milestone payments related
to development and license agreements is approximately $398.2 million.
Purchase orders for raw materials, finished goods and other goods and services are not
included in the above table. We are not able to determine the aggregate amount of such purchase
orders that represent contractual
71
obligations, as purchase orders may represent authorizations to
purchase rather than binding agreements. For the purpose of this table, contractual obligations
for purchase of goods or services are defined as agreements that are enforceable and legally
binding on us and that specify all significant terms, including: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the approximate timing of the
transaction. Our purchase orders are based on our current manufacturing needs and are fulfilled by
our vendors with relatively short timetables. We do not have significant agreements for the
purchase of raw materials or finished goods specifying minimum quantities or set prices that exceed
our short-term expected requirements. We also enter into contracts for outsourced services;
however, the obligations under these contracts were not significant and the contracts generally
contain clauses allowing for cancellation without significant penalty.
The expected timing of payment of the obligations discussed above is estimated based on
current information. Timing of payments and actual amounts paid may be different depending on the
time of receipt of goods or services or changes to agreed-upon amounts for some obligations.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in conformity with U.S.
generally accepted accounting principles. The preparation of the consolidated financial statements
requires us to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates
related to sales allowances, chargebacks, rebates, returns and other pricing adjustments,
depreciation and amortization and other contingencies and litigation. We base our estimates on
historical experience and various other factors related to each circumstance. Actual results could
differ from those estimates based upon future events, which could include, among other risks,
changes in the regulations governing the manner in which we sell our products, changes in the
health care environment and managed care consumption patterns. Our significant accounting policies
are described in Note 2 to the consolidated financial statements included in this report. We
believe the following critical accounting policies affect our most significant estimates and
assumptions used in the preparation of our consolidated financial statements and are important in
understanding our financial condition and results of operations.
Revenue Recognition
Revenue from our product sales is recognized pursuant to Staff Accounting Bulletin No. 104
(SAB 104), Revenue Recognition in Financial Statements. Accordingly, revenue is recognized when
all four of the following criteria are met: (i) persuasive evidence that an arrangement exists;
(ii) delivery of the products has occurred; (iii) the selling price is both fixed and determinable;
and (iv) collectibility is reasonably assured. Our customers consist primarily of large
pharmaceutical wholesalers who sell directly into the retail channel.
We do not provide any material forms of price protection to our wholesale customers and permit
product returns if the product is damaged, or, depending on the customer, if it is returned within
six months prior to expiration or up to 12 months after expiration. Our customers consist
principally of financially viable wholesalers, and depending on the customer, revenue is recognized
based upon shipment (“FOB shipping point”) or receipt (“FOB destination”), net of estimated
provisions. As a general practice, we do not ship product that has less than 15 months until its
expiration date. We also authorize returns for damaged products and credits for expired products
in accordance with our returned goods policy and procedures. The shelf life associated with our
products is up to 36 months depending on the product. The majority of our prescription products
have a shelf life of approximately 18-24 months.
We enter into licensing arrangements with other parties whereby we receive contract revenue
based on the terms of the agreement. The timing of revenue recognition is dependent on the level
of our continuing involvement in the manufacture and delivery of licensed products. If we have
continuing involvement, the revenue is deferred and recognized on a straight-line basis over the
period of continuing involvement. In addition, if our licensing
arrangements require no continuing involvement and payments are merely based on the passage of
time, we assess such payments for revenue recognition under the collectibility criteria of SAB 104.
Items Deducted From Gross Revenue
72
Provisions
for estimated product returns, sales discounts and chargebacks are established as a
reduction of product sales revenues at the time such revenues are recognized. Provisions for
managed care and Medicaid rebates and consumer rebate and loyalty programs are established as a
reduction of product sales revenues at the later of the date at which revenue is recognized or the
date at which the sales incentive is offered in accordance with EITF 01-9, Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products). In
addition, we defer revenue for certain sales of inventory into the distribution channel that are in
excess of eight (8) weeks of projected demand. These deductions from gross revenue are established
by us as our best estimate based on historical experience adjusted to reflect known changes in the
factors that impact such reserves, including but not limited to, prescription data, industry
trends, competitive developments and estimated inventory in the distribution channel. Our
estimates of inventory in the distribution channel are based on inventory information reported to
us by our major wholesale customers for which we have inventory management agreements, historical
shipment and return information from our accounting records and data on prescriptions filled, which
we purchase from IMS Health, Inc., one of the leading providers of prescription-based information.
We regularly monitor internal as well as external data from our wholesalers, in order to assess the
reasonableness of the information obtained from external sources. We also utilize projected
prescription demand for our products, as well as, our internal information regarding our products.
These deductions from gross revenue are generally reflected either as a direct reduction to
accounts receivable through an allowance, as a reserve within current liabilities, as an addition
to accrued expenses, or as deferred revenue within current liabilities.
We identify product returns by their manufacturing lot number. Because we manufacture in
bulk, lot sizes can be large and, as a result, sales of any individual lot may occur over several
periods. As a result, we are unable to specify if actual returns or credits relate to a sale that
occurred in the current period or a prior period, and therefore, we cannot specify how much of the
provision recorded relates to sales made in prior periods. However, we believe the process
discussed above, including the tracking of returns by lot, and the availability of other internal
and external data allows us to reasonably estimate the level of product returns, as well as
estimate the level of expected credits associated with rebates or chargebacks.
Our accounting policies for revenue recognition have a significant impact on our reported
results and rely on certain estimates that require complex and subjective judgment on the part of
our management. If the levels of product returns, inventory in the distribution channel, cash
discounts, chargebacks, managed care and Medicaid rebates and consumer rebate and loyalty programs
fluctuate significantly and/or if our estimates do not adequately reserve for these reductions of
gross product revenues, our reported net product revenues could be negatively affected.
73
The following table shows the activity of each reserve, associated with the various sales
provisions that serve to reduce our accounts receivable balance or increase our accrued expenses or
deferred revenue, for the years ended December 31, 2007 and 2008 (dollars in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed |
|
Consumer |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Care & |
|
Rebate |
|
|
| |
|
Reserve |
|
|
|
|
|
Sales |
|
|
|
|
|
Medicaid |
|
and |
|
|
| |
|
for Sales |
|
Deferred |
|
Discounts |
|
Chargebacks |
|
Rebates |
|
Loyalty |
|
|
| |
|
Returns |
|
Revenue |
|
Reserve |
|
Reserve |
|
Reserve |
|
Programs |
|
Total |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December
31, 2006 |
|
$ |
87,412 |
|
|
$ |
— |
|
|
$ |
1,701 |
|
|
$ |
447 |
|
|
$ |
6,111 |
|
|
$ |
5,398 |
|
|
$ |
101,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
|
(57,216 |
) |
|
|
— |
|
|
|
(11,270 |
) |
|
|
(1,432 |
) |
|
|
(9,814 |
) |
|
|
(15,942 |
) |
|
|
(95,674 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision |
|
|
38,591 |
|
|
|
1,907 |
|
|
|
10,080 |
|
|
|
1,305 |
|
|
|
8,584 |
|
|
|
25,289 |
|
|
|
85,756 |
|
| |
|
|
Balance at December
31, 2007 |
|
$ |
68,787 |
|
|
$ |
1,907 |
|
|
$ |
511 |
|
|
$ |
320 |
|
|
$ |
4,881 |
|
|
$ |
14,745 |
|
|
$ |
91,151 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
|
(50,042 |
) |
|
|
(2,387 |
) |
|
|
(12,268 |
) |
|
|
(2,001 |
) |
|
|
(17,230 |
) |
|
|
(49,462 |
) |
|
|
(133,390 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision |
|
|
40,866 |
|
|
|
1,194 |
|
|
|
13,005 |
|
|
|
2,152 |
|
|
|
29,305 |
|
|
|
63,165 |
|
|
|
149,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Balance at December
31, 2008 |
|
$ |
59,611 |
|
|
$ |
714 |
|
|
$ |
1,248 |
|
|
$ |
471 |
|
|
$ |
16,956 |
|
|
$ |
28,448 |
|
|
$ |
107,448 |
|
| |
|
|
Reserve for Sales Returns
We account for returns of product by establishing an allowance based on our estimate of
revenues recorded for which the related products are expected to be returned in the future. We
estimate the rate of future product returns for our established products based on our historical
experience, the relative risk of return based on expiration date, and other qualitative factors
that could impact the level of future product returns, such as competitive developments, product
discontinuations and our introduction of similar new products. Historical experience and the other
qualitative factors are assessed on a product-specific basis as part of our compilation of our
estimate of future product returns. We also estimate inventory in the distribution channel by
monitoring inventories held by our distributors, as well as prescription trends to help us assess
whether historical rates of return continue to be appropriate given current conditions. We
estimate returns of new products primarily based on our historical acceptance of our new product
introductions by our customers and product returns experience of similar products, products that
have similar characteristics at various stages of their life cycle, and other available information
pertinent to the intended use and marketing of the new product. Changes due to our competitors’
price movements have not adversely affected us. We do not provide material pricing incentives to
our distributors that are intended to have them assume additional inventory levels beyond what is
customary in their ordinary course of business.
Our actual experience and the qualitative factors that we use to determine the necessary
accrual for future product returns are susceptible to change based on unforeseen events and
uncertainties. We assess the trends that could affect our estimates and make changes to the
accrual quarterly when it appears product returns may differ from our original estimates.
The provision for product returns was $40.9 million, or 6.2% of gross product sales, and $38.6
million, or 7.2% of gross product sales, for the years ended December 31, 2008 and 2007,
respectively. The reserve for product returns was $59.6 million and $68.8 million as of December
31, 2008 and 2007, respectively. The decrease in the provision as a percentage of gross product
sales and the reserve was primarily related to a reduction in
74
product returns experienced during 2008 and lower levels of inventory in the distribution channel at December 31, 2008.
If the amount of our estimated quarterly returns increased by 10.0 percent, our sales returns
reserve at December 31, 2008 would increase by approximately $4.4 million and corresponding revenue
would decrease by the same amount. Conversely, if the amount of our estimated quarterly returns
decreased by 10.0 percent, our sales returns reserve at December 31, 2008 would decrease by
approximately $4.4 million and corresponding revenue would increase by the same amount. We
consider the sensitivity analysis of a 10.0 percent variance between estimated and actual sales
returns to be representative of the range of other outcomes that we are reasonably likely to
experience in estimating our sales returns reserves.
For newly-launched products, if the returns reserve percentage increased by one percentage
point, our sales return reserve at December 31, 2008 would increase by approximately $3.2 million
and corresponding revenue would decrease by the same amount. Conversely, if the returns reserve
percentage decreased by one percentage point, our sales returns reserve at December 31, 2008 would
have decreased by approximately $3.2 million and corresponding revenue would increase by the same
amount.
We also defer the recognition of revenue and related cost of revenue for certain sales of
inventory into the distribution channel that are in excess of eight (8) weeks of projected demand.
The distribution channel’s market demand requirement is estimated based on inventory information
reported to us by our major wholesale customers for which we have inventory management agreements,
who make up a significant majority of our total sales of inventory into the distribution channel.
No adjustment is made for those customers who do not provide inventory information to us. Deferred
product revenue net of the related cost of revenue associated with estimated excess inventory at
wholesalers was approximately $0.7 million and $1.9 million as of December 31, 2008 and December
31, 2007, respectively.
Sales Discounts
We offer cash discounts to our customers as an incentive for prompt payment, generally
approximately 2% of the sales price. We account for cash discounts by establishing an allowance
reducing accounts receivable by the full amount of the discounts expected to be taken by the
customers. We consider payment performance and adjust the allowance to reflect actual experience
and our current expectations about future activity.
The provision for cash discounts was $13.0 million, or 2.0% of gross product sales, and $10.1
million, or 1.9% of gross product sales, for the years ended December 31, 2008 and 2007,
respectively. The reserve for cash discounts was $1.2 million and $0.5 million as of December 31,
2008 and 2007, respectively. The increase in the provision was due to an increase in gross product
sales. The balance in the reserve for sales discounts at the end of the fiscal year is related to
the amount of accounts receivable that is outstanding at that date that is still eligible for the
cash discounts to be taken by the customers. The fluctuations in the reserve for sales discounts
between periods are normally reflective of increases or decreases in the related eligible
outstanding accounts receivable amounts at the comparable dates.
Contract Chargebacks
We have agreements for contract pricing with several entities, whereby pricing on products is
extended below wholesaler list price. These parties purchase products through wholesalers at the
lower contract price, and the wholesalers charge the difference between their acquisition cost and
the lower contract price back to us. We account for chargebacks by establishing an allowance
reducing accounts receivable based on our estimate of chargeback claims attributable to a sale. We
determine our estimate of chargebacks based on historical experience and changes to current
contract prices. We also consider our claim processing lag time, and adjust the allowance
periodically throughout each quarter to reflect actual experience. Although we record an allowance
for estimated chargebacks at the time we record the sale (typically when we ship the product), the
actual chargeback related to that sale is not processed until the entities purchase the product
from the wholesaler. We continually monitor our historical experience and current pricing trends
to ensure the liability for future chargebacks is fairly stated.
75
The provision for contract chargebacks was $2.2 million, or 0.3% of gross product sales, and
$1.3 million, or 0.2% of gross product sales, for the years ended December 31, 2008 and 2007,
respectively. The reserve for contract chargebacks was $0.5 million and $0.3 million as of December 31, 2008 and 2007,
respectively. The increase in the provision and the reserve was due to an increase in the number
of pricing contracts in place during the comparable periods.
Managed Care and Medicaid Rebates
Rebates are contractual discounts offered to government programs and private health plans that
are eligible for such discounts at the time prescriptions are dispensed, subject to various
conditions. We record provisions for rebates based on factors such as timing and terms of plans
under contract, time to process rebates, product pricing, sales volumes, amount of inventory in the
distribution channel, and prescription trends. We continually monitor historical payment rates and
actual claim data to ensure the liability is fairly stated.
The provision for managed care and Medicaid rebates was $29.3 million, or 4.4% of gross
product sales, and $8.6 million, or 1.6% of gross product sales, for the years ended December 31,
2008 and 2007, respectively. The reserve for managed care and Medicaid rebates was $17.0 million
and $4.9 million as of December 31, 2008 and 2007, respectively. The increase in the provision was
primarily due to an increase in the number of pricing contracts in place during the comparable
periods related to SOLODYN®. The increase in the reserve is due to an increase in the
amount of rebates outstanding at the comparable dates, due to the increase in the number of
SOLODYN® pricing contracts in place.
Consumer Rebates and Loyalty Programs
We offer consumer rebates on many of our products and we have consumer loyalty programs. We
generally account for these programs by establishing an accrual based on our estimate of the rebate
and loyalty incentives attributable to a sale. We generally base our estimates for the accrual of
these items on historical experience and other relevant factors. We adjust our accruals
periodically throughout each quarter based on actual experience and changes in other factors, if
any, to ensure the balance is fairly stated.
The provision for consumer rebates and loyalty programs was $63.2 million, or 9.6% of gross
product sales, and $25.3 million, or 4.7% of gross product sales, for the years ended December 31,
2008 and 2007, respectively. The reserve for consumer rebates and loyalty programs was $28.4
million and $14.7 million as of December 31, 2008 and 2007, respectively. The increase in the
provision and the reserve was primarily due to new consumer rebate programs initiated during 2008
related to our SOLODYN®, RESTYLANE® and PERLANE® products.
If our 2008 estimates of rebate redemption rates or average rebate amounts for our consumer
rebate programs changed by 10.0 percent, or our estimates of eligible procedures completed related
to our customer loyalty programs were to change by 10.0 percent, our reserve for these items would
be impacted by approximately $2.5 million and corresponding revenue would be impacted by the same
amount. We consider the sensitivity analysis of a 10.0 percent variance in our estimated rebate
redemption rates and average rebate amounts to be representative of the range of other outcomes
that we are reasonably likely to experience in estimating our reserve for consumer rebates and
loyalty programs.
Use of Information from External Sources
We use information from external sources to estimate our significant items deducted from gross
revenues. Our estimates of inventory in the distribution channel are based on historical shipment
and return information from our accounting records and data on prescriptions filled, which we
purchase from IMS Health, Inc., one of the leading providers of prescription-based information. We
regularly monitor internal data as well as external data from our wholesalers, in order to assess
the reasonableness of the information obtained from external sources. We also utilize projected
prescription demand for our products, as well as, written and oral information obtained from
certain wholesalers with respect to their inventory levels and our internal information. We use
the information from IMS Health, Inc. to project the prescription demand for our products. Our
estimates are subject to inherent limitations pertaining to reliance on third-party information, as
certain third-party information is itself in the form of estimates.
76
Use of Estimates in Reserves
We believe that our allowances and accruals for items that are deducted from gross revenues
are reasonable and appropriate based on current facts and circumstances. It is possible, however,
that other parties applying reasonable judgment to the same facts and circumstances could develop
different allowance and accrual amounts for items that are deducted from gross revenues.
Additionally, changes in actual experience or changes in other qualitative factors could cause our
allowances and accruals to fluctuate, particularly with newly launched products. We review the
rates and amounts in our allowance and accrual estimates on a quarterly basis. If future estimated
rates and amounts are significantly greater than those reflected in our recorded reserves, the
resulting adjustments to those reserves would decrease our reported net revenues; conversely, if
actual returns, rebates and chargebacks are significantly less than those reflected in our recorded
reserves, the resulting adjustments to those reserves would increase our reported net revenues. If
we changed our assumptions and estimates, our related reserves would change, which would impact the
net revenues we report.
Share-Based Compensation
As part of our adoption of SFAS No. 123R as of July 1, 2005, we were required to recognize the
fair value of share-based compensation awards as an expense. Determining the appropriate
fair-value model and calculating the fair value of share-based awards at the date of grant requires
judgment. We use the Black-Scholes option pricing model to estimate the fair value of employee
stock options. Option pricing models, including the Black-Scholes model, also require the use of
input assumptions, including expected volatility, expected life, expected dividend rate, and
expected risk-free rate of return. We use a blend of historical and implied volatility based on
options freely traded in the open market as we believe this is more reflective of market conditions
and a better indicator of expected volatility than using purely historical volatility. Increasing
the weighted average volatility by 2.5 percent (from 0.35 — 0.38 percent to 0.375 — 0.405
percent) would have increased the fair value of stock options granted in 2008 to $9.51 per share.
Conversely, decreasing the weighted average volatility by 2.5 percent (from 0.35 — 0.38 percent to
0.325 — 0.355 percent) would have decreased the fair value of stock options granted in 2008 to
$8.59 per share. The expected life of the awards is based on historical experience of awards with
similar characteristics. Stock option awards granted during 2008 have a stated term of 7 years,
and the weighted average expected life of the awards was determined to be 7 years. Decreasing the
weighted average expected life by 0.5 years (from 7.0 years to 6.5 years) would have decreased the
fair value of stock options granted in 2008 to $8.75 per share. The risk-free interest rate
assumption is based on observed interest rates appropriate for the terms of our awards. The
dividend yield assumption is based on our history and expectation of future dividend payouts.
The fair value of our restricted stock grants is based on the fair market value of our common
stock on the date of grant discounted for expected future dividends.
SFAS No. 123R requires us to develop an estimate of the number of share-based awards which
will be forfeited due to employee turnover. Quarterly changes in the estimated forfeiture rate may
have a significant effect on share-based compensation, as the effect of adjusting the rate for all
expense amortization after July 1, 2005 is recognized in the period the forfeiture estimate is
changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an
adjustment is made to increase the estimated forfeiture rate, which will result in a decrease to
the expense recognized in the financial statements. If the actual forfeiture rate is lower than
the estimated forfeiture rate, then an adjustment is made to decrease the estimated forfeiture
rate, which will result in an increase to the expense recognized in the financial statements. The
effect of forfeiture adjustments in the first quarter of 2009 was immaterial.
We evaluate the assumptions used to value our awards on a quarterly basis. If factors change
and we employ different assumptions, stock-based compensation expense may differ significantly from
what was recorded in the past. If there are any modifications or cancellations of the underlying
unvested securities, we may be required to accelerate, increase or cancel any remaining unearned
stock-based compensation expense. Future stock-based compensation expense and unearned stock-based
compensation will increase to the extent that we grant additional equity awards to employees or we
assume unvested equity awards in connection with acquisitions.
77
Our estimates of these important assumptions are based on historical data and judgment
regarding market trends and factors. If actual results are not consistent with our assumptions and
judgments used in estimating these factors, we may be required to record additional stock-based
compensation expense or income tax expense, which could be material to our results of operations.
Inventory
Inventory costs associated with products that have not yet received regulatory approval are
capitalized if we believe there is probable future commercial use and future economic benefit. If
future commercial use and future economic benefit are not considered probable, then costs
associated with pre-launch inventory that has not yet received regulatory approval are expensed as
research and development expense during the period the costs are incurred. We could be required to
expense previously capitalized costs related to pre-approval inventory if the probability of future
commercial use and future economic benefit changes due to denial or delay of regulatory approval, a
delay in commercialization, or other factors. Conversely, our gross margins could be favorably
impacted if previously expensed pre-approval inventory becomes available and is used for commercial
sale. As of December 31, 2008, there were $1.1 million of costs capitalized into inventory for
products that have not yet received regulatory approval. We believe that it is probable that these
products will receive regulatory approval and future revenues that exceed costs will be generated
from the sale of the inventory.
Long-lived Assets
We assess the impairment of long-lived assets when events or changes in circumstances indicate
that the carrying value of the assets may not be recoverable. Factors that we consider in deciding
when to perform an impairment review include significant under-performance of a product line in
relation to expectations, significant negative industry or economic trends, and significant changes
or planned changes in our use of the assets. Recoverability of assets that will continue to be used
in our operations is measured by comparing the carrying amount of the asset grouping to our
estimate of the related total future net cash flows. If an asset carrying value is not recoverable
through the related cash flows, the asset is considered to be impaired. The impairment is measured
by the difference between the asset grouping’s carrying amount and its fair value, based on the
best information available, including market prices or discounted cash flow analysis.
When we determine that the useful lives of assets are shorter than we had originally
estimated, and there are sufficient cash flows to support the carrying value of the assets, we
accelerate the rate of amortization charges in order to fully amortize the assets over their new
shorter useful lives.
During 2008, we did not recognize an impairment charge as a result of our review of long-lived
assets. During 2007 and 2006, impairment charges of $4.1 million and $52.6 million, respectively,
were recognized related to our review of long-lived assets. During 2007, the remaining useful life
of the intangible asset that was deemed to be impaired was reduced. During 2006, the remaining
useful lives of two of the intangible assets that were deemed to be impaired were reduced. This
process requires the use of estimates and assumptions, which are subject to a high degree of
judgment. If these assumptions change in the future, we may be required to record additional
impairment charges for, and/or accelerate amortization of, long-lived assets.
Income Taxes
Income taxes are determined using an annual effective tax rate, which generally differs from
the U.S. Federal statutory rate, primarily because of state and local income taxes, enhanced
charitable contribution deductions for inventory, tax credits available in the U.S., the treatment
of certain share-based payments under SFAS 123R that are not designed to normally result in tax
deductions, various expenses that are not deductible for tax purposes, and differences in tax rates
in certain non-U.S. jurisdictions. Our effective tax rate may be subject to fluctuations during
the year as new information is obtained which may affect the assumptions we use to estimate our
annual effective tax rate, including factors such as our mix of pre-tax earnings in the various tax
jurisdictions in which we operate, changes in valuation allowances against deferred tax assets,
reserves for tax audit issues and settlements, utilization of tax credits and changes in tax laws
in jurisdictions where we conduct operations. We recognize tax benefits in accordance with
Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”). Under FIN 48, tax benefits are recognized only if the tax position is
78
more likely than not of being sustained. We recognize deferred tax assets and liabilities for temporary
differences between the financial reporting basis and the tax basis of our assets and liabilities,
along with net operating losses and credit carryforwards. We record valuation allowances against
our deferred tax assets to reduce the net carrying values to amounts that management believes is
more likely than not to be realized.
Based on our historical pre-tax earnings, we believe it is more likely than not that we will
realize the benefit of substantially all of the existing net deferred tax assets at December 31,
2008. We believe the existing net deductible temporary differences will reverse during periods in
which we generate net taxable income; however, there can be no assurance that we will generate any
earnings or any specific level of continuing earnings in future years. Certain tax planning or
other strategies could be implemented, if necessary, to supplement income from operations to fully
realize recorded tax benefits.
The Company has an option to acquire Revance or license Revance’s product that is under
development. Through December 31, 2008, we have recorded $18.1 million of charges related to the
reduction in the carrying value of the Revance investment. The reduction in the carrying value of
the Revance investment is currently an unrealized loss for tax purposes. We will not be able to
determine the character of the loss until we exercise or fail to exercise our option. A realized
loss characterized as a capital loss can only be utilized to offset capital gains. We have
recorded a $6.7 million valuation allowance against the deferred tax asset associated with this
unrealized tax loss in order to reduce the carrying value of the deferred tax asset to $0, which is
the amount that we believe is more likely than not to be realized.
Research and Development Costs and Accounting for Strategic Collaborations
All research and development costs, including payments related to products under development
and research consulting agreements, are expensed as incurred. We may continue to make
non-refundable payments to third parties for new technologies and for new technologies and research
and development work that has been completed. These payments may be expensed at the time of
payment depending on the nature of the payment made.
Our policy on accounting for costs of strategic collaborations determines the timing of our
recognition of certain development costs. In addition, this policy determines whether the cost is
classified as development expense or capitalized as an asset. We are required to form judgments
with respect to the commercial status of such products in determining whether development costs
meet the criteria for immediate expense or capitalization. For example, when we acquire certain
products for which there is already an ANDA or NDA approval related directly to the product, and
there is net realizable value based on projected sales for these products, we capitalize the amount
paid as an intangible asset. In addition, if we acquire product rights which are in the
development phase and as to which we have no assurance that the third party will successfully
complete its development milestones, we expense such payments.
Legal Contingencies
We record contingent liabilities resulting from asserted and unasserted claims against us,
when it is probable that a liability has been incurred and the amount of the loss is reasonably
estimable. We disclose material contingent liabilities, when there is a reasonable possibility,
that the ultimate loss will exceed the recorded liability. Estimating probable losses requires
analysis of multiple factors, in some cases including judgments about the potential actions of
third-party claimants and courts. Therefore, actual losses in any future period are inherently
uncertain. In addition to the matters disclosed in “Item 3. Legal Proceedings,” we are party to
ordinary and routine litigation incidental to our business. We do not expect the outcome of any
pending litigation to have a material adverse effect on our consolidated financial position or
results of operations. It is possible, however, that future results of operations for any
particular quarterly or annual period could be materially affected by changes in our assumptions or
the effectiveness of our strategies related to these proceedings.
79
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141R, Business Combinations, which replaces SFAS
No. 141 and establishes principles and requirements for how an acquirer in a business combination
recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed and any controlling interest. It also established principles and requirements
for how an acquirer in a business combination recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase, and determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141R provides for the following changes from SFAS No. 141: 1) an
acquirer will record all assets and liabilities of acquired business, including goodwill, at fair
value, regardless of the level of interest acquired; 2) certain contingent assets and liabilities
acquired will be recognized at fair value at the acquisition date; 3) contingent consideration
will be recognized at fair value on the acquisition date with changes in fair value to be
recognized in earnings; 4) acquisition-related transaction and restructuring costs will be
expensed as incurred rather than treated as part of the cost of the acquisition and included in the
amount recorded for assets acquired; 5) reversals of valuation allowances related to acquired
deferred tax assets and changes to acquired income tax uncertainties will be recognized in
earnings; and 6) when making adjustments to finalize initial accounting, acquirers will revise any
previously issued post-acquisition financial information in future financial statements to reflect
any adjustments as if they occurred on the acquisition date. SFAS No. 141R applies prospectively
to business combinations for which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008. The impact of SFAS No. 141R, if
any, on our consolidated results of operations and financial condition will depend on the nature of
business combinations we enter into, if any, subsequent to December 31, 2008.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements — an amendment of Accounting Research Bulletin No. 51. SFAS No. 160
establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary
and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition
of a noncontrolling interest, or minority interest, as equity in the consolidated financial
statements and separate from the parent’s equity. The amount of net income attributable to the
noncontrolling interest will be included in consolidated net income on the face of the statement of
operations. SFAS No. 160 clarifies that changes in a parent’s ownership interest in a subsidiary
that do not result in deconsolidation are equity transactions if the parent retains it controlling
financial interest. In addition, this statement requires that a parent recognize a gain or loss in
net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair
value of the noncontrolling equity investment on the deconsolidation date. SFAS No. 160 also
includes expanded disclosure requirements regarding the interests of the parent and its
noncontrolling interest. SFAS No. 160 is effective for fiscal years beginning on or after December
15, 2008. We do not expect the adoption of SFAS No. 160 to have a material impact on our
consolidated results of operations and financial condition.
In December 2007, the EITF reached a consensus on EITF 07-01, Accounting for Collaborative
Agreements. EITF 07-01 prohibits companies from applying the equity method of accounting to
activities performed outside a separate legal entity by a virtual joint venture. Instead, revenues
and costs incurred with third parties in connection with the collaborative arrangement should be
presented gross or net by the collaborators based on the criteria in EITF Issue No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an Agent, and other applicable accounting
literature. The consensus should be applied to collaborative arrangements in existence at the date
of adoption using a modified retrospective method that requires reclassification in all periods
presented for those arrangements still in effect at the transition date, unless that application is
impracticable. The consensus is effective for fiscal years beginning after December 15, 2008. We
do not expect the adoption of EITF 07-01 to have a material impact on our consolidated results of
operations and financial condition.
In April 2008, the FASB issued FSP 142-3, Determination of the Useful Life of Intangible
Assets. FSP 142-3 amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets. FSP 142-3 is effective for fiscal years beginning after
December 15, 2008. We do not expect the adoption of FSP 142-3 to have a material impact on our
consolidated results of operations and financial condition.
80
In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That
May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 clarifies
the accounting for convertible debt instruments that may be settled in cash (including partial cash
settlement) upon conversion. FSP APB 14-1 specifies that issuers of such instruments should
separately account for the liability and equity components of certain convertible debt instruments
in a manner that reflects the issuer’s nonconvertible debt borrowing rate when interest cost is
recognized. FSP APB 14-1 requires bifurcation of a component of the debt, classification of that
component in equity and the accretion of the resulting discount on the debt to be recognized as
part of interest expense. FSP APB 14-1 requires retrospective application to the terms of
instruments as they existed for all periods presented. FSP APB 14-1 is effective for fiscal years
beginning after December 15, 2008, and early adoption is not permitted. We do not expect FSP APB
14-1 to impact our consolidated results of operations and financial condition.
In June 2008, the FASB reached a consensus on EITF 07-5, Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entity’s Own Stock. EITF 07-5 addresses the determination of
whether an instrument (or embedded feature) is indexed to an entity’s own stock. EITF 07-5 is
effective for fiscal years beginning after December 15, 2008. We do not expect the adoption of
EITF 07-5 to have a material impact on our consolidated results of operations and financial
condition.
In October 2008, the FASB issued FSP 157-3, Determining the Fair Value of a Financial Asset
When the Market for That Asset is Not Active. FSP 157-3 clarifies the application of SFAS No. 157,
Fair Value Measurements, in a market that is not active and provides an example to illustrate key
considerations in determining fair value of financial assets when the market for that financial
asset is not active. FSP 157-3 applies to financial assets within the scope of accounting
pronouncements that require or permit fair value measurements in accordance with SFAS No. 157. FSP
157-3 was effective upon issuance and included prior periods for which financial statements had not
been issued. The application of FSP 157-3 did not have a material impact on our consolidated
financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
At December 31, 2008, $83.2 million of our cash equivalent investments are in money market
securities that are reflected as cash equivalents, because all maturities are within 90 days.
Included in money market securities are commercial paper, Federal agency discount notes and money
market funds. Our interest rate risk with respect to these investments is limited due to the
short-term duration of these arrangements and the yields earned, which approximate current interest
rates.
Our
policy for our short-term and long-term investments is to establish a high-quality portfolio
that preserves principal, meets liquidity needs, avoids inappropriate concentrations and delivers
an appropriate yield in relationship to our investment guidelines and market conditions. Our
investment portfolio, consisting of fixed income securities that we hold on an available-for-sale
basis, was approximately $319.2 million as of December 31, 2008, $703.7 million as of December 31,
2007 and $481.2 million as of December 31, 2006. These securities, like all fixed income
instruments, are subject to interest rate risk and will decline in value if market interest rates
increase. We have the ability to hold our fixed income investments until maturity and, therefore,
we would not expect to recognize any material adverse impact in income or cash flows if market
interest rates increase.
As of December 31, 2008, our short-term investments included auction rate floating securities
with a fair value of $38.2 million. Our auction rate floating securities are debt instruments with
a long-term maturity and with an interest rate that is reset in short intervals through auctions.
The negative conditions in the credit markets during 2008 have prevented some investors from
liquidating their holdings, including their holdings of auction rate floating securities. As a
result, these affected auction rate floating securities are now considered illiquid, and we could
be required to hold them until they are redeemed by the holder at maturity. We may not be able to
liquidate the securities until a future auction on these investments is successful. As a result of
the lack of liquidity of these investments, we recorded an other-than-temporary impairment loss of
$6.4 million during 2008 on our auction rate floating securities.
81
The following table provides information about our available-for-sale and trading securities
that are sensitive to changes in interest rates. We have aggregated our available-for-sale
securities for presentation purposes since they are all very similar in nature (dollar amounts in
thousands):
Interest Rate Sensitivity
Principal Amount by Expected Maturity as of December 31, 2008
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Financial instruments mature during year ended December 31, |
| |
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale and
trading securities |
|
$ |
224,189 |
|
|
$ |
50,354 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
38,225 |
|
Weighted-average yield rate |
|
|
3.6 |
% |
|
|
3.3 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2.0 |
% |
Contingent convertible
senior notes due 2032 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
169,145 |
|
Interest rate |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2.5 |
% |
Contingent convertible
senior notes due 2033 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
181 |
|
Interest rate |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.5 |
% |
Changes in interest rates do not affect interest expense incurred on our Contingent
Convertible Senior Notes as the interest rates are fixed. We have not entered into derivative
financial instruments. We have minimal operations outside of the United States and, accordingly,
we have not been susceptible to significant risk from changes in foreign currencies.
During the normal course of business we could be subjected to a variety of market risks,
examples of which include, but are not limited to, interest rate movements and foreign currency
fluctuations, as we discussed above, and collectibility of accounts receivable. We continuously
assess these risks and have established policies and procedures to protect against the adverse
effects of these and other potential exposures. Although we do not anticipate any material losses
in these risk areas, no assurance can be made that material losses will not be incurred in these
areas in the future.
Item 8. Financial Statements and Supplementary Data
Our financial statements and related financial statement schedule and the Independent
Registered Public Accounting Firm’s Reports are incorporated herein by reference to the financial
statements set forth in Item 15 of Part IV of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of
the Exchange Act) that are designed to ensure that information required to be disclosed in reports
filed by us under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms and that such information is accumulated and
communicated to management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow for timely decisions regarding required disclosure. Our Chief Executive
Officer and Chief Financial Officer, with the participation of other members of management,
evaluated the effectiveness of our disclosure controls and procedures as of the end of the period
covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that our disclosure controls and procedures were
effective and designed to ensure
82
that the information we are required to disclose in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the SEC’s rules and forms.
Although management of our Company, including the Chief Executive Officer and the Chief
Financial Officer, believes that our disclosure controls and internal controls currently provide
reasonable assurance that our desired control objectives have been met, management does not expect
that our disclosure controls or internal controls will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all control issues and instances of
fraud, if any, within our Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the controls. The design
of any system of controls is also based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions.
Management’s Report on Internal Control over Financial Reporting
The management of Medicis Pharmaceutical Corporation is responsible for establishing and
maintaining adequate internal control over financial reporting as such term is defined in Exchange
Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with accounting principles generally
accepted in the United States of America.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of the Chief Executive Officer and Chief
Financial Officer, management conducted an evaluation of the effectiveness of our internal control
over financial reporting as of December 31, 2008. The framework on which such evaluation was based
is contained in the report entitled “Internal Control — Integrated Framework” issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Report”). Based on
that evaluation and the criteria set forth in the COSO Report, management concluded that our
internal control over financial reporting was effective as of December 31, 2008.
Our independent registered public accounting firm, Ernst & Young LLP, who also audited our
consolidated financial statements, audited the effectiveness of our internal control over financial
reporting. Ernst & Young LLP has issued their attestation report, which is included below.
83
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Medicis Pharmaceutical Corporation
We have audited Medicis Pharmaceutical Corporation’s (the “Company”) internal control over
financial reporting as of December 31, 2008, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Medicis Pharmaceutical Corporation’s management is responsible for
maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting included above under the heading
“Management’s Report on Internal Control over Financial Reporting.” Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Medicis Pharmaceutical Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008, based on the COSO
criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the December 31, 2008 consolidated financial statements of Medicis
Pharmaceutical Corporation and subsidiaries and our report dated February 24, 2009 expressed an
unqualified opinion thereon.
Phoenix, Arizona
February 24, 2009
84
Changes in Internal Control over Financial Reporting
In our Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, management
concluded that our internal control over financial reporting was ineffective as a result of a
material weakness with respect to our interpretation and application of SFAS 48 as it applies to
the calculation of sales return reserves, as initially disclosed in Amendment No. 1 to our Annual
Report on Form 10-K for the year ended December 31, 2007. Management dedicated significant
resources to remediate the controls around our sales return reserve and to ensure that the proper
steps were taken to remedy the material weakness in our internal control over financial reporting.
Specifically, management took the following actions to remediate the material weakness:
| |
• |
|
conducted a full review of our accounting methodology for sales return reserves; |
| |
| |
• |
|
assessed the technical accounting capabilities of the accounting and finance
departments to ensure the proper knowledge, skills, and training; and |
| |
| |
• |
|
finance and accounting personnel attended training sessions, covering relevant
topics, which included revenue recognition and related accounting concepts. |
As of December 31, 2008, management has determined that the material weakness identified in
2008 has been remediated.
Item 9B. Other Information
None.
PART III
Item 10. Directors and Executive Officers and Corporate Governance
The Company has adopted a written code of ethics, “Medicis Pharmaceutical Corporation Code of
Business Conduct and Ethics,” which is applicable to all directors, officers and employees of the
Company, including the Company’s principal executive officer, principal financial officer,
principal accounting officer or controller and other executive officers identified pursuant to this
Item 10 who perform similar functions (collectively, the “Selected Officers”). In accordance with
the rules and regulations of the SEC, a copy of the code is available on the Company’s website.
The Company will disclose any changes in or waivers from its code of ethics applicable to any
Selected Officer on its website at http://www.Medicis.com or by filing a Form 8-K.
The Company has filed, as exhibits to this Annual Report on Form 10-K for the year ended
December 31, 2008, the certifications of its Chief Executive Officer and Chief Financial Officer
required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
On June 11, 2008, the Company submitted to the New York Stock Exchange the Annual CEO
Certification required pursuant to Section 303A.12(a) of the New York Stock Exchange Listed Company
Manual.
The information in the section entitled “Section 16(a) Beneficial Ownership Reporting
Compliance”, “Director Biographical Information”, “Board Nominees”, “Executive Officers” and
“Governance of Medicis” in the Proxy Statement is incorporated herein by reference.
Item 11. Executive Compensation
The information to be included in the sections entitled “Executive Compensation,”
“Compensation of Directors,” and “Stock Option and Compensation Committee Report” in the Proxy
Statement is incorporated herein by reference.
85
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information to be included in the section entitled “Security Ownership of Directors and
Executive Officers and Certain Beneficial Owners” in the Proxy Statement is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information to be included in the sections entitled “Certain Relationships and Related
Transactions” and “Stock Option and Compensation Committee Interlocks and Insider Participation” in
the Proxy Statement is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information to be included in the section entitled “Independent Public Accountants” in the
Proxy Statement is incorporated herein by reference.
86
PART IV
Item 15. Exhibits, Financial Statement Schedules
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Page |
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(a) Documents filed as a part of this Report |
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|
(1) Financial Statements: |
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F-1 |
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F-2 |
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F-3 |
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F-5 |
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F-6 |
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F-8 |
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F-9 |
|
(2) Financial Statement Schedule: |
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S-1 |
|
This financial statement schedule should be read in conjunction with
the consolidated financial statements. Financial statement schedules
not included in this Annual Report on Form 10-K have been omitted
because they are not applicable or the required information is shown
in the financial statements or notes thereto. |
|
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|
(3) Exhibits filed as part of this Report: |
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| |
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| Exhibit No. |
|
|
|
Description |
|
|
|
|
|
2.1
|
|
|
|
Agreement of Merger by and between the Company, Medicis Acquisition Corporation and GenDerm
Corporation, dated November 28, 1997 (11) |
|
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|
2.2
|
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|
|
Agreement of Plan of Merger, dated as of October 1, 2001, by and among the Company, MPC
Merger Corp. and Ascent Pediatrics, Inc. (17) |
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2.3
|
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|
Agreement and Plan of Merger by and among the Company, Donatello, Inc., and LipoSonix, Inc.
dated June 16, 2008(49) |
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|
3.1
|
|
|
|
Certificate of Incorporation of the Company, as amended (23) |
|
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|
|
3.2
|
|
|
|
Amended and Restated By-Laws of the Company (43) |
|
|
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4.1
|
|
|
|
Amended and Restated Rights Agreement, dated as of August 17, 2005, between the Company and
Wells Fargo Bank, N.A., as Rights Agent(26) |
|
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|
|
4.2
|
|
|
|
Indenture, dated as of August 19, 2003, by and between the Company, as issuer, and Deutsche
Bank Trust Company Americas, as trustee (23) |
|
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4.3
|
|
|
|
Indenture, dated as of June 4, 2002, by and between the Company, as issuer, and Deutsche Bank
Trust Company Americas, as trustee. (19) |
|
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4.4
|
|
|
|
Supplemental Indenture dated as of February 1, 2005 to Indenture dated as of August 19, 2003
between the Company and Deutsche Bank Trust Company Americas as Trustee (25) |
|
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4.5
|
|
|
|
Registration Rights Agreement, dated as of June 4, 2002, by and between the Company and
Deutsche Bank Securities Inc. (19) |
|
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|
4.6
|
|
|
|
Form of specimen certificate representing Class A common stock (1) |
|
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|
10.1
|
|
|
|
Asset Purchase Agreement among the Company, Ascent Pediatrics, Inc., BioMarin Pharmaceutical
Inc., and BioMarin Pediatrics Inc., dated April 20, 2004 (23) |
|
|
|
|
|
10.2
|
|
|
|
Merger Termination Agreement, dated as of December 13, 2005, by and among the Company,
Masterpiece Acquisition Corp., and Inamed Corporation(31) |
|
|
|
|
|
10.3
|
|
|
|
Securities Purchase Agreement among the Company, Ascent Pediatrics, Inc., BioMarin
Pharmaceutical Inc. and BioMarin Pediatrics Inc., dated May 18, 2004 (23) |
|
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10.4
|
|
|
|
Termination Agreement dated October 19, 2005 between the Company and Michael A.
Pietrangelo(28) |
|
|
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|
|
10.5
|
|
|
|
License Agreement among the Company, Ascent Pediatrics, Inc. and BioMarin Pediatrics Inc.,
dated May 18, 2004 (23) |
87
| |
|
|
|
|
| Exhibit No. |
|
|
|
Description |
|
|
|
|
|
10.6
|
|
|
|
Medicis Pharmaceutical Corporation 1995 Stock Option Plan (incorporated by
reference to Exhibit C to the definitive Proxy Statement for the 1995 Annual
Meeting of Shareholders previously filed with the SEC, File No. 0-18443) |
|
|
|
|
|
10.7(a)
|
|
|
|
Employment Agreement between the Company and Jonah Shacknai, dated
July 24, 1996 (8) |
|
|
|
|
|
10.7(b)
|
|
|
|
Amendment to Employment Agreement by and between the Company and
Jonah Shacknai, dated April 1, 1999 (15) |
|
|
|
|
|
10.7(c)
|
|
|
|
Amendment to Employment Agreement by and between the Company and
Jonah Shacknai, dated February 21, 2001 (15) |
|
|
|
|
|
10.7(d)
|
|
|
|
Third Amendment, dated December 30, 2005, to Employment Agreement between the Company and
Jonah Shacknai(32) |
|
|
|
|
|
10.8
|
|
|
|
Medicis Pharmaceutical Corporation 2001 Senior Executive Restricted Stock Plan(30) |
|
|
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|
|
10.9(a)
|
|
|
|
Medicis Pharmaceutical Corporation 2002 Stock Option Plan (20) |
|
|
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|
|
10.9(b)
|
|
|
|
Amendment No. 1 to the Medicis Pharmaceutical Corporation 2002 Stock Option Plan, dated
August 1, 2005(29) |
|
|
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|
|
10.10(a)
|
|
|
|
Medicis Pharmaceutical Corporation 2004 Stock Incentive Plan(27) |
|
|
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|
|
10.10(b)
|
|
|
|
Amendment No. 1 to the Medicis Pharmaceutical Corporation 2004 Stock Option Plan, dated
August 1, 2005(29) |
|
|
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|
|
10.11(a)
|
|
|
|
Medicis Pharmaceutical Corporation 1998 Stock Option Plan(33) |
|
|
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|
|
10.11(b)
|
|
|
|
Amendment No. 1 to the Medicis Pharmaceutical Corporation 1998 Stock Option Plan, dated
August 1, 2005(29) |
|
|
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|
|
10.11(c)
|
|
|
|
Amendment No. 2 to the Medicis Pharmaceutical Corporation 1998 Stock Option Plan, dated
September 30, 2005(29) |
|
|
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|
|
10.12(a)
|
|
|
|
Medicis Pharmaceutical Corporation 1996 Stock Option Plan(34) |
|
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|
10.12(b)
|
|
|
|
Amendment No. 1 to the Medicis Pharmaceutical Corporation 1996 Stock Option Plan, dated
August 1, 2005(29) |
|
|
|
|
|
10.13
|
|
|
|
Waiver Letter dated March 18, 2005 between the Company and Q-Med AB(27) |
|
|
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|
|
10.14
|
|
|
|
Supply Agreement, dated October 21, 1992, between Schein Pharmaceutical and the Company
(2) |
|
|
|
|
|
10.15
|
|
|
|
Amendment to Manufacturing and Supply Agreement, dated March 2, 1993, between
Schein Pharmaceutical and the Company (3) |
|
|
|
|
|
10.16(a)
|
|
|
|
Credit and Security Agreement, dated August 3, 1995, between the Company and
Norwest Business Credit, Inc. (5) |
|
|
|
|
|
10.16(b)
|
|
|
|
First Amendment to Credit and Security Agreement, dated May 29, 1996,
between the Company and Norwest Bank Arizona, N.A. (8) |
|
|
|
|
|
10.16(c)
|
|
|
|
Second Amendment to Credit and Security Agreement, dated November 22, 1996,
by and between the Company and Norwest Bank Arizona, N.A. as successor-in-interest
to Norwest Business Credit, Inc. (10) |
|
|
|
|
|
10.16(d)
|
|
|
|
Third Amendment to Credit and Security Agreement, dated November 22, 1998, by
and between the Company and Norwest Bank Arizona, N.A., as successor-in-interest
to Norwest Business Credit, Inc. (12) |
|
|
|
|
|
10.16(e)
|
|
|
|
Fourth Amendment to Credit and Security Agreement, dated November 22, 2000,
by and between the Company and Wells Fargo Bank Arizona, N.A., formerly
known as Norwest Bank Arizona, N.A., as successor-in-interest to Norwest Business
Credit, Inc. (16) |
|
|
|
|
|
10.16(f)
|
|
|
|
Fifth Amendment to Credit and Security Agreement, dated November 22, 2002, by and between the
Company and Wells Fargo Bank Arizona, N.A., formerly known as Norwest Bank Arizona, N.A., as
successor-in-interest to Norwest Business Credit, Inc. (23) |
|
|
|
|
|
10.17(a)
|
|
|
|
Patent Collateral Assignment and Security Agreement, dated August 3, 1995, by
the Company to Norwest Business Credit, Inc. (6) |
|
|
|
|
|
10.17(b)
|
|
|
|
First Amendment to Patent Collateral Assignment and Security Agreement, dated
May 29, 1996, by the Company to Norwest Bank Arizona, N.A. (8) |
|
|
|
|
|
10.17(c)
|
|
|
|
Amended and Restated Patent Collateral Assignment and Security Agreement, dated
November 22, 1998, by the Company to Norwest Bank Arizona, N.A. (12) |
|
|
|
|
|
10.18(a)
|
|
|
|
Trademark Collateral Assignment and Security Agreement, dated August 3, 1995,
by the Company to Norwest Business Credit, Inc. (7) |
|
|
|
|
|
10.18(b)
|
|
|
|
First Amendment to Trademark Collateral Assignment and Security Agreement, dated
May 29, 1996, by the Company to Norwest Bank Arizona, N.A. (8) |
88
| |
|
|
|
|
| Exhibit No. |
|
|
|
Description |
|
|
|
|
|
10.18(c)
|
|
|
|
Amended and Restated Trademark, Tradename, and Service Mark Collateral
Assignment and Security Agreement, dated November 22, 1998, by the Company
to Norwest Bank Arizona, N.A. (12) |
|
|
|
|
|
10.19
|
|
|
|
Assignment and Assumption of Loan Documents, dated May 29, 1996, from
Norwest Business Credit, Inc., to and by Norwest Bank Arizona, N.A. (8) |
|
|
|
|
|
10.20
|
|
|
|
Multiple Advance Note, dated May 29, 1996, from the Company to Norwest Bank
Arizona, N.A. (8) |
|
|
|
|
|
10.21
|
|
|
|
Asset Purchase Agreement dated November 15, 1998, by and among the Company and
Hoechst Marion Roussel, Inc., Hoechst Marion Roussel Deutschland GMHB and
Hoechst Marion Roussel, S.A. (12) |
|
|
|
|
|
10.22
|
|
|
|
License and Option Agreement dated November 15, 1998, by and among the Company
and Hoechst Marion Roussel, Inc., Hoechst Marion Roussel Deutschland GMBH and
Hoechst Marion Roussel, S.A. (12) |
|
|
|
|
|
10.23
|
|
|
|
Loprox Lotion Supply Agreement dated November 15, 1998, by and between the
Company and Hoechst Marion Roussel, Inc. (12) |
|
|
|
|
|
10.24
|
|
|
|
Supply Agreement dated November 15, 1998, by and between the Company and
Hoechst Marion Roussel Deutschland GMBH (12) |
|
|
|
|
|
10.25
|
|
|
|
Asset Purchase Agreement effective January 31, 1999, between the Company and
Bioglan Pharma Plc (14) |
|
|
|
|
|
10.26
|
|
|
|
Stock Purchase Agreement by and among the Company, Ucyclyd Pharma, Inc. and
Syed E. Abidi, William Brusilow, Susan E. Brusilow and Norbert L. Wiech, dated
April 19, 1999 (14) |
|
|
|
|
|
10.27
|
|
|
|
Asset Purchase Agreement by and between the Company and Bioglan Pharma Plc,
dated June 29, 1999 (14) |
|
|
|
|
|
10.28
|
|
|
|
Asset Purchase Agreement by and among The Exorex Company, LLC, Bioglan
Pharma Plc, the Company and IMX Pharmaceuticals, Inc., dated June 29, 1999 (16) |
|
|
|
|
|
10.29
|
|
|
|
Medicis Pharmaceutical Corporation Executive Retention Plan (14) |
|
|
|
|
|
10.30
|
|
|
|
Asset Purchase Agreement between Warner Chilcott, plc and the Company, dated
September 14, 1999(14) |
|
|
|
|
|
10.31(a)
|
|
|
|
Share Purchase Agreement between Q-Med International B.V. and Startskottet 21914
AB (under proposed change of name to Medicis Sweden Holdings AB), dated
February 10, 2003(21) |
|
|
|
|
|
10.31(b)
|
|
|
|
Amendment No. 1 to Share Purchase Agreement between Q-Med International
B.V. and Startskottet 21914 AB (under proposed change of name to Medicis Sweden
Holdings AB), dated March 7, 2003(21) |
|
|
|
|
|
10.32
|
|
|
|
Supply Agreement between Q-Med AB and the Company,
dated March 7, 2003(21) |
|
|
|
|
|
10.33
|
|
|
|
Amended and Restated Intellectual Property Agreement between Q-Med AB and HA
North American Sales AB, dated March 7, 2003(21) |
|
|
|
|
|
10.34
|
|
|
|
Supply Agreement between Medicis Aesthetics Holdings Inc., a wholly owned subsidiary of the
Company, and Q-Med AB, dated July 15, 2004 (23) Portions of this exhibit
(indicated by asterisks) have been omitted pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. |
|
|
|
|
|
10.35
|
|
|
|
Intellectual Property License Agreement between Q-Med AB and Medicis Aesthetics Holdings
Inc., dated July 15, 2004 (23) Portions of this exhibit (indicated by asterisks)
have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2
under the Securities Exchange Act of 1934. |
|
|
|
|
|
10.36
|
|
|
|
Note Agreement, dated as of October 1, 2001, by and among Ascent Pediatrics, Inc., the
Company, Furman Selz Investors II L.P., FS Employee Investors LLC, FS Ascent Investments LLC,
FS Parallel Fund L.P., BancBoston Ventures Inc. and Flynn Partners (17) |
|
|
|
|
|
10.37
|
|
|
|
Voting Agreement, dated as of October 1, 2001, by and among the Company, MPC Merger Corp., FS
Private Investments LLC, Furman Selz Investors II L.P., FS Employee Investors LLC, FS Ascent
Investments LLC and FS Parallel Fund L.P. (17) |
|
|
|
|
|
10.38
|
|
|
|
Exclusive Remedy Agreement, dated as of October 1, 2001, by and among the Company, Ascent
Pediatrics, Inc., FS Private Investments LLC, Furman Selz Investors II L.P., FS Employee
Investors LLC, FS Ascent Investments LLC and FS Parallel Fund L.P., BancBoston Ventures Inc.,
Flynn Partners, Raymond F. Baddour, Sc.D., Robert E. Baldini, Medical Science Partners L.P.
and Emmett Clemente, Ph.D. (17) |
89
| |
|
|
|
|
| Exhibit No. |
|
|
|
Description |
|
|
|
|
|
10.39
|
|
|
|
Medicis Pharmaceutical Corporation 1992 Stock Option Plan(35) |
|
|
|
|
|
10.40
|
|
|
|
Form of Stock Option Agreement for Medicis Pharmaceutical Corporation 2004 Stock Incentive
Plan(36) |
|
|
|
|
|
10.41
|
|
|
|
Form of Restricted Stock Agreement for Medicis Pharmaceutical Corporation 2004 Stock
Incentive Plan(36) |
|
|
|
|
|
10.42
|
|
|
|
Letter Agreement dated as of March 13, 2006 among Medicis Pharmaceutical Corporation,
Aesthetica Ltd., Medicis Aesthetics Holdings Inc., Ipsen S.A. and Ipsen Ltd. (37) |
|
|
|
|
|
10.43
|
|
*
|
|
Development and Distribution Agreement by and between Aesthetica, Ltd. and Ipsen, Ltd.
(38) |
|
|
|
|
|
10.44
|
|
*
|
|
Trademark License Agreement by and between Aesthetica, Ltd. and Ipsen, Ltd. (38) |
|
|
|
|
|
10.45
|
|
*
|
|
Trademark Assignment Agreement by and between Aesthetica, Ltd. and Ipsen, Ltd. (38) |
|
|
|
|
|
10.46(a)
|
|
|
|
Medicis 2006 Incentive Award Plan(39) |
|
|
|
|
|
10.46(b)
|
|
|
|
Amendment to the Medicis 2006 Incentive Award Plan, dated July 10, 2006(41) |
|
|
|
|
|
10.46(c)
|
|
|
|
Amendment No. 2 to the Medicis 2006 Incentive Award Plan, dated April 11, 2007(46) |
|
|
|
|
|
10.46(d)
|
|
|
|
Amendment No. 3 to the Medicis 2006 Incentive Award Plan, dated April 16, 2007(45) |
|
|
|
|
|
10.46(e)
|
|
|
|
Form of Stock Option Agreement for Medicis Pharmaceutical Corporation 2006 Incentive Award
Plan(48) |
|
|
|
|
|
10.46(f)
|
|
|
|
Form of Restricted Stock Agreement for Medicis Pharmaceutical Corporation 2006 Incentive
Award Plan(48) |
|
|
|
|
|
10.47
|
|
|
|
Employment Agreement, dated July 25, 2006, between Medicis Pharmaceutical Corporation and
Mark A. Prygocki, Sr. (40) |
|
|
|
|
|
10.48
|
|
|
|
Employment Agreement, dated July 25, 2006, between Medicis Pharmaceutical Corporation and
Mitchell S. Wortzman, Ph.D. (40) |
|
|
|
|
|
10.49
|
|
|
|
Employment Agreement, dated July 25, 2006, between Medicis Pharmaceutical Corporation and
Richard J. Havens (40) |
|
|
|
|
|
10.50
|
|
|
|
Employment Agreement, dated July 27, 2006, between Medicis Pharmaceutical Corporation and
Jason D. Hanson (40) |
|
|
|
|
|
10.51
|
|
*
|
|
Office Sublease by and between Apex 7720 North Dobson, L.L.C., an Arizona limited liability
company, and Medicis Pharmaceutical Corporation, dated as of July 26, 2006(42) |
|
|
|
|
|
10.52
|
|
|
|
Corporate Integrity Agreement between the Office of Inspector General of the department of
Health and Human Services and Medicis Pharmaceutical Corporation(44) |
|
|
|
|
|
10.53
|
|
*
|
|
Collaboration Agreement, dated as of August 23, 2007, by and between Ucyclyd Pharma, Inc. and
Hyperion Therapuetics, Inc. (47) |
|
|
|
|
|
10.54
|
|
|
|
Employment Agreement, dated December 23, 2008, by and between the Company and Joseph P.
Cooper (50) |
|
|
|
|
|
10.55
|
|
|
|
Amended and Restated Employment Agreement, dated December 23, 2008, by and between the
Company and Jason D. Hanson (50) |
|
|
|
|
|
10.56
|
|
|
|
Employment Agreement, dated December 23, 2008, by and between the Company and Vincent P.
Ippolito (50) |
|
|
|
|
|
10.57
|
|
|
|
Employment Agreement, dated December 23, 2008, by and between the Company and Richard D.
Peterson (50) |
|
|
|
|
|
10.58
|
|
|
|
Amended and Restated Employment Agreement, dated December 23, 2008, by and between the
Company and Mark A. Prygocki (50) |
|
|
|
|
|
10.59
|
|
|
|
Amended and Restated Employment Agreement, dated December 23, 2008, by and between the
Company and Mitchell S. Wortzman, Ph.D. (50) |
|
|
|
|
|
10.60
|
|
|
|
Fourth Amendment to Employment Agreement, dated December 23, 2008, by and between the Company
and Jonah Shacknai (50) |
|
|
|
|
|
10.61
|
|
+*
|
|
Joint Development Agreement, dated as of November 26, 2008, between the Company and Impax
Laboratories, Inc. |
|
|
|
|
|
10.62
|
|
+*
|
|
License and Settlement Agreement, dated as of November 26, 2008, between the Company and
Impax Laboratories, Inc. |
|
|
|
|
|
12
|
|
+
|
|
Computation of Ratios of Earnings to Fixed Charges |
|
|
|
|
|
21.1
|
|
+
|
|
Subsidiaries |
|
|
|
|
|
23.1
|
|
+
|
|
Consent of Independent Registered Public Accounting Firm |
|
|
|
|
|
24.1
|
|
|
|
Power of Attorney See signature page |
|
|
|
|
|
31.1
|
|
+
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended |
|
|
|
|
|
31.2
|
|
+
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act, as amended |
90
| |
|
|
|
|
| Exhibit No. |
|
|
|
Description |
|
|
|
|
|
32.1
|
|
+
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
32.2
|
|
+
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
| + |
|
Filed herewith |
| |
| * |
|
Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request
for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. |
| |
| (1) |
|
Incorporated by reference to the Registration Statement on Form S-1 of the Registrant,
File No. 33-32918, filed with the SEC on January 16, 1990 |
| |
| (2) |
|
Incorporated by reference to the Registration Statement on Form S-1 of the Company, File
No. 33-54276, filed with the SEC on June 11, 1993 |
| |
| (3) |
|
Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year
ended June 30, 1993, File No. 0-18443, filed with the SEC on October 13, 1993 |
| |
| (4) |
|
Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year
ended June 30, 1995, File No. 0-18443, previously filed with the SEC (the “1994 Form 10-K”) |
| |
| (5) |
|
Incorporated by reference to the Company’s 1995 Form 10-K |
| |
| (6) |
|
Incorporated by reference to the Company’s 1995 Form 10-K |
| |
| (7) |
|
Incorporated by reference to the Company’s 1995 Form 10-K |
| |
| (8) |
|
Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year
ended June 30, 1996, File No. 0-18443, previously filed with the SEC |
| |
| (9) |
|
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997, File No. 0-18443, previously filed with the SEC |
| |
| (10) |
|
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter
ended December 31, 1996, File No. 0-18443, previously filed with the SEC |
| |
| (11) |
|
Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC
on December 15, 1997 |
| |
| (12) |
|
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998, File No. 0-18443, previously filed with the SEC |
| |
| (13) |
|
Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC
on July 13, 2006 |
| |
| (14) |
|
Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year
ended June 30, 1999, File No. 0-18443, previously filed with the SEC |
| |
| (15) |
|
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001, File No. 0-18443, previously filed with the SEC |
| |
| (16) |
|
Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year
ended June 30, 2001, File No. 0-18443, previously filed with the SEC |
| |
| (17) |
|
Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC
on October 2, 2001 |
| |
| (18) |
|
Incorporated by reference to the Company’s registration statement on Form 8-A12B/A filed
with the SEC on June 4, 2002 |
| |
| (19) |
|
Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC
on June 6, 2002 |
| |
| (20) |
|
Incorporated by reference to the Company’s Annual Report on Form
10-K for the fiscal year ended June 30, 2002, File No. 0-18443, previously filed with the
SEC |
| |
| (21) |
|
Incorporated by reference to the Company’s Current Report on Form
8-K filed with the SEC on March 10, 2003 |
| |
| (22) |
|
Incorporated by reference to the Company’s Quarterly Report on
Form 10-Q for the quarter ended December 31, 2003, File No. 0-18443, previously filed with
the SEC |
| |
| (23) |
|
Incorporated by reference to the Company’s Annual Report on Form
10-K for the fiscal year ended June 30, 2004, File No. 0-18443, previously filed with the
SEC |
| |
| (24) |
|
Incorporated by reference to the Company’s Current Report on Form
8-K filed with the SEC on March 21, 2005 |
| |
| (25) |
|
Incorporated by reference to the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2005, File No. 0-18443, previously filed with the
SEC |
91
|
|
|
| (26) |
|
Incorporated by reference to the Company’s Current Report on
Form 8-K filed with the SEC on August 18, 2005 |
| |
| (27) |
|
Incorporated by reference to the Company’s Annual Report on
Form 10-K for the fiscal year ended June 30, 2005, File No. 0-18443, previously filed with
the SEC |
| |
| (28) |
|
Incorporated by reference to the Company’s Current Report on
Form 8-K filed with the SEC on October 20, 2005 |
| |
| (29) |
|
Incorporated by reference to the Company’s Annual Report on
Form 10-K/A for the fiscal year ended June 30, 2005, File No. 0-18443, previously filed with
the SEC on October 28, 2005 |
| |
| (30) |
|
Incorporated by reference to the Company’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2005, File No. 0-18443, previously filed with
the SEC |
| |
| (31) |
|
Incorporated by reference to the Company’s Current Report on
Form 8-K filed with the SEC on December 13, 2005 |
| |
| (32) |
|
Incorporated by reference to the Company’s Current Report on
Form 8-K filed with the SEC on January 3, 2006 |
| |
| (33) |
|
Incorporated by reference to Appendix 1 to the Company’s definitive Proxy Statement for
the 1998 Annual Meeting of Stockholders filed with the SEC on December 2, 1998 |
| |
| (34) |
|
Incorporated by reference to Appendix 2 to the Company’s definitive Proxy Statement for
the 1996 Annual Meeting of Stockholders filed with the SEC on October 23, 1996 |
| |
| (35) |
|
Incorporated by reference to Exhibit B to the Company’s definitive Proxy Statement for
the 1992 Annual Meeting of Stockholders previously filed with the SEC |
| |
| (36) |
|
Incorporated by reference to the Company’s Annual Report on Form 10-K/T for the six month
transition period ended December 31, 2005, File No. 0-18443, previously filed with the SEC on March 16, 2006 |
| |
| (37) |
|
Incorporated by reference to the Company’s Current Report on
Form 8-K filed with the SEC on March 16, 2006 |
| |
| (38) |
|
Incorporated by reference to the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2006, File No. 0-18443, previously filed with the
SEC |
| |
| (39) |
|
Incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement for
the 2006 Annual Meeting of Stockholders filed with the SEC on April 13, 2006 |
| |
| (40) |
|
Incorporated by reference to the Company’s Current Report on
Form 8-K filed with the SEC on July 31, 2006 |
| |
| (41) |
|
Incorporated by reference to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2006, File No. 0-18443, previously filed with
the SEC |
| |
| (42) |
|
Incorporated by reference to the Company’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2006, File No. 0-18443, previously filed
with the SEC |
| |
| (43) |
|
Incorporated by reference to the Company’s Current Report on
Form 8-K filed with the SEC on February 18, 2009 |
| |
| (44) |
|
Incorporated by reference to the Company’s Current Report on
Form 8-K filed with the SEC on April 30, 2007 |
| |
| (45) |
|
Incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement on
Schedule 14A filed with the SEC on April 16, 2007 |
| |
| (46) |
|
Incorporated by reference to the Company’s Registration Statement on Form S-8 dated
September 3, 2007 |
| |
| (47) |
|
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2007, File No. 0-18443, previously filed with the SEC |
| |
| (48) |
|
Incorporated by reference to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2007, File No. 0-18443, previously filed with the SEC |
| |
| (49) |
|
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2008, File No. 001-14471, previously filed with the SEC. |
| |
| (50) |
|
Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC
on December 30, 2008 |
| (b) |
|
The exhibits to this Form 10-K follow the Company’s Financial Statement Schedule included in
this Form 10-K. |
| |
| (c) |
|
The Financial Statement Schedule to this Form 10-K appears on page S-1 of this Form 10-K. |
92
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date: March 2, 2009
| |
|
|
|
|
| |
MEDICIS PHARMACEUTICAL CORPORATION
|
|
| |
By: |
/s/ JONAH SHACKNAI
|
|
| |
|
Jonah Shacknai |
|
| |
|
Chairman of the Board and Chief Executive Officer |
|
| |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Jonah Shacknai and Richard D. Peterson, or either of them, as his true and lawful
attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual
Report on Form 10-K and any documents related to this report and filed pursuant to the Securities
Exchange Act of 1934, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant in the capacities and on the
dates indicated.
| |
|
|
|
|
| SIGNATURE |
|
TITLE |
|
DATE |
|
|
|
|
|
/s/ JONAH SHACKNAI
Jonah Shacknai
|
|
Chairman of the Board of Directors and
Chief Executive Officer
(Principal Executive Officer)
|
|
March 2, 2009 |
|
|
|
|
|
/s/ RICHARD D. PETERSON
Richard D. Peterson
|
|
Executive Vice President, Chief Financial Officer,
and Treasurer
(Principal Financial and Accounting Officer)
|
|
March 2, 2009 |
|
|
|
|
|
/s/ ARTHUR G. ALTSCHUL, JR.
Arthur G. Altschul, Jr.
|
|
Director
|
|
March 2, 2009 |
|
|
|
|
|
/s/ SPENCER DAVIDSON
Spencer Davidson
|
|
Director
|
|
March 2, 2009 |
|
|
|
|
|
/s/ STUART DIAMOND
Stuart Diamond
|
|
Director
|
|
March 2, 2009 |
|
|
|
|
|
/s/ PETER S. KNIGHT, ESQ.
Peter S. Knight, Esq.
|
|
Director
|
|
March 2, 2009 |
|
|
|
|
|
/s/ MICHAEL A. PIETRANGELO
Michael A. Pietrangelo
|
|
Director
|
|
March 2, 2009 |
|
|
|
|
|
/s/ PHILIP S. SCHEIN, M.D.
Philip S. Schein, M.D.
|
|
Director
|
|
March 2, 2009 |
|
|
|
|
|
/s/ LOTTIE SHACKELFORD
Lottie Shackelford
|
|
Director
|
|
March 2, 2009 |
93
MEDICIS PHARMACEUTICAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| |
|
|
| |
|
PAGE |
|
|
|
|
|
F-2 |
|
|
|
|
|
F-3 |
|
|
|
|
|
F-5 |
|
|
|
|
|
F-6 |
|
|
|
|
|
F-8 |
|
|
|
|
|
F-9 |
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Medicis Pharmaceutical Corporation
We have audited the accompanying consolidated balance sheets of Medicis Pharmaceutical
Corporation and subsidiaries (the Company) as of December 31, 2008 and 2007, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for each of the
three years in the period ended December 31, 2008. Our audits also included the financial
statement schedule listed in Item 15(a)(2). These financial statements and schedule are the
responsibility of the Company’s management. Our responsibility is to express an opinion on
these financial statements and schedule based upon our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Medicis Pharmaceutical Corporation
and subsidiaries at December 31, 2008 and 2007 and the consolidated results of their
operations and their cash flows for each of the three years in the period ended December 31,
2008, in conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Notes 2 and 15, in 2007 the Company adopted Financial Accounting
Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.”
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Medicis Pharmaceutical Corporation’s internal control over
financial reporting as of December 31, 2008, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 24, 2009 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Phoenix, Arizona
February 24, 2009
F-2
MEDICIS PHARMACEUTICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
| |
|
|
|
|
|
|
|
|
| |
|
DECEMBER 31, |
|
| |
|
2008 |
|
|
2007 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
86,450 |
|
|
$ |
108,046 |
|
Short-term investments |
|
|
257,435 |
|
|
|
686,634 |
|
Accounts receivable, less allowances: |
|
|
|
|
|
|
|
|
December 31, 2008 and 2007: $1,719
and $830, respectively |
|
|
52,588 |
|
|
|
22,205 |
|
Inventories, net |
|
|
24,226 |
|
|
|
29,973 |
|
Deferred tax assets, net |
|
|
53,161 |
|
|
|
9,190 |
|
Other current assets |
|
|
19,676 |
|
|
|
18,049 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
493,536 |
|
|
|
874,097 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
26,300 |
|
|
|
13,850 |
|
Intangible assets: |
|
|
|
|
|
|
|
|
Intangible assets related to product line
acquisitions and business combinations |
|
|
267,624 |
|
|
|
258,873 |
|
Other intangible assets |
|
|
7,752 |
|
|
|
6,695 |
|
|
|
|
|
|
|
|
|
|
|
275,376 |
|
|
|
265,568 |
|
Less: accumulated amortization |
|
|
113,947 |
|
|
|
92,482 |
|
|
|
|
|
|
|
|
Net intangible assets |
|
|
161,429 |
|
|
|
173,086 |
|
Goodwill |
|
|
156,762 |
|
|
|
63,107 |
|
Deferred tax assets, net |
|
|
77,149 |
|
|
|
59,577 |
|
Long-term investments |
|
|
55,333 |
|
|
|
17,072 |
|
Other assets |
|
|
2,925 |
|
|
|
12,622 |
|
|
|
|
|
|
|
|
|
|
$ |
973,434 |
|
|
$ |
1,213,411 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
MEDICIS PHARMACEUTICAL CORPORATION
CONSOLIDATED BALANCE SHEETS, Continued
(in thousands, except share amounts)
| |
|
|
|
|
|
|
|
|
| |
|
DECEMBER 31, |
|
| |
|
2008 |
|
|
2007 |
|
Liabilities |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
39,032 |
|
|
$ |
34,891 |
|
Current portion of contingent convertible senior notes |
|
|
— |
|
|
|
283,910 |
|
Reserve for sales returns |
|
|
59,611 |
|
|
|
68,787 |
|
Income taxes payable |
|
|
— |
|
|
|
7,731 |
|
Other current liabilities |
|
|
87,258 |
|
|
|
55,807 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
185,901 |
|
|
|
451,126 |
|
Long-term liabilities: |
|
|
|
|
|
|
|
|
Contingent convertible senior notes |
|
|
169,326 |
|
|
|
169,145 |
|
Deferred revenue |
|
|
4,167 |
|
|
|
6,667 |
|
Other liabilities |
|
|
10,346 |
|
|
|
3,172 |
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; shares authorized: 5,000,000;
no shares issued |
|
|
— |
|
|
|
— |
|
Class A common stock, $0.014 par value; shares authorized:
150,000,000; issued and outstanding: 69,396,394, and 69,005,019 at
December 31, 2008 and 2007, respectively |
|
|
969 |
|
|
|
965 |
|
Class B common stock, $0.014 par value; shares authorized:
1,000,000; issued and outstanding: none |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
661,703 |
|
|
|
641,907 |
|
Accumulated other comprehensive income |
|
|
2,106 |
|
|
|
2,221 |
|
Accumulated earnings |
|
|
282,284 |
|
|
|
281,218 |
|
Less: Treasury stock, 12,678,559 and 12,656,503 shares at cost at
December 31, 2008 and 2007, respectively |
|
|
(343,368 |
) |
|
|
(343,010 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
603,694 |
|
|
|
583,301 |
|
|
|
|
|
|
|
|
|
|
$ |
973,434 |
|
|
$ |
1,213,411 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
MEDICIS PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
YEARS ENDED DECEMBER 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net product revenues |
|
$ |
500,977 |
|
|
$ |
441,868 |
|
|
$ |
377,548 |
|
Net contract revenues |
|
|
16,773 |
|
|
|
15,526 |
|
|
|
15,617 |
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
517,750 |
|
|
|
457,394 |
|
|
|
393,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues (1) |
|
|
38,714 |
|
|
|
56,110 |
|
|
|
46,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
479,036 |
|
|
|
401,284 |
|
|
|
347,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative (2) |
|
|
279,768 |
|
|
|
242,633 |
|
|
|
202,457 |
|
Impairment of intangible assets |
|
|
— |
|
|
|
4,067 |
|
|
|
52,586 |
|
Research and development (3) |
|
|
99,916 |
|
|
|
39,428 |
|
|
|
161,837 |
|
In-process research and development |
|
|
30,500 |
|
|
|
— |
|
|
|
— |
|
Depreciation and amortization |
|
|
27,698 |
|
|
|
24,548 |
|
|
|
23,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
41,154 |
|
|
|
90,608 |
|
|
|
(92,869 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense |
|
|
(15,470 |
) |
|
|
— |
|
|
|
— |
|
Interest and investment income |
|
|
23,396 |
|
|
|
38,390 |
|
|
|
30,787 |
|
Interest expense |
|
|
(6,674 |
) |
|
|
(10,018 |
) |
|
|
(10,640 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax |
|
|
42,406 |
|
|
|
118,980 |
|
|
|
(72,722 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
32,130 |
|
|
|
48,544 |
|
|
|
(24,570 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
10,276 |
|
|
$ |
70,436 |
|
|
$ |
(48,152 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
0.18 |
|
|
$ |
1.26 |
|
|
$ |
(0.88 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share |
|
$ |
0.18 |
|
|
$ |
1.08 |
|
|
$ |
(0.88 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend declared per common share |
|
$ |
0.16 |
|
|
$ |
0.12 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
used in calculating: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
|
56,567 |
|
|
|
55,988 |
|
|
|
54,688 |
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share |
|
|
57,323 |
|
|
|
71,246 |
|
|
|
54,688 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
(1) amounts exclude amortization of
intangible assets related to acquired
products |
|
$ |
21,479 |
|
|
$ |
21,606 |
|
|
$ |
20,017 |
|
(2) amounts include share-based
compensation expense |
|
$ |
16,265 |
|
|
$ |
21,031 |
|
|
$ |
24,453 |
|
(3) amounts include share-based
compensation expense |
|
$ |
332 |
|
|
$ |
112 |
|
|
$ |
1,626 |
|
See accompanying notes to consolidated financial statements.
F-5
MEDICIS PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Class A |
|
|
Class B |
|
| |
|
Common Stock |
|
|
Common Stock |
|
| |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
Balance at December 31, 2005 |
|
|
67,052 |
|
|
$ |
938 |
|
|
|
— |
|
|
$ |
— |
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net unrealized gains on available-for-sale
securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net unrealized losses on foreign currency
translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Dividends declared |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Restricted shares issued for deferred
compensation |
|
|
24 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Restricted shares held in lieu of employee taxes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Exercise of stock options |
|
|
968 |
|
|
|
14 |
|
|
|
— |
|
|
|
— |
|
Tax effect of stock options exercised |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
68,044 |
|
|
|
952 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net unrealized gains on available-for-sale
securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net unrealized gains on foreign currency
translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for adoption of FIN 48 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Share-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted shares issued for deferred
compensation |
|
|
37 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Restricted shares held in lieu of employee taxes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Exercise of stock options |
|
|
924 |
|
|
|
13 |
|
|
|
— |
|
|
|
— |
|
Tax effect of stock options exercised |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
|
69,005 |
|
|
|
965 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net unrealized gains on available-for-sale
securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net unrealized losses on foreign currency
translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted shares issued for deferred
compensation |
|
|
110 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Restricted shares held in lieu of employee taxes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Exercise of stock options |
|
|
281 |
|
|
|
4 |
|
|
|
— |
|
|
|
— |
|
Tax effect of stock options exercised |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
69,396 |
|
|
$ |
969 |
|
|
|
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
| Additional |
|
|
Other |
|
|
|
|
|
|
Treasury |
|
|
|
|
| Paid-In |
|
|
Comprehensive |
|
|
Accumulated |
|
|
Stock |
|
|
|
|
| Capital |
|
|
Income (Loss) |
|
|
Earnings |
|
|
Shares |
|
|
Amount |
|
|
Total |
|
| $ |
550,006 |
|
|
$ |
379 |
|
|
$ |
273,158 |
|
|
|
(12,647 |
) |
|
$ |
(342,730 |
) |
|
$ |
481,751 |
|
| |
— |
|
|
|
— |
|
|
|
(48,152 |
) |
|
|
— |
|
|
|
— |
|
|
|
(48,152 |
) |
| |
— |
|
|
|
236 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
236 |
|
| |
— |
|
|
|
(78 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(78 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47,994 |
) |
| |
26,078 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
26,078 |
|
| |
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
— |
|
|
|
— |
|
|
|
(6,614 |
) |
|
|
— |
|
|
|
— |
|
|
|
(6,614 |
) |
| |
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3 |
) |
|
|
(66 |
) |
|
|
(66 |
) |
| |
18,430 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
18,444 |
|
| |
3,921 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,921 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
598,435 |
|
|
|
537 |
|
|
|
218,392 |
|
|
|
(12,650 |
) |
|
|
(342,796 |
) |
|
|
475,520 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
— |
|
|
|
— |
|
|
|
70,436 |
|
|
|
— |
|
|
|
— |
|
|
|
70,436 |
|
| |
— |
|
|
|
885 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
885 |
|
| |
— |
|
|
|
799 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
799 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,120 |
|
| |
— |
|
|
|
— |
|
|
|
(808 |
) |
|
|
— |
|
|
|
— |
|
|
|
(808 |
) |
| |
21,143 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
21,143 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
— |
|
|
|
— |
|
|
|
(6,802 |
) |
|
|
— |
|
|
|
— |
|
|
|
(6,802 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6 |
) |
|
|
(214 |
) |
|
|
(214 |
) |
| |
19,739 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19,752 |
|
| |
2,590 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,590 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
641,907 |
|
|
|
2,221 |
|
|
|
281,218 |
|
|
|
(12,656 |
) |
|
|
(343,010 |
) |
|
|
583,301 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
— |
|
|
|
— |
|
|
|
10,276 |
|
|
|
— |
|
|
|
— |
|
|
|
10,276 |
|
| |
— |
|
|
|
28 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
28 |
|
| |
— |
|
|
|
(143 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(143 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,161 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,597 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
16,597 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
— |
|
|
|
— |
|
|
|
(9,210 |
) |
|
|
— |
|
|
|
— |
|
|
|
(9,210 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
— |
|
|
|
— |
|
|
|
— |
|
|
|
(23 |
) |
|
|
(358 |
) |
|
|
(358 |
) |
| |
4,842 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,846 |
|
| |
(1,643 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,643 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ |
661,703 |
|
|
$ |
2,106 |
|
|
$ |
282,284 |
|
|
|
(12,679 |
) |
|
$ |
(343,368 |
) |
|
$ |
603,694 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-7
MEDICIS PHARMACEUTICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
YEARS ENDED DECEMBER 31, |
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
| Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
10,276 |
|
|
$ |
70,436 |
|
|
$ |
(48,152 |
) |
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
In-process research and development |
|
|
30,500 |
|
|
|
— |
|
|
|
— |
|
Depreciation and amortization |
|
|
27,698 |
|
|
|
24,548 |
|
|
|
23,048 |
|
Amortization of deferred financing fees |
|
|
666 |
|
|
|
1,519 |
|
|
|
2,144 |
|
Impairment of intangible assets |
|
|
— |
|
|
|
4,067 |
|
|
|
52,586 |
|
Impairment of available-for-sale investments |
|
|
6,400 |
|
|
|
— |
|
|
|
— |
|
Loss on disposal of property and equipment |
|
|
20 |
|
|
|
19 |
|
|
|
449 |
|
Loss on sale of product rights |
|
|
398 |
|
|
|
259 |
|
|
|
— |
|
Charge reducing value of investment in Revance |
|
|
9,071 |
|
|
|
— |
|
|
|
— |
|
Gain on sale of available-for-sale investments, net |
|
|
(1,020 |
) |
|
|
(105 |
) |
|
|
(421 |
) |
Share-based compensation expense |
|
|
16,597 |
|
|
|
21,143 |
|
|
|
26,079 |
|
Deferred income tax (benefit) expense |
|
|
(42,690 |
) |
|
|
14,027 |
|
|
|
(43,896 |
) |
Tax (expense) benefit from exercise of stock options and
vesting of restricted stock awards |
|
|
(1,643 |
) |
|
|
2,590 |
|
|
|
3,921 |
|
Excess tax benefits from share-based payment arrangements |
|
|
(169 |
) |
|
|
(1,494 |
) |
|
|
(2,166 |
) |
Increase (decrease) in provision for sales
discounts and chargebacks |
|
|
888 |
|
|
|
(1,318 |
) |
|
|
154 |
|
(Amortization) accretion of (discount)/premium on
Investments |
|
|
(60 |
) |
|
|
(3,369 |
) |
|
|
(2,159 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(30,259 |
) |
|
|
50,777 |
|
|
|
(8,955 |
) |
Inventories |
|
|
6,693 |
|
|
|
(2,957 |
) |
|
|
(7,940 |
) |
Other current assets |
|
|
(1,176 |
) |
|
|
(2,060 |
) |
|
|
(3,749 |
) |
Accounts payable |
|
|
3,707 |
|
|
|
(12,622 |
) |
|
|
(10,195 |
) |
Reserve for sales returns |
|
|
(9,176 |
) |
|
|
(18,625 |
) |
|
|
(23,414 |
) |
Income taxes payable |
|
|
(7,731 |
) |
|
|
(4,420 |
) |
|
|
(20,175 |
) |
Other current liabilities |
|
|
28,417 |
|
|
|
8,000 |
|
|
|
21,878 |
|
Other liabilities |
|
|
(1,637 |
) |
|
|
8,529 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities |
|
|
45,770 |
|
|
|
158,944 |
|
|
|
(40,963 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(11,090 |
) |
|
|
(10,020 |
) |
|
|
(4,450 |
) |
Proceeds from sale of property and equipment |
|
|
19 |
|
|
|
— |
|
|
|
— |
|
Equity investment in an unconsolidated entity |
|
|
— |
|
|
|
(11,957 |
) |
|
|
— |
|
LipoSonix acquisition, net of cash acquired |
|
|
(149,805 |
) |
|
|
— |
|
|
|
— |
|
Payment of direct acquisition costs |
|
|
(3,637 |
) |
|
|
— |
|
|
|
(27,420 |
) |
Payments for purchase of product rights |
|
|
(1,024 |
) |
|
|
(30,394 |
) |
|
|
(2,164 |
) |
Proceeds from sale of product rights |
|
|
— |
|
|
|
1,000 |
|
|
|
— |
|
Increase in other assets |
|
|
(34 |
) |
|
|
— |
|
|
|
— |
|
Purchase of available-for-sale investments |
|
|
(393,862 |
) |
|
|
(741,075 |
) |
|
|
(822,512 |
) |
Sale of available-for-sale investments |
|
|
417,536 |
|
|
|
291,804 |
|
|
|
349,034 |
|
Maturity of available-for-sale investments |
|
|
361,988 |
|
|
|
231,156 |
|
|
|
290,597 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities |
|
|
220,091 |
|
|
|
(269,486 |
) |
|
|
(216,915 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payment of dividends |
|
|
(8,600 |
) |
|
|
(6,771 |
) |
|
|
(6,581 |
) |
Payment of contingent convertible senior notes |
|
|
(283,729 |
) |
|
|
(5 |
) |
|
|
— |
|
Excess tax benefits from share-based
payment arrangements |
|
|
169 |
|
|
|
1,494 |
|
|
|
2,166 |
|
Proceeds from the exercise of stock options |
|
|
4,846 |
|
|
|
19,752 |
|
|
|
18,693 |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
financing activities |
|
|
(287,314 |
) |
|
|
14,470 |
|
|
|
14,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash and
cash equivalents |
|
|
(143 |
) |
|
|
799 |
|
|
|
(78 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(21,596 |
) |
|
|
(95,273 |
) |
|
|
(243,678 |
) |
Cash and cash equivalents at beginning of period |
|
|
108,046 |
|
|
|
203,319 |
|
|
|
446,997 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
86,450 |
|
|
$ |
108,046 |
|
|
$ |
203,319 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-8
MEDICIS PHARMACEUTICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY AND BASIS OF PRESENTATION
The Company
Medicis Pharmaceutical Corporation (“Medicis” or the “Company”) is a leading specialty
pharmaceutical company focusing primarily on the development and marketing of products in
the United States (“U.S.”) for the treatment of dermatological, aesthetic and podiatric
conditions. Medicis also markets products in Canada for the treatment of dermatological and
aesthetic conditions and began commercial efforts in Europe with the Company’s acquisition
of LipoSonix, Inc. (“LipoSonix”) in July 2008.
The Company offers a broad range of products addressing various conditions or aesthetic
improvements including facial wrinkles, acne, fungal infections, rosacea, hyperpigmentation,
photoaging, psoriasis, seborrheic dermatitis and cosmesis (improvement in the texture and
appearance of skin). Medicis currently offers 18 branded products. Its primary brands are
PERLANE®, RESTYLANE®, SOLODYN®, TRIAZ®,
VANOS®, and ZIANA®. Medicis entered the non-invasive fat ablation
market with its acquisition of LipoSonix in July 2008 (see Note 5).
The consolidated financial statements include the accounts of Medicis and its wholly
owned subsidiaries. The Company does not have any subsidiaries in which it does not own
100% of the outstanding stock. All of the Company’s subsidiaries are included in the
consolidated financial statements. All significant intercompany accounts and transactions
have been eliminated in consolidation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
At December 31, 2008, cash and cash equivalents included highly liquid investments
invested in money market accounts consisting of government securities and high-grade
commercial paper. These investments are stated at cost, which approximates fair value. The
Company considers all highly liquid investments purchased with a remaining maturity of three
months or less to be cash equivalents.
Short-Term and Long-Term Investments
The Company’s short-term and long-term investments are classified as
available-for-sale. Available-for-sale securities are carried at fair value with the
unrealized gains and losses reported in stockholders’ equity. Realized gains and losses and
declines in value judged to be other-than-temporary are included in operations. On an
ongoing basis, the Company evaluates its available-for-sale securities to determine if a
decline in value is other-than-temporary. A decline in market value of any
available-for-sale security below cost that is determined to be other-than-temporary,
results in an impairment in the fair value of the investment. The impairment is charged to
earnings and a new cost basis for the security is established. Premiums and discounts are
amortized or accreted over the life of the related available-for-sale security. Dividends
and interest income are recognized when earned. Realized gains and losses and interest and
dividends on securities are included in interest and investment income. The cost of
securities sold is calculated using the specific identification method.
Inventories
The Company utilizes third parties to manufacture and package inventories held for
sale, takes title to certain inventories once manufactured, and warehouses such goods until
packaged for final distribution and sale. Inventories consist of salable products held at
the Company’s warehouses, as well as raw materials and components at the manufacturers’
facilities, and are valued at the lower of cost or market using the first-in, first-out
method. The Company provides valuation reserves for estimated obsolescence or unmarketable
inventory in an amount equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market conditions.
F-9
Inventory costs associated with products that have not yet received regulatory approval
are capitalized if, in the view of the Company’s management, there is probable future
commercial use and future economic benefit. If future commercial use and future economic
benefit are not considered probable, then costs associated with pre-launch inventory that
has not yet received regulatory approval are expensed as research and development expense
during the period the costs are incurred. As of December 31, 2008 and 2007, there was $1.1
million and $0 of costs capitalized into inventory for products that have not yet received
regulatory approval.
Inventories are as follows (amounts in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
DECEMBER 31, |
|
| |
|
2008 |
|
|
2007 |
|
Raw materials |
|
$ |
7,234 |
|
|
$ |
9,002 |
|
Finished goods |
|
|
18,407 |
|
|
|
24,789 |
|
Valuation reserve |
|
|
(1,415 |
) |
|
|
(3,818 |
) |
|
|
|
|
|
|
|
Total inventories |
|
$ |
24,226 |
|
|
$ |
29,973 |
|
|
|
|
|
|
|
|
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated on a
straight-line basis over the estimated useful lives of property and equipment (three to five
years). Leasehold improvements are amortized over the shorter of their estimated useful
lives or the remaining lease term. Property and equipment consist of the following (amounts
in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
DECEMBER 31, |
|
| |
|
2008 |
|
|
2007 |
|
Furniture, fixtures and equipment |
|
$ |
26,661 |
|
|
$ |
19,102 |
|
Leasehold improvements |
|
|
14,489 |
|
|
|
4,082 |
|
|
|
|
|
|
|
|
|
|
|
41,150 |
|
|
|
23,184 |
|
Less: accumulated depreciation |
|
|
(14,850 |
) |
|
|
(9,334 |
) |
|
|
|
|
|
|
|
|
|
$ |
26,300 |
|
|
$ |
13,850 |
|
|
|
|
|
|
|
|
Total depreciation expense for property and equipment was approximately $6.0 million,
$2.7 million and $2.8 million for 2008, 2007 and 2006, respectively.
Goodwill
Goodwill is recorded when the purchase price paid for an acquisition exceeds the
estimated fair value of the net identified tangible and intangible assets acquired. The
Company is required to perform an annual impairment review, and more frequently under
certain circumstances. The goodwill is subjected to this annual impairment test during the
last quarter of the Company’s fiscal year. If the Company determines through the impairment
process that goodwill has been impaired, the Company will record the impairment charge in
the statement of operations. As of December 31, 2008, there was no impairment charge
related to goodwill. There can be no assurance that future goodwill impairment tests will
not result in a charge to earnings.
F-10
Intangible Assets
The Company has in the past made acquisitions of license agreements, product rights,
and other identifiable intangible assets. Intangible assets subject to amortization were
approximately $161.4 million and $173.1 million as of December 31, 2008 and 2007,
respectively. The Company amortizes intangible assets on a straight-line basis over their
expected useful lives, which range between five and 25 years. Total intangible assets as of
December 31, 2008 and 2007 were as follows (dollars in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
December 31, 2008 |
|
|
December 31, 2007 |
|
| |
|
Weighted |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
| |
|
Average Life |
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
| |
|
|
|
|
|
|
|
|
Related to product line
acquisitions |
|
|
15.7 |
|
|
$ |
253,142 |
|
|
$ |
(107,377 |
) |
|
$ |
145,765 |
|
|
$ |
253,791 |
|
|
$ |
(87,406 |
) |
|
$ |
166,385 |
|
Related to business
combinations |
|
|
8.9 |
|
|
|
14,482 |
|
|
|
(5,176 |
) |
|
|
9,306 |
|
|
|
5,082 |
|
|
|
(3,919 |
) |
|
|
1,163 |
|
Patents and trademarks |
|
|
18.0 |
|
|
|
7,752 |
|
|
|
(1,394 |
) |
|
|
6,358 |
|
|
|
6,695 |
|
|
|
(1,157 |
) |
|
|
5,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
|
|
$ |
275,376 |
|
|
$ |
(113,947 |
) |
|
$ |
161,429 |
|
|
$ |
265,568 |
|
|
$ |
(92,482 |
) |
|
$ |
173,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization expense was approximately $21.7 million, $21.8 million and $20.2
million for 2008, 2007 and 2006, respectively. Based on the intangible assets recorded at
December 31, 2008, and assuming no subsequent impairment of the underlying assets, the
annual amortization expense for each period, is expected to be as follows: approximately
$19.5 million for the year ended December 31, 2009, and approximately $16.9 million for the
years ended December 31, 2010, 2011, 2012 and 2013.
Impairment of Long-Lived Assets
The Company assesses the potential impairment of long-lived assets on a periodic basis
and when events or changes in circumstances indicate that the carrying value of the assets
may not be recoverable. Factors that the Company considers in deciding when to perform an
impairment review include significant under-performance of a product line in relation to
expectations, significant negative industry or economic trends, and significant changes or
planned changes in the Company’s use of the assets. Recoverability of assets that will
continue to be used in the Company’s operations is measured by comparing the carrying amount
of the asset grouping to the Company’s estimate of the related total future net cash flows.
If an asset carrying value is not recoverable through the related cash flows, the asset is
considered to be impaired. The impairment is measured by the difference between the asset
grouping’s carrying amount and its fair value, based on the best information available,
including market prices or discounted cash flow analysis. If the assets determined to be
impaired are to be held and used, the Company recognizes an impairment loss through a charge
to operating results to the extent the present value of anticipated net cash flows
attributable to the asset are less than the asset’s carrying value. When it is determined
that the useful lives of assets are shorter than originally estimated, and there are
sufficient cash flows to support the carrying value of the assets, the Company will
accelerate the rate of amortization charges in order to fully amortize the assets over their
new shorter useful lives.
This process requires the use of estimates and assumptions, which are subject to a high
degree of judgment. If these assumptions change in the future, the Company may be required
to record impairment charges for these assets.
F-11
During the quarter ended June 30, 2007, an intangible asset related to
OMNICEF® was determined to be impaired based on the Company’s analysis of the
intangible asset’s carrying value and projected future cash flows. As a result of the
impairment analysis, the Company recorded a write-down of approximately $4.1 million related
to this intangible asset.
Factors affecting the future cash flows of the OMNICEF® intangible asset
included an early termination letter received during May 2007 from Abbott Laboratories, Inc.
(“Abbott”), which, in accordance with the Company’s agreement with Abbott, transitions the
Company’s co-promotion agreement into a two-year residual period, and competitive pressures
in the marketplace, including generic competition.
In addition, as a result of the impairment analysis, the remaining amortizable life of
the intangible asset related to OMNICEF® was reduced to two years. The
intangible asset related to OMNICEF® will be fully amortized by June 30, 2009.
The net impact on amortization expense as a result of the write-down of the carrying value
of the intangible asset and the reduction of its amortizable life is a decrease in quarterly
amortization expense of approximately $126,000.
During the quarter ended September 30, 2006, long-lived assets related to certain of
the Company’s products were determined to be impaired based on the Company’s analysis of the
long-lived assets’ carrying value and projected future cash flows. As a result of the
impairment analysis, the Company recorded a write-down of approximately $52.6 million
related to these long-lived assets. This write-down included the following (in thousands):
| |
|
|
|
|
Long-lived asset related to LOPROX® products |
|
$ |
49,163 |
|
Long-lived asset related to ESOTERICA® products |
|
|
3,267 |
|
Other long-lived asset |
|
|
156 |
|
|
|
|
|
|
|
$ |
52,586 |
|
|
|
|
|
Factors affecting the future cash flows of the LOPROX® long-lived asset
included competitive pressures in the marketplace and the cancellation of the development
plan to support future forms of LOPROX®. Factors affecting the future cash flows
of the ESOTERICA® long-lived asset included a notice of proposed rulemaking by
the FDA for an NDA to be required for continued marketing of hydroquinone products, such as
ESOTERICA®. ESOTERICA® is currently an over-the-counter product line,
and the Company does not plan to invest in obtaining an approved NDA for this product line
if this proposed rule is made final without change.
In addition, as a result of the impairment analysis, the remaining amortizable lives of
the long-lived assets related to LOPROX® and ESOTERICA® were reduced
to fifteen years and fifteen months, respectively. The long-lived asset related to
LOPROX® will become fully amortized on September 30, 2021, and the long-lived
asset related to ESOTERICA® became fully amortized on December 31, 2007. The net
impact on amortization expense as a result of the write-down of the carrying value of the
long-lived assets and the reduction of their respective amortizable lives was a decrease in
quarterly amortization expense related to LOPROX® of $354,051 and an increase in
quarterly amortization expense related to ESOTERICA® of $48,077.
Managed Care and Medicaid Reserves
Rebates are contractual discounts offered to government programs and private health
plans that are eligible for such discounts at the time prescriptions are dispensed, subject
to various conditions. The Company records provisions for rebates based on factors such as
timing and terms of plans under contract, time to process rebates, product pricing, sales
volumes, amount of inventory in the distribution channel, and prescription trends.
Consumer Rebate and Loyalty Programs
Consumer rebate and loyalty programs are contractual discounts and incentives offered
to consumers at the time prescriptions are dispensed, subject to various conditions. The
Company estimates its accruals for consumer rebates based on estimated redemption rates and
average rebate amounts based on historical and other relevant data. The Company estimates
its accruals for loyalty programs, which are related to the Company’s dermal filler
products, based on an estimate of eligible procedures based on historical and other relevant
data.
F-12
Other Current Liabilities
Other current liabilities are as follows (amounts in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
DECEMBER 31, |
|
| |
|
2008 |
|
|
2007 |
|
Accrued incentives |
|
$ |
18,910 |
|
|
$ |
15,324 |
|
Managed care and Medicaid
reserves |
|
|
16,956 |
|
|
|
4,881 |
|
Accrued consumer rebate and loyalty
programs |
|
|
28,449 |
|
|
|
14,745 |
|
Deferred revenue |
|
|
3,341 |
|
|
|
4,758 |
|
Other accrued expenses |
|
|
19,602 |
|
|
|
16,099 |
|
|
|
|
|
|
|
|
|
|
$ |
87,258 |
|
|
$ |
55,807 |
|
|
|
|
|
|
|
|
Included in deferred revenue as of December 31, 2008 and December 31, 2007 was $0.7
million and $1.9 million, respectively, associated with the deferral of the recognition of
revenue and related cost of revenue for certain sales of inventory into the distribution
channel that are in excess of eight (8) weeks of projected demand.
Revenue Recognition
Revenue from product sales is recognized pursuant to Staff Accounting Bulletin No. 104
(SAB 104), Revenue Recognition in Financial Statements. Accordingly, revenue is
recognized when all four of the following criteria are met: (i) persuasive evidence that an
arrangement exists; (ii) delivery of the products has occurred; (iii) the selling price is
both fixed and determinable; and (iv) collectibility is reasonably assured. The Company’s
customers consist primarily of large pharmaceutical wholesalers who sell directly into the
retail channel. Provisions for estimated product returns, sales discounts and chargebacks
are established as a reduction of product sales revenues at the time such revenues are
recognized. Provisions for managed care and Medicaid rebates and consumer rebate and
loyalty programs are established as a reduction of product sales revenues at the later of
the date at which revenue is recognized or the date at which the sales incentive is offered
in accordance with EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor’s Products). These deductions from gross revenue are
established by the Company’s management as its best estimate based on historical experience
adjusted to reflect known changes in the factors that impact such reserves, including but
not limited to, prescription data, industry trends, competitive developments and estimated
inventory in the distribution channel. The Company’s estimates of inventory in the
distribution channel are based on inventory information reported to the Company by its major
wholesale customers for which the Company has inventory management agreements, historical
shipment and return information from its accounting records, and data on prescriptions
filled, which the Company purchases from one of the leading providers of prescription-based
information. The Company continually monitors internal and external data, in order to
ensure that information obtained from external sources is reasonable. The Company also
utilizes projected prescription demand for its products, as well as, the Company’s internal
information regarding its products. These deductions from gross revenue are generally
reflected either as a direct reduction to accounts receivable through an allowance, as a
reserve within current liabilities, as an addition to accrued expenses, or as deferred
revenue within current liabilities.
The Company enters into licensing arrangements with other parties whereby the Company
receives contract revenue based on the terms of the agreement. The timing of revenue
recognition is dependent on the level of the Company’s continuing involvement in the
manufacture and delivery of licensed products. If the Company has continuing involvement,
the revenue is deferred and recognized on a straight-line basis over the period of
continuing involvement. In addition, if the licensing arrangements require no continuing
involvement and payments are merely based on the passage of time, the Company assesses such
payments for revenue recognition under the collectibility criteria of SAB 104. Direct costs
related to contract acquisition and origination of licensing agreements are expensed as
incurred.
The Company does not provide any material forms of price protection to its wholesale
customers and permits product returns if the product is damaged, or, depending on the
customer, if it is returned within six months prior to expiration or up to 12 months after
expiration. The Company’s customers consist principally of financially viable wholesalers,
and depending on the customer, revenue is based upon shipment (“FOB shipping point”) or
receipt (“FOB destination”), net of estimated provisions. As a general practice, the
Company does not ship product
F-13
that has less than 15 months until its expiration date. The Company also authorizes
returns for damaged products and credits for expired products in accordance with its
returned goods policy and procedures.
Advertising
The Company expenses advertising as incurred. Advertising expenses for 2008, 2007 and
2006 were approximately $47.0 million, $47.9 million and $34.6 million, respectively.
Advertising expenses include samples of the Company’s products given to physicians for
marketing to their patients.
Share-Based Compensation
At December 31, 2008, the Company had seven active share-based employee compensation
plans. Of these seven share-based compensation plans, only the 2006 Incentive Award Plan is
eligible for the granting of future awards. Stock option awards granted from these plans
are granted at the fair market value on the date of grant. The option awards vest over a
period determined at the time the options are granted, ranging from one to five years, and
generally have a maximum term of ten years. Certain options provide for accelerated vesting
if there is a change in control (as defined in the plans). When options are exercised, new
shares of the Company’s Class A common stock are issued. Effective July 1, 2005, the
Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based
Payment, using the modified prospective method. Other than restricted stock, no share-based
employee compensation cost has been reflected in net income prior to the adoption of SFAS
No. 123R.
The total value of the stock options awards is expensed ratably over the service period
of the employees receiving the awards. As of December 31, 2008, total unrecognized
compensation cost related to stock option awards, to be recognized as expense subsequent to
December 31, 2008, was approximately $6.1 million and the related weighted-average period
over which it is expected to be recognized is approximately 1.1 years.
A summary of stock option activity within the Company’s stock-based compensation plans
and changes for 2008 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
| |
|
|
|
|
|
Weighted |
|
Average |
|
|
| |
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
| |
|
Number |
|
Exercise |
|
Contractual |
|
Intrinsic |
| |
|
of Shares |
|
Price |
|
Term |
|
Value |
Balance at December 31, 2007 |
|
|
11,666,955 |
|
|
$ |
27.99 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
127,702 |
|
|
$ |
22.22 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(278,492 |
) |
|
$ |
15.59 |
|
|
|
|
|
|
|
|
|
Terminated/expired |
|
|
(808,808 |
) |
|
$ |
31.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
10,707,357 |
|
|
$ |
27.98 |
|
|
|
3.7 |
|
|
$ |
1,826,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of options exercised during 2008 was $1,914,487. Options
exercisable under the Company’s share-based compensation plans at December 31, 2008 were
9,817,129 with an average exercise price of $27.42, an average remaining contractual term of
3.5 years, and an aggregate intrinsic value of $1,826,187.
A summary of fully vested stock options and stock options expected to vest, based on
historical forfeiture rates, as of December 31, 2008, is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
| |
|
|
|
|
|
Weighted |
|
Average |
|
|
| |
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
| |
|
Number |
|
Exercise |
|
Contractual |
|
Intrinsic |
| |
|
of Shares |
|
Price |
|
Term |
|
Value |
Outstanding |
|
|
9,807,554 |
|
|
$ |
28.14 |
|
|
|
3.8 |
|
|
$ |
1,500,943 |
|
Exercisable |
|
|
8,985,667 |
|
|
$ |
27.60 |
|
|
|
3.6 |
|
|
$ |
1,500,943 |
|
F-14
The fair value of each stock option award is estimated on the date of the grant using
the Black-Scholes option pricing model with the following assumptions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
Year Ended |
|
Year Ended |
| |
|
December 31, 2008 |
|
December 31, 2007 |
|
December 31, 2006 |
Expected dividend yield |
|
0.6% to 0.7% |
|
|
0.4 |
% |
|
|
0.4 |
% |
Expected stock price volatility |
|
|
0.35 to 0.38 |
|
|
|
0.35 |
|
|
|
0.36 |
|
Risk-free interest rate |
|
3.0% to 3.4% |
|
4.5% to 4.8% |
|
4.5% to 4.6% |
Expected life of options |
|
7 Years |
|
7 Years |
|
7 Years |
The expected dividend yield is based on expected annual dividend to be paid by the
Company as a percentage of the market value of the Company’s stock as of the date of grant.
The Company determined that a blend of implied volatility and historical volatility is more
reflective of market conditions and a better indicator of expected volatility than using
purely historical volatility. The risk-free interest rate is based on the U.S. treasury
security rate in effect as of the date of grant. The expected lives of options are based on
historical data of the Company.
The weighted average fair value of stock options granted during 2008, 2007 and 2006 was
$8.90, $14.98 and $14.00, respectively.
The Company also grants restricted stock awards to certain employees. Restricted stock
awards are valued at the closing market value of the Company’s Class A common stock on the
date of grant, and the total value of the award is expensed ratably over the service period
of the employees receiving the grants. During 2008, 864,423 shares of restricted stock were
granted to certain employees. Share-based compensation expense related to all restricted
stock awards outstanding during 2008, 2007 and 2006 was approximately $5.9 million, $3.7
million and $2.0 million, respectively. As of December 31, 2008, the total amount of
unrecognized compensation cost related to nonvested restricted stock awards, to be
recognized as expense subsequent to December 31, 2008, was approximately $22.8 million, and
the related weighted-average period over which it is expected to be recognized is
approximately 3.5 years.
A summary of restricted stock activity within the Company’s share-based compensation
plans and changes for 2008 is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted- |
| |
|
|
|
|
|
Average |
| |
|
|
|
|
|
Grant-Date |
| Nonvested Shares |
|
Shares |
|
Fair Value |
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2007 |
|
|
552,769 |
|
|
$ |
31.92 |
|
Granted |
|
|
864,423 |
|
|
$ |
19.14 |
|
Vested |
|
|
(122,722 |
) |
|
$ |
31.57 |
|
Forfeited |
|
|
(89,619 |
) |
|
$ |
23.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2008 |
|
|
1,204,851 |
|
|
$ |
23.38 |
|
|
|
|
|
|
|
|
|
|
The total fair value of restricted shares vested during 2008, 2007 and 2006 was $3.9
million, $1.3 million and $1.8 million, respectively.
See Note 18 for further discussion of the Company’s share-based employee compensation plans.
F-15
Shipping and Handling Costs
Substantially all costs of shipping and handling of products to customers are included
in selling, general and administrative expense. Shipping and handling costs for 2008, 2007
and 2006 were approximately $2.8 million, $2.8 million and $2.4 million, respectively.
Research and Development Costs and Accounting for Strategic Collaborations
All research and development costs, including payments related to products under
development and research consulting agreements, are expensed as incurred. The Company may
continue to make non-refundable payments to third parties for new technologies and for
research and development work that has been completed. These payments may be expensed at
the time of payment depending on the nature of the payment made.
The Company’s policy on accounting for costs of strategic collaborations determines the
timing of the recognition of certain development costs. In addition, this policy determines
whether the cost is classified as development expense or capitalized as an asset.
Management is required to form judgments with respect to the commercial status of such
products in determining whether development costs meet the criteria for immediate expense or
capitalization. For example, when the Company acquires certain products for which there is
already an Abbreviated New Drug Application (“ANDA”) or a New Drug Application (“NDA”)
approval related directly to the product, and there is net realizable value based on
projected sales for these products, the Company capitalizes the amount paid as an intangible
asset. If the Company acquires product rights which are in the development phase and to
which the Company has no assurance that the third party will successfully complete its
development milestones, the Company expenses such payments.
Income Taxes
Income taxes are determined using an annual effective tax rate, which generally differs
from the U.S. Federal statutory rate, primarily because of state and local income taxes,
enhanced charitable contribution deductions for inventory, tax credits available in the
U.S., the treatment of certain share-based payments under SFAS 123R that are not designed to
normally result in tax deductions, various expenses that are not deductible for tax
purposes, and differences in tax rates in certain non-U.S. jurisdictions The Company’s
effective tax rate may be subject to fluctuations during the year as new information is
obtained which may affect the assumptions it uses to estimate its annual effective tax rate,
including factors such as its mix of pre-tax earnings in the various tax jurisdictions in
which it operates, changes in valuation allowances against deferred tax assets, reserves for
tax audit issues and settlements, utilization of tax credits and changes in tax laws in
jurisdictions where the Company conducts operations. The Company recognizes tax benefits in
accordance with FIN 48, Accounting for Uncertainty in Income Taxes — an Interpretation of
FASB Statement No. 109. Under FIN 48, tax benefits are recognized only if the tax position
is more likely than not of being sustained. The Company recognizes deferred tax assets and
liabilities for temporary differences between the financial reporting basis and the tax
basis of its assets and liabilities, along with net operating losses and credit
carryforwards. The Company records valuation allowances against its deferred tax assets to
reduce the net carrying value to amounts that management believes is more likely than not to
be realized.
Legal Contingencies
In the ordinary course of business, the Company is involved in legal proceedings
involving regulatory inquiries, contractual and employment relationships, product liability
claims, patent rights, and a variety of other matters. The Company records contingent
liabilities resulting from asserted and unasserted claims against it, when it is probable
that a liability has been incurred and the amount of the loss is estimable. Estimating
probable losses requires analysis of multiple factors, in some cases including judgments
about the potential actions of third-party claimants and courts. Therefore, actual losses
in any future period are inherently uncertain. Currently, the Company does not believe any
of its pending legal proceedings or claims will have a material adverse effect on its
results of operations or financial condition. See Note 14 for further discussion.
Foreign Currency Translations
The U.S. Dollar is the functional currency of all our foreign subsidiaries. The
financial statements of foreign subsidiaries have been translated into U.S. Dollars in
accordance with SFAS No. 52, Foreign Currency
F-16
Translation. All balance sheet accounts have been translated using the exchange rates
in effect at the balance sheet date. Income statement amounts have been translated using
the average exchange rate for the year. The gains and losses resulting from the changes in
exchange rates from year to year have been reported in other comprehensive income. Total
accumulated gains from foreign currency translation, included in accumulated other
comprehensive income at December 31, 2008 was approximately $1.3 million. The effect on the
consolidated statements of operations of transaction gains and losses is not material for
all years presented.
Earnings Per Common Share
Basic and diluted earnings per common share are calculated in accordance with the
requirements of SFAS No. 128, Earnings Per Share. Because the Company has Contingently
Convertible Debt (see Note 13), diluted net income per common share must be calculated using
the “if-converted” method in accordance with EITF 04-8, Effect of Contingently Convertible
Debt on Diluted Earnings per Share. Diluted net income per common share is calculated by
adjusting net income for tax-effected net interest and issue costs on the Contingent
Convertible Debt, divided by the weighted average number of common shares outstanding
assuming conversion.
Use of Estimates and Risks and Uncertainties
The preparation of the consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial statements and
accompanying notes. The accounting estimates that require management’s most significant,
difficult and subjective judgments include the assessment of recoverability of long-lived
assets and goodwill; the valuation of auction rate floating securities; the recognition and
measurement of current and deferred income tax assets and liabilities; and the reductions to
revenue recorded at the time of sale for various items, including sales returns and rebate
reserves. The actual results experienced by the Company may differ from management’s
estimates.
The Company purchases its inventory from third-party manufacturers, many of whom are
the sole source of products for the Company. The failure of such manufacturers to provide
an uninterrupted supply of products could adversely impact the Company’s ability to sell
such products.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and accrued liabilities reported in the consolidated balance
sheets approximates fair value because of the immediate or short-term maturity of these
financial instruments. Long-term investments are carried at fair value based on market
quotations and a discounted cash flow analysis for auction rate floating securities. The
fair value of the Company’s contingent convertible senior notes, based on market quotations,
is approximately $119.9 million at December 31, 2008.
Supplemental Disclosure of Cash Flow Information
During 2008, 2007 and 2006, the Company made interest payments of $6.4 million, $8.5
million and $8.5 million, respectively.
F-17
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141R, Business Combinations, which replaces
SFAS No. 141 and establishes principles and requirements for how an acquirer in a business
combination recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed and any controlling interest. It also established
principles and requirements for how an acquirer in a business combination recognizes and
measures the goodwill acquired in the business combination or a gain from a bargain
purchase, and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business combination. SFAS
No. 141R provides for the following changes from SFAS No. 141: 1) an acquirer will record
all assets and liabilities of acquired business, including goodwill, at fair value,
regardless of the level of interest acquired; 2) certain contingent assets and liabilities
acquired will be recognized at fair value at the acquisition date; 3) contingent
consideration will be recognized at fair value on the acquisition date with changes in fair
value to be recognized in earnings; 4) acquisition-related transaction and restructuring
costs will be expensed as incurred rather than treated as part of the cost of the
acquisition and included in the amount recorded for assets acquired; 5) reversals of
valuation allowances related to acquired deferred tax assets and changes to acquired income
tax uncertainties will be recognized in earnings; and 6) when making adjustments to
finalize initial accounting, acquirers will revise any previously issued post-acquisition
financial information in future financial statements to reflect any adjustments as if they
occurred on the acquisition date. SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The impact of SFAS No. 141R, if
any, on the Company’s consolidated results of operations and financial condition will depend
on the nature of business combinations the Company enters into, if any, subsequent to
December 31, 2008.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51.
SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this
statement requires the recognition of a noncontrolling interest, or minority interest, as
equity in the consolidated financial statements and separate from the parent’s equity. The
amount of net income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the statement of operations. SFAS No. 160 clarifies
that changes in a parent’s ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the parent retains it controlling financial
interest. In addition, this statement requires that a parent recognize a gain or loss in
net income when a subsidiary is deconsolidated. Such gain or loss will be measured using
the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS
No. 160 also includes expanded disclosure requirements regarding the interests of the parent
and its noncontrolling interest. SFAS No. 160 is effective for fiscal years beginning on or
after December 15, 2008. The Company does not expect the adoption of SFAS No. 160 to have a
material impact on its consolidated results of operations and financial condition.
In December 2007, the EITF reached a consensus on EITF 07-01, Accounting for
Collaborative Agreements. EITF 07-01 prohibits companies from applying the equity method of
accounting to activities performed outside a separate legal entity by a virtual joint
venture. Instead, revenues and costs incurred with third parties in connection with the
collaborative arrangement should be presented gross or net by the collaborators based on the
criteria in EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an
Agent, and other applicable accounting literature. The consensus should be applied to
collaborative arrangements in existence at the date of adoption using a modified
retrospective method that requires reclassification in all periods presented for those
arrangements still in effect at the transition date, unless that application is
impracticable. The consensus is effective for fiscal years beginning after December 15,
2008. The Company does not expect the adoption of EITF 07-01 to have a material impact on
its consolidated results of operations and financial condition.
In April 2008, the FASB issued FSP 142-3, Determination of the Useful Life of
Intangible Assets. FSP 142-3 amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. FSP 142-3 is
effective for fiscal years beginning after December 15, 2008. The Company does not expect
the adoption of FSP 142-3 to have a material impact on its consolidated results of
operations and financial condition.
In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB
14-1 clarifies the accounting for
F-18
convertible debt instruments that may be settled in cash (including partial cash
settlement) upon conversion. FSP APB 14-1 specifies that issuers of such instruments should
separately account for the liability and equity components of certain convertible debt
instruments in a manner that reflects the issuer’s nonconvertible debt borrowing rate when
interest cost is recognized. FSP APB 14-1 requires bifurcation of a component of the debt,
classification of that component in equity and the accretion of the resulting discount on
the debt to be recognized as part of interest expense. FSP APB 14-1 requires retrospective
application to the terms of instruments as they existed for all periods presented. FSP APB
14-1 is effective for fiscal years beginning after December 15, 2008, and early adoption is
not permitted. The Company does not expect FSP APB 14-1 to impact its consolidated results
of operations and financial condition.
In June 2008, the FASB reached a consensus on EITF 07-5, Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock. EITF 07-5 addresses
the determination of whether an instrument (or embedded feature) is indexed to an entity’s
own stock. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. The
Company does not expect the adoption of EITF 07-5 to have a material impact on its
consolidated results of operations and financial condition.
In October 2008, the FASB issued FSP 157-3, Determining the Fair Value of a Financial
Asset When the Market for That Asset is Not Active. FSP 157-3 clarifies the application of
SFAS No. 157, Fair Value Measurements, in a market that is not active and provides an
example to illustrate key considerations in determining fair value of financial assets when
the market for that financial asset is not active. FSP 157-3 applies to financial assets
within the scope of accounting pronouncements that require or permit fair value measurements
in accordance with SFAS No. 157. FSP 157-3 was effective upon issuance and included prior
periods for which financial statements had not been issued. The application of FSP 157-3
did not have a material impact on the Company’s consolidated financial statements.
NOTE 3. SEGMENT AND PRODUCT INFORMATION
The Company operates in one significant business segment: pharmaceuticals. The
Company’s current pharmaceutical franchises are divided between the dermatological and
non-dermatological fields. The dermatological field represents products for the treatment
of acne and acne-related dermatological conditions and non-acne dermatological conditions.
The non-dermatological field represents products for the treatment of urea cycle disorder
and contract revenue. The acne and acne-related dermatological product lines include
DYNACIN®, PLEXION® SOLODYN®, TRIAZ® and
ZIANA®. The non-acne dermatological product lines include LOPROX®,
PERLANE®, RESTYLANE® and VANOS®. The non-dermatological
product lines include AMMONUL®, and BUPHENYL®. The non-dermatological
field also includes contract revenues associated with licensing agreements and authorized
generics.
The Company’s pharmaceutical products, with the exception of AMMONUL® and
BUPHENYL®, are promoted to dermatologists, podiatrists and plastic surgeons.
Such products are often prescribed by physicians outside these three specialties; including
family practitioners, general practitioners, primary-care physicians and OB/GYNs, as well as
hospitals, government agencies and others. Currently, the Company’s products are sold
primarily to wholesalers and retail chain drug stores. Prior to October 2006,
BUPHENYL® was primarily sold directly to hospitals and pharmacies. During 2008,
2007 and 2006, two wholesalers accounted for the following portions of the Company’s net
revenues:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
YEARS ENDED |
| |
|
DECEMBER 31, |
| |
|
2008 |
|
2007 |
|
2006 |
McKesson |
|
|
45.8 |
% |
|
|
52.2 |
% |
|
|
56.8 |
% |
Cardinal |
|
|
21.2 |
% |
|
|
16.9 |
% |
|
|
19.3 |
% |
McKesson is the sole distributor for the Company’s PERLANE® and
RESTYLANE® products in the U.S. and Canada.
F-19
Net revenues and the percentage of net revenues for each of the product categories are
as follows (amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
YEARS ENDED |
|
| |
|
DECEMBER 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
| |
|
|
Acne and acne-related dermatological products |
|
$ |
325,020 |
|
|
$ |
243,414 |
|
|
$ |
159,815 |
|
Non-acne dermatological products |
|
|
147,954 |
|
|
|
172,902 |
|
|
|
199,613 |
|
Non-dermatological products |
|
|
44,776 |
|
|
|
41,078 |
|
|
|
33,737 |
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
517,750 |
|
|
$ |
457,394 |
|
|
$ |
393,165 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
YEARS ENDED |
| |
|
DECEMBER 31, |
| |
|
2008 |
|
2007 |
|
2006 |
Acne and acne-related dermatological products |
|
|
63 |
% |
|
|
53 |
% |
|
|
41 |
% |
Non-acne dermatological products |
|
|
29 |
|
|
|
38 |
|
|
|
51 |
|
Non-dermatological products |
|
|
8 |
|
|
|
9 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2008, 2007 and 2006, our top three products constituted 69.4%, 70.8% and 77.3%,
respectively, of our total net revenues.
NOTE 4. STRATEGIC COLLABORATIONS
On November 26, 2008, the Company entered into a License and Settlement Agreement and a
Joint Development Agreement with IMPAX Laboratories, Inc. (“IMPAX”). In connection with the
License and Settlement Agreement, the Company and IMPAX agreed to terminate all legal
disputes between them relating to SOLODYN®. Additionally, under terms of the
License and Settlement Agreement, IMPAX confirmed that the Company’s patents relating to
SOLODYN® are valid and enforceable, and cover IMPAX’s activities relating to its
generic product under ANDA #90-024.
Under the terms of the License and Settlement Agreement, IMPAX has a license to market
its generic versions of SOLODYN® 45mg, 90mg and 135mg under the
SOLODYN® intellectual property rights belonging to the Company upon the
occurrence of specific events. Upon launch of its generic formulations of
SOLODYN®, IMPAX may be required to pay the Company a royalty, based on sales of
those generic formulations by IMPAX under terms described in the License and Settlement
Agreement.
Under the Joint Development Agreement, the Company and IMPAX will collaborate on the
development of five strategic dermatology product opportunities, including an advanced-form
SOLODYN® product. Under terms of the agreement, the Company made an initial
payment of $40.0 million upon execution of the agreement. In addition, the Company will be
required to pay up to $23.0 million upon successful completion of certain clinical and
commercial milestones. The Company will also make royalty payments based on sales of the
advanced-form SOLODYN® product if and when it is commercialized by Medicis upon
approval by the FDA. The Company will share equally in the gross profit of the other four
development products if and when they are commercialized by IMPAX upon approval by the FDA.
The $40.0 million payment was recognized as a charge to research and development
expense during the three months ended December 31, 2008.
On June 27, 2008, the Company and a U.S. company entered into a license agreement that
provides patent rights for development and commercialization of dermatologic products.
Under terms of the agreement, the Company made an initial payment of $2.0 million upon
execution of the agreement. In addition, the Company will be required to pay $19.0 million
upon successful completion of certain clinical milestones, $15.0 million upon the first
commercial sales of the products in the U.S. and $30.0 million upon achievement of certain
commercial milestones. The Company will also make royalty payments based on net sales as
defined in the license. The $2.0
F-20
million payment was recognized as a charge to research and development expense during
the three months ended June 30, 2008.
On June 26, 2002, the Company entered into an exclusive strategic alliance,
subsequently amended on January 28, 2005, with AAIPharma, Inc. (“AAIPharma”) for the
development, commercialization and license of a key dermatologic product,
SOLODYN®. The Company also entered into a supply agreement with AAIPharma for
the manufacture of the product by AAIPharma. The Company had the right to qualify an
alternate manufacturing facility, and AAIPharma agreed to assist the Company in obtaining
these qualifications. The alternate facility was approved during 2008, and in accordance
with the agreement the Company paid AAIPharma approximately $1.0 million during 2008. The
$1.0 million payment was recognized as a charge to research and development expense during
2008.
On October 9, 2007, the Company entered into a development and license agreement with
an Israeli company for the development of a dermatologic product. Under terms of the
agreement, the Company made an initial payment of $1.5 million upon execution of the
agreement. In addition, the Company will be required to pay $18.0 million upon successful
completion of certain clinical milestones and $5.2 million upon the first commercial sales
of the product in the U.S. The Company will also make royalty payments based on net sales
as defined in the license. The $1.5 million payment was recognized as a charge to research
and development expense during 2007.
On June 19, 2006, the Company entered into an exclusive start-up development agreement
with a German company for the development of a dermatologic product. Under terms of the
agreement, the Company made an initial payment of $1.0 million upon signing of the contract.
The Company will be required to pay a milestone payment of $3.0 million upon execution of a
development and license agreement between the parties. In addition, Medicis will pay
approximately $16.0 million upon successful completion of certain clinical milestones and
approximately $12.0 million upon the first commercial sales of the product in the U.S. The
Company will also make additional milestone payments upon the achievement of certain
commercial milestones. The $1.0 million payment was recognized as a charge to research and
development expense during 2006.
NOTE 5. ACQUISITION OF LIPOSONIX
On July 1, 2008, the Company, through its wholly-owned subsidiary Donatello, Inc.,
acquired LipoSonix, an independent, privately-held company that employs a staff of
approximately 40 scientists, engineers and clinicians located near Seattle, Washington.
LipoSonix is a medical device company developing non-invasive body sculpting technology, and
recently launched its first product in Europe, where it is being marketed and sold through
distributors. The LipoSonix technology is currently not approved for sale or use in the
United States.
Under terms of the transaction, Medicis paid $150 million in cash for all of the
outstanding shares of LipoSonix. In addition, Medicis will pay LipoSonix stockholders
certain milestone payments up to an additional $150 million upon FDA approval of the
LipoSonix technology and if various commercial milestones are achieved on a worldwide basis.
The following is a summary of the components of the LipoSonix purchase price (in
millions):
| |
|
|
|
|
Cash consideration |
|
$ |
150.0 |
|
Transaction costs |
|
|
3.6 |
|
|
|
|
|
|
|
$ |
153.6 |
|
|
|
|
|
The following is a summary of the estimated fair values of the net assets acquired (in millions):
| |
|
|
|
|
Current assets |
|
$ |
2.1 |
|
Deferred tax assets, short-term |
|
|
3.8 |
|
Deferred tax assets, long-term |
|
|
14.9 |
|
Property and equipment |
|
|
0.7 |
|
Identifiable intangible assets |
|
|
9.4 |
|
In-process research and development |
|
|
30.5 |
|
Goodwill |
|
|
93.7 |
|
Accounts payable and other current liabilities |
|
|
(1.5 |
) |
|
|
|
|
|
|
$ |
153.6 |
|
|
|
|
|
F-21
The Company believes the fair values assigned to the assets acquired and liabilities
assumed are based on reasonable assumptions.
Identifiable intangible assets of $9.4 million include existing technology of $6.7
million, with an estimated amortizable life of ten years, and trademarks and trade names of
$2.7 million, with an estimated indefinite amortizable life.
The $30.5 million of acquired in-process research and development has been recognized
as in-process research and development expense in the Company’s statement of operations
during the three months ended September 30, 2008. No tax benefit has been recognized
related to this charge.
The results of operations of LipoSonix are included in the Company’s consolidated
financial statements beginning on July 1, 2008.
The following unaudited proforma financial information for the years ended December 31,
2008 and 2007 gives effect to the acquisition of LipoSonix as if it had occurred on January
1, 2007. Such unaudited proforma information is based on historical financial information
with respect to the acquisition and does not reflect operational and administrative cost
savings (“synergies”) that management of the combined company estimates may be achieved as a
result of the acquisition. The $30.5 million in-process research and development charge has
not been included in the unaudited proforma financial information since this adjustment is
non-recurring in nature.
| |
|
|
|
|
|
|
|
|
| |
|
YEAR ENDED DECEMBER 31, |
| |
|
2008 |
|
2007 |
Net revenues |
|
$ |
518.5 |
|
|
$ |
457.4 |
|
Net income |
|
|
4.6 |
|
|
|
59.2 |
|
Diluted net income per share |
|
$ |
0.08 |
|
|
$ |
0.92 |
|
NOTE 6. INVESTMENT IN REVANCE
On December 11, 2007, the Company announced a strategic collaboration with Revance, a
privately-held, venture-backed development-stage entity, whereby the Company made an equity
investment in Revance and purchased an option to acquire Revance or to license exclusively
in North America Revance’s novel topical botulinum toxin type A product currently under
clinical development. The consideration to be paid to Revance upon the Company’s exercise
of the option will be at an amount that will approximate the then fair value of Revance or
the license of the product under development, as determined by an independent appraisal.
The option period will extend through the end of Phase 2 testing in the United States. In
consideration for the Company’s $20.0 million payment, the Company received preferred stock
representing an approximate 13.7 percent ownership in Revance, or approximately 11.7 percent
on a fully diluted basis, and the option to acquire Revance or to license the product under
development. The $20.0 million is expected to be used by Revance primarily for the
development of the product. Approximately $12.0 million of the $20.0 million payment
represents the fair value of the investment in Revance at the time of the investment and is
included in other long-term assets in the Company’s condensed consolidated balance sheets as
of December 31, 2007. The remaining $8.0 million, which is non-refundable and is expected
to be utilized in the development of the new product, represents the residual value of the
option to acquire Revance or to license the product under development and was recognized as
research and development expense during the three months ended December 31, 2007.
Prior to the exercise of the option, Revance will remain primarily responsible for the
worldwide development of Revance’s topical botulinum toxin type A product in consultation
with the Company in North America. The Company will assume primary responsibility for the
development of the product should consummation of either a merger or a license for topically
delivered botulinum toxin type A in North America be completed under the terms of the
option. Revance will have sole responsibility for manufacturing the development product and
manufacturing the product during commercialization worldwide. The Company’s right to
exercise the option is triggered upon Revance’s successful completion of certain regulatory
milestones through the end of Phase 2 testing in the United States. A license would contain
a payment upon exercise of the license option, milestone payments related to clinical,
regulatory and commercial achievements, and royalties based on sales defined in the license.
If the Company elects to exercise the option, the financial terms for the acquisition or
license will be determined through an independent valuation in accordance with specified
methodologies.
F-22
The Company estimates the impairment and/or the net realizable value of the investment
based on a hypothetical liquidation at book value approach as of the reporting date, unless
a quantitative valuation metric is available for these purposes (such as the completion of
an equity financing by Revance). The amount of the Company’s investment that will be
expensed periodically is uncertain due to the timing of Revance’s expenditures for research
and development of the product, and any charges will not be immediately, if ever, deductible
for income tax purposes and will increase the Company’s effective tax rate. Further equity
investments, if any, will also be subject to the same accounting treatment as the Company’s
original equity investment. During 2008, the Company reduced the carrying value of its
investment in Revance and recorded a related charge to other expense of approximately $9.1
million as a result of a reduction in the estimated net realizable value of the investment
using the hypothetical liquidation at book value approach as of December 31, 2008.
A business entity is subject to the consolidation rules of FASB Interpretation No. 46,
Consolidation of Variable Interest Entities — an Interpretation of Accounting Research
Bulletin No. 51 (“FIN 46”) and is referred to as a variable interest entity if it lacks
sufficient equity to finance its activities without additional financial support from other
parties or its equity holders lack adequate decision making ability based on criteria set
forth in FIN 46. FIN 46 also requires disclosures about variable interest entities that a
company is not required to consolidate, but in which a company has a significant variable
interest. The Company has determined that Revance is a variable interest entity and that
the Company is not the primary beneficiary, and therefore the Company’s equity investment in
Revance currently does not require the Company to consolidate Revance into its financial
statements. The consolidation status could change in the future, however, depending on
changes in the Company’s relationship with Revance.
NOTE 7. STRATEGIC COLLABORATION WITH HYPERION
On August 28, 2007, the Company, through its wholly-owned subsidiary Ucyclyd Pharma,
Inc. (“Ucyclyd”), announced a strategic collaboration with Hyperion Therapeutics, Inc.
(“Hyperion”) whereby Hyperion will be responsible for the ongoing research and development
of a compound referred to as GT4P for the treatment of Urea Cycle Disorder, Hepatic
Encephalopathies and other indications, and additional indications for AMMONUL®.
Under terms of the Collaboration Agreement between Ucyclyd and Hyperion, dated as of August
23, 2007, Hyperion made an initial non-refundable payment of $10.0 million to the Company
for the rights and licenses granted to Hyperion in the agreement. In accordance with EITF
No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, and SAB 104,
Revenue Recognition in Financial Statements, this $10.0 million payment was recorded as
deferred revenue and is being recognized on a ratable basis over a period of four years.
The Company recognized approximately $2.5 million and $0.8 million of contract revenue
during 2008 and 2007, respectively, related to this transaction. In addition, if certain
specified conditions are satisfied relating to the Ucyclyd development projects, then
Hyperion will have certain purchase rights with respect to the Ucyclyd development products,
as well as Ucyclyd’s existing on-market products, AMMONUL® and
BUPHENYL®, and will pay Ucyclyd royalties and regulatory and sales milestone
payments in connection with certain licenses that would be granted to Hyperion upon exercise
of the purchase rights.
Hyperion will be funding all research and development costs for the Ucyclyd research
projects. As of November 24, 2008, Hyperion suspended development activities with respect
to AMMONUL® for Hepatic Encephalopathies so as to focus development efforts on
GT4P.
Until June 6, 2008, Hyperion undertook certain sales and marketing efforts for
Ucyclyd’s existing on-market products. Hyperion received a commission from Ucyclyd equal to
a certain percentage of any increase in unit sales during the period Hyperion was performing
these sales and marketing efforts. Ucyclyd will continue to record product sales for the
existing on-market Ucyclyd products until such time as Hyperion exercises its purchase
rights.
Ucyclyd entered into an amendment (the “Amendment”), effective as of November 24, 2008,
to the Collaboration Agreement with Hyperion. Among other actions, the Amendment terminates
all rights, including research and development rights, granted to Hyperion under the
Collaboration Agreement related to Ammonul for the treatment of hepatic encephalopathy
(“Ammonul HE”). Hyperion retains buyout rights to Ammonul HE in the event Hyperion
exercises its buyout rights to Ucyclyd’s on-market and other development products. Hyperion
and Ucyclyd also agreed that Hyperion’s rights to promote AMMONUL® and
BUPHENYL® for the treatment of urea cycle disorder were terminated, effective
June 6, 2008.
F-23
Professional fees of approximately $2.2 million were incurred related to the completion
of the original August 2007 agreement with Hyperion. These costs were recognized as general
and administrative expenses during the three months ended September 30, 2007.
NOTE 8. DEVELOPMENT AND DISTRIBUTION AGREEMENT WITH IPSEN FOR RIGHTS TO
IPSEN’S BOTULINUM TOXIN TYPE A PRODUCT KNOWN AS RELOXIN®
On March 17, 2006, the Company entered into a development and distribution agreement
with Ipsen Ltd., a wholly-owned subsidiary of Ipsen, S.A. (“Ipsen”), whereby Ipsen granted
to one of the Company’s wholly-owned subsidiaries the rights to develop, distribute and
commercialize Ipsen’s botulinum toxin type A product in the United States, Canada and Japan
for aesthetic use by physicians. The product is commonly referred to as RELOXIN®
in the U.S. aesthetic market and DYSPORT® in medical and aesthetic markets
outside the U.S. The product is not currently approved for use in the U.S., Canada or
Japan. Medicis made an initial payment to Ipsen in the amount of $90.1 million in
consideration for the exclusive distribution rights in the U.S., Canada and Japan.
Additionally, Medicis and Ipsen agreed to negotiate and enter into an agreement
relating to the exclusive distribution and development rights of the product for the
aesthetic market in Europe, and subsequently in certain other markets. Under the terms of
the U.S., Canada and Japan agreement, as amended, Medicis was obligated to make an
additional $35.1 million payment to Ipsen if this agreement was not entered into by April
15, 2006. On April 13, 2006, Medicis and Ipsen agreed to extend this deadline to July 15,
2006. In connection with this extension, Medicis paid Ipsen approximately $12.9 million in
April 2006, which would be applied against the total obligation, in the event an agreement
was not entered into by the extended deadline. On July 17, 2006, Medicis and Ipsen agreed
that the two companies would not pursue an agreement for the commercialization of the
product outside of the U.S., Canada and Japan. On July 17, 2006, Medicis made the
additional $22.2 million payment to Ipsen, representing the remaining portion of the $35.1
million total obligation, resulting from the discontinuance of negotiations for other
territories.
The initial $90.1 million payment was recognized as a charge to research and
development expense during the three months ended March 31, 2006, and the $35.1 million
obligation was recognized as a charge to research and development expense during the three
months ended June 30, 2006.
In May 2008, the FDA accepted the filing of Ipsen’s BLA for RELOXIN®, and in
accordance with the agreement, the Company paid Ipsen $25.0 million during the three months
ended June 30, 2008 upon achievement of this milestone. The $25.0 million was recognized as
a charge to research and development expense during the three months ended June 30, 2008.
Additionally, during the three months ended December 31, 2008, the Company paid Ipsen
$1.5 million upon the successful completion of an additional regulatory milestone. The $1.5
million was recognized as a charge to research and development expense during the three
months ended December 31, 2008.
Medicis will pay an additional $75.0 million upon the product’s approval by the FDA and
$2.0 million upon regulatory approval of the product in Japan. Ipsen will manufacture and
provide the product to Medicis for the term of the agreement, which extends to December
2036. Ipsen will receive a royalty based on sales and a supply price, the total of which is
equivalent to approximately 30% of net sales as defined under the agreement. Under the
terms of the agreement, Medicis is responsible for all remaining research and development
costs associated with obtaining the product’s approval in the U.S., Canada and Japan.
F-24
NOTE 9. LICENSE OF ORAPRED® TO BIOMARIN
On May 18, 2004, the Company closed an asset purchase agreement and license agreement
and executed a securities purchase agreement with BioMarin. The asset purchase agreement
involves BioMarin’s purchase of assets related to ORAPRED®, including assets
concerning the Ascent field sales force. ORAPRED® and related pediatric
intellectual property is owned by Ascent, a wholly owned subsidiary of Medicis. The license
agreement granted BioMarin, among other things, the exclusive worldwide rights to
ORAPRED®. As part of the transaction, the name of Ascent Pediatrics, Inc. was
changed to Medicis Pediatrics, Inc.
Under terms of the original agreements, BioMarin was to make license payments to Ascent
of approximately $93 million payable over a five-year period as follows: approximately $10
million as of the date of the transaction; approximately $12.5 million per quarter for four
quarters beginning in July 2004; approximately $2.5 million per quarter for the subsequent
four quarters beginning in July 2005; approximately $2 million per quarter for the
subsequent eight quarters beginning in July 2006; and approximately $1.75 million per
quarter for the last four quarters of the five-year period beginning in July 2008. BioMarin
was also to make payments of $2.5 million per quarter for six quarters beginning in July
2004 for reimbursement of certain contingent payments as discussed in Note 13. The license
agreement with BioMarin will terminate on the earlier of May 18, 2010 or upon BioMarin
exercising their option to purchase all the issued and outstanding shares of common stock of
Ascent. The securities purchase agreement contains a contingent net call option for all the
issued and outstanding shares of common stock of Ascent, based on certain conditions (the
Option). Under the Option, BioMarin is required to purchase all the issued and outstanding
stock of Ascent pursuant to the terms of the agreement on a specified date (August 17,
2009). The Option also grants a right to BioMarin, that if the aggregate number of
prescriptions for products with an equivalent or greater economic value per prescription
using the licensed assets that are sold by BioMarin during the twelve months ended April 1,
2009 exceeds 150% of the aggregate number of prescriptions for products using the licensed
assets that were sold by Medicis during the twelve months ended March 31, 2004, BioMarin may
elect on August 17, 2009, in its sole and absolute discretion, to not exercise the Option.
The payment was to consist of $62 million in cash and $20 million in BioMarin common stock,
based on the fair value of the stock at that time. The Company was responsible for the
manufacture and delivery of finished goods inventory to BioMarin, and BioMarin was
responsible for paying the Company for finished goods inventory delivered through June 30,
2005. As a result, the Company was required to recognize the first $60 million of license
payments ratably through June 30, 2005. The license payments received after June 30, 2005
and the reimbursement of contingent payments will be recognized as revenue when all four
criteria of SAB 104 have been met.
As of the closing date of the transaction, BioMarin is responsible for all marketing
and promotional efforts regarding the sale of ORAPRED®. As a result, Medicis no
longer advertises and promotes any oral liquid prednisolone sodium phosphate solution
product or any related line extension. During the term of the license agreement, Medicis
will maintain ownership of the intellectual property and, consequently, will continue to
amortize the related intangible assets. Payments received from BioMarin under the license
agreement will be treated as contract revenue, which is included in net revenues in the
consolidated statements of operations.
On January 12, 2005, BioMarin and the Company entered into amendments to the Securities
Purchase Agreement and License Agreement entered into on May 18, 2004, a Convertible
Promissory Note (the “Convertible Note”) and a Settlement and Mutual Release Agreement
(collectively the “Agreements”). Under the terms of the Agreements, transaction payments
from BioMarin to Medicis previously totaling $175 million were reduced to $159 million.
Beginning with license payments relating to ORAPRED® to be made by BioMarin after
July 2005, license payments totaling $93 million were reduced pro rata to $88.4 million.
Consideration to be received by Medicis from BioMarin in 2009 for the Option relating to the
purchase of all outstanding shares of Ascent Pediatrics were reduced from $82 million to
$70.6 million. Medicis took full financial responsibility for contingent payments due to
former Ascent Pediatric shareholders without the $5 million in offset payments that would
have been paid by BioMarin to Medicis after July 1, 2005. Contingent payments are due to
former Ascent Pediatric shareholders from Medicis only if revenue from Ascent Pediatric
products exceeds certain thresholds. In addition, Medicis reimbursed BioMarin for actual
returns, up to certain agreed-upon limits, of ORAPRED® finished goods received by
BioMarin during the quarters ended December 31, 2004, March 31, 2005 and June 30, 2005.
Additionally, per the terms of the Agreements, Medicis has made available to BioMarin
the ability to draw down on a Convertible Note up to $25 million beginning July 1, 2005.
The Convertible Note is convertible based on certain terms and conditions including a change
of control provision. Money advanced under the Convertible
F-25
Note is convertible into
BioMarin shares at a strike price equal to the BioMarin average closing price for the 20
trading days prior to such advance. The Convertible Note matures on the option purchase date
in 2009 as defined in the Securities Purchase Agreement but may be repaid by BioMarin at any
time prior to the option purchase date. No monies have been advanced to-date. In
conjunction with the Agreements, BioMarin and Medicis entered into a settlement and Mutual
Release Agreement to forever discharge each other from any and all claims, demands, damages,
debts, liabilities, actions and causes of action relating to the transaction consummated by
the parties other than certain continuing obligations in accordance with the terms of the
parties’ agreements. As of December 31, 2008, BioMarin had paid $95.4 million to Medicis
under the license agreement, which represents all scheduled payments due through that date
under the license agreement.
NOTE 10. MERGER OF ASCENT PEDIATRICS, INC.
As part of its merger with Ascent Pediatrics, Inc. (“Ascent”), which was completed in
November 2001, the Company was required to make contingent purchase price payments
(“Contingent Payments”) for each of the first five years following closing based upon
reaching certain sales threshold milestones on the Ascent products for each twelve month
period through November 15, 2006, subject to certain deductions and set-offs. Payment of
the contingent portion of the purchase price was withheld pending the final outcome of a
litigation matter. The Company distributed the accumulated $27.4 million in Contingent
Payments, representing the first four years’ Contingent Payments, to the former shareholders
of Ascent during the three months ended March 31, 2006, as the pending litigation matter was
settled in Medicis’ favor. In addition, the Company settled an additional dispute during
May 2006, which was initiated in March 2006, relating to the concluded lawsuit. The
resulting $1.8 million settlement was recognized as a charge to selling, general and
administrative expense during the three months ended March 31, 2006. For the fifth and
final twelve month period ended November 30, 2006, sales threshold milestones were not met
and no additional Contingent Payment became payable.
NOTE 11. SHORT-TERM AND LONG-TERM INVESTMENTS
The
Company’s policy for its short-term and long-term investments is to
establish a high-quality portfolio that preserves principal, meets liquidity needs, avoids
inappropriate concentrations and delivers an appropriate yield in relationship to the
Company’s investment guidelines and market conditions. Short-term and long-term investments
consist of corporate and various government agency and municipal debt securities. The
Company’s investments in auction rate floating securities consist of investments in student
loans. Management classifies the Company’s short-term and long-term investments as
available-for-sale. Available-for-sale securities are carried at fair value with unrealized
gains and losses reported in stockholders’ equity. Realized gains and losses and declines
in value judged to be other than temporary, if any, are included in other expense in the
consolidated statement of operations. A decline in the market value of any
available-for-sale security below cost that is deemed to be other than temporary, results in
an impairment in the fair value of the investment. The impairment is charged to earnings
and a new cost basis for the security is established. Premiums and discounts are amortized
or accreted over the life of the related available-for-sale security. Dividends and
interest income are recognized when earned. The cost of securities sold is calculated using
the specific identification method. At December 31, 2008, the Company has recorded the
estimated fair value in available-for-sale securities for short-term and long-term
investments of approximately $257.4 million and $55.3 million, respectively.
F-26
Available-for-sale and trading securities consist of the following at December 31, 2008
and 2007 (amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
DECEMBER 31, 2008 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other- |
|
|
|
|
| |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Than-Temporary |
|
|
|
|
| |
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Impairment |
|
|
Fair |
|
| |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Losses |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes and bonds |
|
$ |
124,622 |
|
|
$ |
418 |
|
|
$ |
(429 |
) |
|
$ |
— |
|
|
$ |
124,611 |
|
Federal agency notes and bonds |
|
|
117,040 |
|
|
|
1,841 |
|
|
|
— |
|
|
|
— |
|
|
|
118,881 |
|
Auction rate floating securities |
|
|
44,625 |
|
|
|
— |
|
|
|
— |
|
|
|
(6,400 |
) |
|
|
38,225 |
|
Asset-backed securities |
|
|
31,681 |
|
|
|
— |
|
|
|
(630 |
) |
|
|
— |
|
|
|
31,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
$ |
317,968 |
|
|
$ |
2,259 |
|
|
$ |
(1,059 |
) |
|
$ |
(6,400 |
) |
|
$ |
312,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
DECEMBER 31, 2007 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other- |
|
|
|
|
| |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Than-Temporary |
|
|
|
|
| |
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Impairment |
|
|
Fair |
|
| |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Losses |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes and bonds |
|
$ |
283,248 |
|
|
$ |
498 |
|
|
$ |
(624 |
) |
|
$ |
— |
|
|
$ |
283,122 |
|
Federal agency notes and bonds |
|
|
206,308 |
|
|
|
968 |
|
|
|
— |
|
|
|
— |
|
|
|
207,276 |
|
Auction rate floating securities |
|
|
101,649 |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
101,650 |
|
Asset-backed securities |
|
|
76,936 |
|
|
|
399 |
|
|
|
(83 |
) |
|
|
— |
|
|
|
77,252 |
|
Commercial paper |
|
|
34,409 |
|
|
|
3 |
|
|
|
(6 |
) |
|
|
— |
|
|
|
34,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
$ |
702,550 |
|
|
$ |
1,869 |
|
|
$ |
(713 |
) |
|
$ |
— |
|
|
$ |
703,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2008, 2007 and 2006, the gross realized gains on sales of available-for-sale
securities totaled $1,134,731, $104,777 and $430,122, respectively, and the gross realized
losses totaled $6,513,687 (including $6,399,653 of other-than-temporary impairment losses),
$0 and $8,547, respectively. Such amounts of gains and losses are determined based on the
specific identification method. The net adjustment to unrealized gains during 2008, 2007
and 2006 on available-for-sale securities included in stockholders’ equity totaled $27,890,
$884,854 and $235,718, respectively. The amortized cost and estimated fair value of the
available-for-sale securities at December 31, 2008, by maturity, are shown below (amounts in
thousands).
| |
|
|
|
|
|
|
|
|
| |
|
DECEMBER 31, 2008 |
|
| |
|
|
|
|
|
Estimated |
|
| |
|
Cost |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
223,008 |
|
|
$ |
224,188 |
|
Due after one year through five years |
|
|
50,334 |
|
|
|
50,354 |
|
Due after five years through 10 years |
|
|
— |
|
|
|
— |
|
Due after 10 years |
|
|
43,326 |
|
|
|
36,973 |
|
|
|
|
|
|
|
|
|
|
$ |
316,668 |
|
|
$ |
311,515 |
|
|
|
|
|
|
|
|
Expected maturities will differ from contractual maturities because the issuers of the
securities may have the right to prepay obligations without prepayment penalties, and the
Company views its available-for-sale securities as available for current operations. At
December 31, 2008, approximately $55.3 million in estimated fair value expected to mature
greater than one year has been classified as long-term investments since these investments
are in an unrealized loss position, and management has both the ability and intent to hold
these investments until recovery of fair value, which may be maturity.
As of December 31, 2008, the Company’s investments included auction rate floating
securities with a fair value of $38.2 million. The Company’s auction rate floating
securities are debt instruments with a long-term maturity and with an interest rate that is
reset in short intervals through auctions. The negative conditions in the credit markets
during 2008 have prevented some investors from liquidating their holdings, including their
holdings of auction rate floating securities. During the three months ended March 31, 2008,
the Company was informed that
F-27
there was insufficient demand at auction for the auction rate floating securities. As
a result, these affected auction rate floating securities are now considered illiquid, and
the Company could be required to hold them until they are redeemed by the holder at
maturity. The Company may not be able to liquidate the securities until a future auction on
these investments is successful. As a result of the continued lack of liquidity of these
investments, the Company recorded an other-than-temporary impairment loss of $6.4 million
during 2008 on its auction rate floating securities in other expense, based on the Company’s
estimate of the fair value of these investments. The Company’s estimate of the fair value
of its auction rate floating securities was based on market information and assumptions
determined by the Company’s management, which could change significantly based on market
conditions.
In November 2008, the Company entered into a settlement agreement with the broker
through which the Company purchased auction rate floating securities. The settlement
agreement provides the Company with the right to put an auction rate floating security
currently held by the Company back to the broker beginning on June 30, 2010. At December
31, 2008, the Company held one auction rate floating security with a par value of $1.3
million that was subject to the settlement agreement. The Company elected the irrevocable
Fair Value Option treatment under SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities, and adjusted the put option to fair value. The Company has
reclassified this auction rate floating security from available-for-sale to trading
securities as of December 31, 2008, and future changes in fair value related to this
investment will be recorded in earnings.
The following table shows the gross unrealized losses, the other-than-temporary
impairment losses and the fair value of the Company’s investments, with unrealized losses
that are not deemed to be other-than-temporarily impaired and with losses that are deemed to
be other-than-temporarily impaired aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position or an
other-than-temporary impairment loss position, respectively, at December 31, 2008 (amounts
in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Less Than 12 Months |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Other-Than- |
|
|
Greater Than 12 Months |
|
| |
|
|
|
|
|
Gross |
|
|
Temporary |
|
|
|
|
|
|
Gross |
|
| |
|
Fair |
|
|
Unrealized |
|
|
Impairment |
|
|
Fair |
|
|
Unrealized |
|
| |
|
Value |
|
|
Loss |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes and bonds |
|
$ |
50,780 |
|
|
$ |
274 |
|
|
$ |
— |
|
|
$ |
6,313 |
|
|
$ |
155 |
|
Federal agency notes and bonds |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Auction rate floating securities |
|
|
38,225 |
|
|
|
— |
|
|
|
6,400 |
|
|
|
— |
|
|
|
— |
|
Asset-backed securities |
|
|
28,987 |
|
|
|
281 |
|
|
|
— |
|
|
|
2,064 |
|
|
|
349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
$ |
117,992 |
|
|
$ |
555 |
|
|
$ |
6,400 |
|
|
$ |
8,377 |
|
|
$ |
504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, the Company has concluded that the unrealized losses on its
investment securities, other than the other-than-temporary impairment loss recognized on the
Company’s auction rate floating securities, are temporary in nature caused by changes in
credit spreads and liquidity issues in the marketplace. Available-for-sale securities are
reviewed quarterly for possible other-than-temporary impairment. This review includes an
analysis of the facts and circumstances of each individual investment such as the severity
of loss, the length of time the fair value has been below cost, the expectation for that
security’s performance and the creditworthiness of the issuer. Additionally, the Company
has the intent and ability to hold these investments for the time necessary to recover its
cost, which for debt securities may be at maturity.
NOTE 12. FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which
clarifies the definition of fair value, establishes a framework for measuring fair value,
and expands the disclosures about fair value measurements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. The Company adopted SFAS No. 157 as of
January 1, 2008. Although the adoption of SFAS No. 157 did not materially impact the
Company’s financial condition, results of operations, or cash flow, the Company is now
required to provide additional disclosures as part of its financial statements.
SFAS No. 157 establishes a three-tier fair value hierarchy, which prioritizes the
inputs used in measuring fair value. These tiers include: Level 1, defined as observable
inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted
prices in active markets that are either directly or indirectly observable; and
F-28
Level 3, defined as unobservable inputs in which little or no market data exists,
therefore requiring an entity to develop its own assumptions.
As of December 31, 2008, the Company held certain assets that are required to be
measured at fair value on a recurring basis. These included certain of the Company’s
short-term and long-term investments, including investments in auction rate floating
securities, and the Company’s investment in Revance.
The Company has invested in auction rate floating securities, which are classified as
available-for-sale or trading securities and are reflected at fair value. Due to recent
events in credit markets, the auction events for some of these instruments held by the
Company failed during the three months ended March 31, 2008 (see Note 11). Therefore, the
fair values of these auction rate floating securities, which are primarily rated AAA, are
estimated utilizing a discounted cash flow analysis as of December 31, 2008. These analyses
consider, among other items, the collateralization underlying the security investments, the
creditworthiness of the counterparty, the timing of expected future cash flows, and the
expectation of the next time the security is expected to have a successful auction. These
investments were also compared, when possible, to other observable market data with similar
characteristics to the securities held by the Company. Changes to these assumptions in
future periods could result in additional declines in fair value of the auction rate
floating securities.
As a result of the liquidity issues of the Company’s auction rate floating securities,
the Company recorded an other-than-temporary impairment loss of $6.4 million in other
expense during the three months ended December 31, 2008, based on the Company’s estimate of
the fair value of these investments. The majority of the auction rate floating securities
held by the Company at December 31, 2008, totaling $38.2 million, were in securities
collateralized by student loan portfolios. These securities were included in long-term
investments at December 31, 2008 in the accompanying consolidated balance sheets. As of
December 31, 2008, the Company continued to earn interest on virtually all of its auction
rate floating securities. Any future fluctuation in fair value related to the auction rate
floating securities classified as available-for-sale that the Company deems to be temporary,
would be recorded to accumulated other comprehensive (loss) income. If the Company
determines that any future decline in fair value of its available-for-sale securities was
other than temporary, it would record a charge to earnings as appropriate.
The Company estimates changes in the net realizable value of its investment in Revance
based on a hypothetical liquidation at book value approach (see Note 6). During 2008, the
Company reduced the carrying value of its investment in Revance and recorded a related
charge to other expense of approximately $9.1 million as a result of a reduction in the
estimated net realizable value of the investment using the hypothetical liquidation at book
value approach as of December 31, 2008.
The Company’s assets measured at fair value on a recurring basis subject to the
disclosure requirements of SFAS No. 157 at December 31, 2008, were as follows (in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fair Value Measurement at Reporting Date Using |
|
| |
|
|
|
|
|
Quoted |
|
|
Significant |
|
|
|
|
| |
|
|
|
|
|
Prices in |
|
|
Other |
|
|
Significant |
|
| |
|
|
|
|
|
Active |
|
|
Observable |
|
|
Unobservable |
|
| |
|
|
|
|
|
Markets |
|
|
Inputs |
|
|
Inputs |
|
| |
|
Dec. 31, 2008 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate floating securities |
|
$ |
38,225 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
38,225 |
|
Other available-for-sale securities |
|
|
274,543 |
|
|
|
274,543 |
|
|
|
— |
|
|
|
— |
|
Investment in Revance |
|
|
2,887 |
|
|
|
— |
|
|
|
— |
|
|
|
2,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
|
$ |
315,655 |
|
|
$ |
274,543 |
|
|
$ |
— |
|
|
$ |
41,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on market conditions, the Company changed its valuation methodology for auction
rate floating securities to a discounted cash flow analysis during the three months ended
March 31, 2008. Accordingly, these securities changed from Level 1 to Level 3 within SFAS
No. 157’s hierarchy since the Company’s initial adoption of SFAS No. 157 at January 1, 2008.
F-29
The following table presents the Company’s assets measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) as defined in SFAS No. 157 for the
year ended December 31, 2008 (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Fair Value Measurements Using Significant |
|
| |
|
Unobservable Inputs (Level 3) |
|
| |
|
Auction Rate |
|
|
Investment |
|
| |
|
Floating |
|
|
in |
|
| |
|
Securities |
|
|
Revance |
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2008 |
|
$ |
— |
|
|
$ |
11,957 |
|
Transfers to Level 3 |
|
|
101,650 |
|
|
|
— |
|
Total losses included in other expense |
|
|
(6,400 |
) |
|
|
(9,070 |
) |
Total gains (losses) included in other
comprehensive (loss) income |
|
|
— |
|
|
|
— |
|
Purchases and settlements (net) |
|
|
(57,025 |
) |
|
|
— |
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
38,225 |
|
|
$ |
2,887 |
|
|
|
|
|
|
|
|
NOTE 13. CONTINGENT CONVERTIBLE SENIOR NOTES
In June 2002, the Company sold $400.0 million aggregate principal amount of its 2.5%
Contingent Convertible Notes Due 2032 (the “Old Notes”) in private transactions. As
discussed below, approximately $230.8 million in principal amount of the Old Notes was
exchanged for New Notes on August 14, 2003. The Old Notes bear interest at a rate of 2.5%
per annum, which is payable on June 4 and December 4 of each year, beginning on December 4,
2002. The Company also agreed to pay contingent interest at a rate equal to 0.5% per annum
during any six-month period, with the initial six-month period commencing June 4, 2007, if
the average trading price of the Old Notes reaches certain thresholds. No contingent
interest related to the Old Notes was payable at December 31, 2008. The Old Notes will
mature on June 4, 2032.
The Company may redeem some or all of the Old Notes at any time on or after June 11,
2007, at a redemption price, payable in cash, of 100% of the principal amount of the Old
Notes, plus accrued and unpaid interest, including contingent interest, if any. Holders of
the Old Notes may require the Company to repurchase all or a portion of their Old Notes on
June 4, 2012 and June 4, 2017, or upon a change in control, as defined in the indenture
governing the Old Notes, at 100% of the principal amount of the Old Notes, plus accrued and
unpaid interest to the date of the repurchase, payable in cash. Pursuant to SFAS No. 48,
Classification of Obligations That Are Callable by the Creditor, if an obligation is due on
demand or will be due on demand within one year from the balance sheet date, even though
liquidation may not be expected within that period, it should be classified as a current
liability. Accordingly, the outstanding balance of Old Notes along with the deferred tax
liability associated with accelerated interest deductions on the Old Notes will be
classified as a current liability during the respective twelve month periods prior to June
4, 2012 and June 4, 2017.
The Old Notes are convertible, at the holders’ option, prior to the maturity date into
shares of the Company’s Class A common stock in the following circumstances:
| |
• |
|
during any quarter commencing after June 30, 2002, if the closing price of
the Company’s Class A common stock over a specified number of trading days
during the previous quarter, including the last trading day of such quarter, is
more than 110% of the conversion price of the Old Notes, or $31.96. The Old
Notes are initially convertible at a conversion price of $29.05 per share, which
is equal to a conversion rate of approximately 34.4234 shares per $1,000
principal amount of Old Notes, subject to adjustment; |
| |
| |
• |
|
if the Company has called the Old Notes for redemption; |
| |
| |
• |
|
during the five trading day period immediately following any nine consecutive
day trading period in which the trading price of the Old Notes per $1,000
principal amount for each day of such period was less than 95% of the product of
the closing sale price of the Company’s Class A common stock on that day
multiplied by the number of shares of the Company’s Class A common stock
issuable upon conversion of $1,000 principal amount of the Old Notes; or |
| |
| |
• |
|
upon the occurrence of specified corporate transactions. |
F-30
The Old Notes, which are unsecured, do not contain any restrictions on the payment of
dividends, the incurrence of additional indebtedness or the repurchase of the Company’s
securities and do not contain any financial covenants.
The Company incurred $12.6 million of fees and other origination costs related to the
issuance of the Old Notes. The Company amortized these costs over the first five-year Put
period, which ran through June 4, 2007.
On August 14, 2003, the Company exchanged approximately $230.8 million in principal
amount of its Old Notes for approximately $283.9 million in principal amount of its 1.5%
Contingent Convertible Senior Notes Due 2033 (the “New Notes”). Holders of Old Notes that
accepted the Company’s exchange offer received $1,230 in principal amount of New Notes for
each $1,000 in principal amount of Old Notes. The terms of the New Notes are similar to the
terms of the Old Notes, but have a different interest rate, conversion rate and maturity
date. Holders of Old Notes that chose not to exchange continue to be subject to the terms
of the Old Notes.
The New Notes bear interest at a rate of 1.5% per annum, which is payable on June 4 and
December 4 of each year, beginning December 4, 2003. The Company will also pay contingent
interest at a rate of 0.5% per annum during any six-month period, with the initial six-month
period commencing June 4, 2008, if the average trading price of the New Notes reaches
certain thresholds. No contingent interest related to the New Notes was payable at December
31, 2008. The New Notes mature on June 4, 2033.
As a result of the exchange, the outstanding principal amounts of the Old Notes and the
New Notes were $169.2 million and $283.9 million, respectively. The Company incurred
approximately $5.1 million of fees and other origination costs related to the issuance of
the New Notes. The Company amortized these costs over the first five-year Put period, which
ran through June 4, 2008.
Holders of the New Notes were able to require the Company to repurchase all or a
portion of their New Notes on June 4, 2008, at 100% of the principal amount of the New
Notes, plus accrued and unpaid interest, including contingent interest, if any, to the date
of the repurchase, payable in cash. Holders of approximately $283.7 million of New Notes
elected to require the Company to repurchase their New Notes on June 4, 2008. The Company
paid $283.7 million, plus accrued and unpaid interest of approximately $2.2 million, to the
holders of New Notes that elected to require the Company to repurchase their New Notes. The
Company was also required to pay an accumulated deferred tax liability of approximately
$34.9 million related to the repurchased New Notes. This $34.9 million deferred tax
liability was paid during the second half of 2008. Following the repurchase of these New
Notes, $181,000 of principal amount of New Notes remained outstanding as of December 31,
2008.
The remaining New Notes are convertible, at the holders’ option, prior to the maturity
date into shares of the Company’s Class A common stock in the following circumstances:
| |
• |
|
during any quarter commencing after September 30, 2003, if the closing price
of the Company’s Class A common stock over a specified number of trading days
during the previous quarter, including the last trading day of such quarter, is
more than 120% of the conversion price of the New Notes, or $46.51. The Notes
are initially convertible at a conversion price of $38.76 per share, which is
equal to a conversion rate of approximately 25.7998 shares per $1,000 principal
amount of New Notes, subject to adjustment; |
| |
| |
• |
|
if the Company has called the New Notes for redemption; |
| |
| |
• |
|
during the five trading day period immediately following any nine consecutive
day trading period in which the trading price of the New Notes per $1,000
principal amount for each day of such period was less than 95% of the product of
the closing sale price of the Company’s Class A common stock on that day
multiplied by the number of shares of the Company’s Class A common stock
issuable upon conversion of $1,000 principal amount of the New Notes; or |
| |
| |
• |
|
upon the occurrence of specified corporate transactions. |
The remaining New Notes, which are unsecured, do not contain any restrictions on the
incurrence of additional indebtedness or the repurchase of the Company’s securities and do
not contain any financial covenants. The New Notes require an adjustment to the conversion
price if the cumulative aggregate of all current and prior dividend increases above $0.025
per share would result in at least a one percent (1%) increase in the conversion price.
This threshold has not been reached and no adjustment to the conversion price has been made.
F-31
As of July 11, 2007, the closing date of the first period whereby holders had the
option to require the Company to purchase their Old Notes for cash, holders of $5,000 of
outstanding principal amounts of the Old Notes exercised their right to require the Company
to purchase their Old Notes for cash.
The following is a quarterly summary of whether or not the criteria for the right of
conversion into shares of the Company’s Class A common stock for holders of the Old Notes
and New Notes were met during 2008, 2007 and 2006. The right of conversion is triggered by
the stock closing above $31.96 and $46.51 for the Old Notes and New Notes, respectively, on
20 of the last 30 trading days and the last trading day of a quarter. If the criteria are
met, the holders of the Old Notes and New Notes have the right to convert their Old Notes
and New Notes, respectively, into shares during the subsequent quarterly period.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Outstanding |
|
|
|
|
|
Outstanding |
| |
|
Conversion |
|
Principal Amounts |
|
Conversion |
|
Principal Amounts |
| |
|
Eligibility |
|
of Old Notes |
|
Eligibility |
|
of New Notes |
| |
|
Criteria Met |
|
Converted During |
|
Criteria Met |
|
Converted During |
| Quarter Ended |
|
For Old Notes? |
|
Subsequent Quarter |
|
For New Notes? |
|
Subsequent Quarter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
No |
|
|
N/A |
|
|
No |
|
|
N/A |
|
September 30, 2008 |
|
No |
|
|
N/A |
|
|
No |
|
|
N/A |
|
June 30, 2008 |
|
No |
|
|
N/A |
|
|
No |
|
|
N/A |
|
March 31, 2008 |
|
No |
|
|
N/A |
|
|
No |
|
|
N/A |
|
December 31, 2007 |
|
No |
|
|
N/A |
|
|
No |
|
|
N/A |
|
September 30, 2007 |
|
No |
|
|
N/A |
|
|
No |
|
|
N/A |
|
June 30, 2007 |
|
No |
|
|
N/A |
|
|
No |
|
|
N/A |
|
March 31, 2007 |
|
No |
|
|
N/A |
|
|
No |
|
|
N/A |
|
December 31, 2006 |
|
Yes |
|
$ |
5,000 |
|
|
No |
|
|
N/A |
|
September 30, 2006 |
|
No |
|
|
N/A |
|
|
No |
|
|
N/A |
|
June 30, 2006 |
|
No |
|
|
N/A |
|
|
No |
|
|
N/A |
|
March 31, 2006 |
|
No |
|
|
N/A |
|
|
No |
|
|
N/A |
|
At the end of all future quarters, the conversion rights will be reassessed in
accordance with the bond indenture agreement to determine if the conversion trigger rights
have been achieved.
NOTE 14. COMMITMENTS AND CONTINGENCIES
Occupancy Arrangements
During July 2006, the Company executed a lease agreement for new headquarter office
space to accommodate its expected long-term growth. The first phase is for approximately
150,000 square feet with the right to expand. The Company occupied the new headquarter
office space, which is located approximately one mile from our previous headquarter office
space in Scottsdale, Arizona, during the second quarter of 2008. There is no cash
obligation for lease payments until May 2009. The Company obtained possession of the leased
premises and therefore began accruing rent expense during the first quarter of 2008. The
term of the lease is twelve years. The average annual expense under the amended lease
agreement is approximately $3.9 million. During the first quarter of 2008, the Company
received approximately $6.7 million in tenant improvement incentives from the landlord.
This amount has been capitalized into leasehold improvements and is being depreciated on a
straight-line basis over the lesser of the useful life or the term of the lease. The tenant
improvement incentives are also included in other long-term liabilities as deferred rent,
and will be recognized as a reduction of rent expense on a straight-line basis over the term
of the lease.
During October 2006, the Company executed a lease agreement for additional headquarter
office space, which is also located approximately one mile from the Company’s current
headquarter office space in Scottsdale, Arizona to accommodate its current needs and future
growth. Under this agreement, approximately 21,000 square feet of office space is being
leased for a period of three years. In May 2007, the Company began occupancy of the
additional headquarter office space.
Medicis Aesthetics Canada Ltd., a wholly owned subsidiary, presently leases
approximately 3,600 square feet of office space in Toronto, Ontario, Canada, under a lease
agreement, as extended, that expires in June 2009.
F-32
Rent expense was approximately $9.4 million, $2.5 million and $2.2 million for 2008,
2007 and 2006, respectively. Rent expense for 2008 includes a $4.8 million charge for the
estimated remaining net cost for the Company’s previous headquarters facility lease, net of
potential sublease income.
At December 31, 2008, approximate future lease payments under the Company’s operating
leases are as follows (amounts in thousands):
| |
|
|
|
|
| YEAR ENDING DECEMBER 31, |
|
|
|
|
2009 |
|
$ |
4,905 |
|
2010 |
|
|
6,200 |
|
2011 |
|
|
4,137 |
|
2012 |
|
|
4,166 |
|
2013 |
|
|
4,417 |
|
Thereafter |
|
|
29,592 |
|
|
|
|
|
|
|
$ |
53,417 |
|
|
|
|
|
Lease Exit Costs
In connection with occupancy of the new headquarter office, the Company ceased use of
the prior headquarter office in July 2008, which consists of approximately 75,000 square
feet of office space, at an average annual expense of approximately $2.1 million, under an
amended lease agreement that expires in December 2010. Under SFAS 146, Accounting for Costs
Associated with Exit or Disposal Activities, a liability for the costs associated with an
exit or disposal activity is recognized when the liability is incurred. In accordance with
SFAS 146, the Company recorded lease exit costs of approximately $4.8 million during the
three months ended September 30, 2008 consisting of the initial liability of $4.7 million
and accretion expense of $0.1 million. These amounts were recorded as selling, general and
administrative expenses. The Company has not recorded any other costs related to the lease
for the prior headquarters.
As of December 31, 2008, approximately $4.0 million of lease exit costs remain accrued
and are expected to be paid by December 2010 of which $1.9 million is classified in other
current liabilities and $2.1 million is classified in other liabilities. Although the
facilities are no longer in use by the Company, the lease exit cost accrual has not been
offset by an adjustment for estimated sublease rentals. After considering sublease market
information as well as factors specific to the lease, the Company concluded it was probable
it would be unable to obtain sublease rentals for the prior headquarters and therefore it
would not be subleased for the remaining lease term. The Company will continue to monitor
the sublease market conditions and reassess the impact on the lease exit cost accrual.
The following is a summary of the activity in the liability for lease exit costs for
the year ended December 31, 2008:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Liability as of |
|
Amounts Charged |
|
Cash Payments |
|
Cash Received |
|
Liability as of |
| |
|
Dec. 31, 2007 |
|
to Expense |
|
Made |
|
from Sublease |
|
Dec. 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease exit costs
liability |
|
$ |
— |
|
|
$ |
4,812,928 |
|
|
$ |
(816,826 |
) |
|
$ |
— |
|
|
$ |
3,996,102 |
|
Research and Development and Consulting Contracts
The Company has various consulting agreements with certain scientists in exchange for
the assignment of certain rights and consulting services. At December 31, 2008, the Company
had approximately $867,300 of commitments (solely attributable to the Chairman of the
Central Research Committee of the Company) payable over the remaining five years under an
agreement that is cancelable by either party under certain conditions.
Litigation
On January 13, 2009, the Company filed suit against Mylan, Matrix, Matrix Laboratories
Inc., Sandoz, and Barr (collectively “Defendants”) in the United States District Court for
the District of Delaware seeking an adjudication that Defendants have infringed one or more
claims of the Company’s ‘838 Patent by submitting to the FDA their respective ANDAs for
generic versions of SOLODYN®. The relief requested by the Company includes a
F-33
request for a permanent injunction preventing Defendants from infringing the ‘838
patent by selling generic versions of SOLODYN®.
On January 21, 2009, the Company received a letter from a stockholder demanding that
its Board of Directors take certain actions, including potentially legal action, in
connection with the restatement of its consolidated financial statements in 2008, and
threatening to pursue a derivative claim if the Company’s Board of Directors does not comply
with the stockholder’s demands. The Company’s Board of Directors is reviewing the letter
and has established a special committee of the Board, comprised of directors who are
independent and disinterested with respect to the letter, (i) to assess whether there is any
merit to the allegations contained in the letter, (ii) if the special committee does
conclude that there may be merit to any of the allegations contained in the letter, to
further assess whether it is in our best interest to pursue litigation or other action
against any or all of the persons named in the letter or any other persons not named in the
letter, and (iii) to recommend to the Board any other appropriate action to be taken.
On October 3, 10, and 27, 2008, purported stockholder class action lawsuits styled
Andrew Hall v. Medicis Pharmaceutical Corp., et al. (Case No. 2:08-cv-01821-MHB);
Steamfitters Local 449 Pension Fund v. Medicis Pharmaceutical Corp., et al. (Case No.
2:08-cv-01870-DKD); and Darlene Oliver v. Medicis Pharmaceutical Corp., et al. (Case No.
2:08-cv-01964-JAT) were filed in the United States District Court for the District of
Arizona on behalf of stockholders who purchased securities of the Company during the period
between October 30, 2003 and approximately September 24, 2008. The complaints name as
defendants Medicis Pharmaceutical Corp. and the Company’s Chief Executive Officer and
Chairman of the Board, Jonah Shacknai, the Company’s Chief Financial Officer, Executive Vice
President and Treasurer, Richard D. Peterson, and the Company’s Chief Operating Officer and
Executive Vice President, Mark A. Prygocki. Plaintiffs’ claims arise in connection with the
restatement of the Company’s annual, transition, and quarterly periods in fiscal years 2003
through 2007 and the first and second quarters of 2008. The complaints allege violations of
federal securities laws, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and
Rule 10b-5, based on alleged material misrepresentations to the market that had the effect
of artificially inflating the market price of the Company’s stock. The plaintiffs seek to
recover unspecified damages and costs, including counsel and expert fees. The Company
intends to vigorously defend the claims in these matters. There can be no assurance,
however, that the Company will be successful, and an adverse resolution of the lawsuits
could have a material adverse effect on the Company’s financial position and results of
operations in the period in which the lawsuits are resolved. The Company is not presently
able to reasonably estimate potential losses, if any, related to the lawsuits.
On April 30, 2008, the Company received notice from Perrigo Israel Pharmaceuticals Ltd.
(“Perrigo Israel”), a generic pharmaceutical company, that it had filed an ANDA with the FDA
for a generic version of the Company’s VANOS® fluocinonide cream 0.1%. Perrigo
Israel’s notice indicated that it was challenging only one of the two patents that the
Company listed with the FDA for VANOS® Cream. On June 6, 2008, the Company filed
a complaint for patent infringement against Perrigo Israel and its domestic corporate parent
Perrigo Company in the United States District Court for the Western District of Michigan,
Civil Action No. 1:08-cv-0539-PLM. The complaint asserts that Perrigo Israel and Perrigo
Company have infringed both of the Company’s patents for VANOS® Cream (United
States Patent Nos. 6,765,001 and 7,220,424). Perrigo Israel and Perrigo Company filed a
joint Answer on November 4, 2008. The Court has scheduled a joint status conference for
March 20, 2009.
On January 15, 2008, IMPAX filed a lawsuit against the Company in the United States
District Court for the Northern District of California seeking a declaratory judgment that
our U.S. Patent No. 5,908,838 related to SOLODYN® is invalid and is not infringed
by IMPAX’s filing of an ANDA for a generic version of SOLODYN®. On April 16,
2008, the Court granted Medicis’ motion to dismiss the IMPAX complaint for lack of
jurisdiction. IMPAX has appealed the Court’s order dismissing the case to the United States
Court of Appeals for the Federal Circuit. On November 26, 2008, the Company entered into a
License and Settlement Agreement and a Joint Development Agreement with IMPAX. In
connection with the License and Settlement Agreement, Medicis and IMPAX agreed to terminate
all legal disputes between them relating to SOLODYN®. Additionally, under terms
of the License and Settlement Agreement, IMPAX has confirmed that Medicis’ patents relating
to SOLODYN® are valid and enforceable, and cover IMPAX’s activities relating to
its generic product under ANDA #90-024.
On October 27, 2005, the Company filed suit against Upsher-Smith Laboratories, Inc. of
Plymouth, Minnesota and against Prasco Laboratories of Cincinnati, Ohio for infringement of
Patent No. 6,905,675 entitled “Sulfur Containing Dermatological Compositions and Methods for
Reducing Malodors in Dermatological Compositions” covering our sodium sulfacetamide/sulfur
technology. This intellectual property is related to the Company’s PLEXION®
Cleanser product. The suit was filed in the U.S. District Court for the District of
Arizona,
F-34
and seeks an award of damages, as well as a preliminary and a permanent injunction. A
hearing on the Company’s preliminary injunction motion was heard on March 8 and March 9,
2006. On May 2, 2006, an order denying the motion for a preliminary injunction was received
by Medicis. The Court has entered an order staying the case until the conclusion of a patent
reexamination request submitted by Medicis.
On May 25, 2006, Prasco Laboratories of Cincinnati, Ohio filed suit against the Company
and Imaginative Research Associates (“IRA”) seeking a declaration that Prasco’s Oscion
product does not infringe certain patents owned by the Company or by IRA. The Company and
IRA moved to dismiss that suit on the grounds that the court had no jurisdiction under the
Declaratory Judgment Act to hear the case. The court granted the Company’s motion and
dismissed the case. Prasco has appealed and the appeal is pending before the U.S. Court of
Appeals for the Federal Circuit. The case was argued to the U.S. Court of Appeals on April
10, 2008.
On April 25, 2007, the Company entered into a Settlement Agreement with the Justice
Department, the Office of Inspector General of the Department of Health and Human Services
(“OIG”) and the TRICARE Management Activity (collectively, the “United States”) and private
complainants to settle all outstanding federal and state civil suits against the Company in
connection with claims related to the Company’s alleged off-label marketing and promotion of
LOPROX® and LOPROX® TS products to pediatricians during periods prior
to the Company’s May 2004 disposition of its pediatric sales division (the “Settlement
Agreement”). Pursuant to the Settlement Agreement, the Company agreed to pay approximately
$10 million to settle the matter. During 2006, the Company accrued a loss contingency of
$10.2 million for this matter in connection with the possibility of additional expenses
related to the settlement amount. The $10.2 million is included in selling, general and
administrative expenses in the accompanying consolidated statements of operations for 2006.
In addition to the matters discussed above, in the ordinary course of business, the
Company is involved in a number of legal actions, both as plaintiff and defendant, and could
incur uninsured liability in any one or more of them. Although the outcome of these actions
is not presently determinable, it is the opinion of the Company’s management, based upon the
information available at this time, that the expected outcome of these matters, individually
or in the aggregate, will not have a material adverse effect on the results of operations,
financial condition or cash flows of the Company.
NOTE 15. INCOME TAXES
The provision (benefit) for income taxes consists of the following (amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
YEARS ENDED DECEMBER 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
68,767 |
|
|
$ |
31,639 |
|
|
$ |
14,172 |
|
State |
|
|
3,631 |
|
|
|
186 |
|
|
|
1,415 |
|
Foreign |
|
|
2,422 |
|
|
|
3,194 |
|
|
|
3,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,820 |
|
|
|
35,019 |
|
|
|
19,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(40,435 |
) |
|
|
13,091 |
|
|
|
(42,662 |
) |
State |
|
|
(2,255 |
) |
|
|
434 |
|
|
|
(1,365 |
) |
Foreign |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,690 |
) |
|
|
13,525 |
|
|
|
(44,027 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
32,130 |
|
|
$ |
48,544 |
|
|
$ |
(24,570 |
) |
|
|
|
|
|
|
|
|
|
|
During 2008, 2007 and 2006, “Additional paid-in-capital” was (decreased)/increased by
$(1.6) million, $2.6 million and $3.9 million, respectively, as a result of tax
(shortfalls)/windfalls related to the vesting of restricted stock and exercise of employee
stock options.
F-35
The reconciliations of the U.S. federal statutory rate to the combined effective tax
rate used to determine income tax expense (benefit) are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
YEARS ENDED DECEMBER 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory federal income tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
(35.0 |
)% |
State tax rate, net of federal benefit |
|
|
2.2 |
|
|
|
0.9 |
|
|
|
(1.9 |
) |
Share-based payments |
|
|
2.4 |
|
|
|
0.4 |
|
|
|
3.1 |
|
Foreign taxes |
|
|
3.3 |
|
|
|
1.7 |
|
|
|
3.9 |
|
Tax contingencies reserve |
|
|
0.3 |
|
|
|
(0.4 |
) |
|
|
(6.8 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Non-deductible research and development
expense |
|
|
25.2 |
|
|
|
— |
|
|
|
— |
|
Other non-deductible items |
|
|
4.2 |
|
|
|
1.3 |
|
|
|
5.0 |
|
Credits and other |
|
|
(4.5 |
) |
|
|
(0.8 |
) |
|
|
(2.1 |
) |
Valuation allowance |
|
|
7.7 |
|
|
|
2.7 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75.8 |
% |
|
|
40.8 |
% |
|
|
(33.8 |
)% |
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Company’s deferred tax assets and
liabilities are as follows (amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
DECEMBER 31, |
|
| |
|
2008 |
|
|
2007 |
|
| |
|
Current |
|
|
Long-term |
|
|
Current |
|
|
Long-term |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss
carryforwards |
|
$ |
7,558 |
|
|
$ |
13,547 |
|
|
$ |
— |
|
|
$ |
4,959 |
|
Reserves and liabilities |
|
|
46,037 |
|
|
|
6,176 |
|
|
|
40,247 |
|
|
|
4,513 |
|
Unrealized losses on securities |
|
|
— |
|
|
|
2,319 |
|
|
|
— |
|
|
|
— |
|
Excess of tax basis over net
book value of intangible assets |
|
|
— |
|
|
|
80,182 |
|
|
|
— |
|
|
|
65,060 |
|
Share-based payment awards |
|
|
— |
|
|
|
17,665 |
|
|
|
— |
|
|
|
15,946 |
|
Depreciation on property and equipment |
|
|
— |
|
|
|
141 |
|
|
|
— |
|
|
|
249 |
|
Credits and other |
|
|
— |
|
|
|
1,387 |
|
|
|
— |
|
|
|
— |
|
Capital loss carryover |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
26 |
|
Charitable contributions, other |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,595 |
|
|
|
121,417 |
|
|
|
40,247 |
|
|
|
93,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on securities |
|
|
(434 |
) |
|
|
— |
|
|
|
(418 |
) |
|
|
— |
|
Bond interest |
|
|
— |
|
|
|
(37,605 |
) |
|
|
(30,639 |
) |
|
|
(30,537 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(434 |
) |
|
|
(37,605 |
) |
|
|
(31,057 |
) |
|
|
(30,537 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance |
|
|
— |
|
|
|
(6,663 |
) |
|
|
— |
|
|
|
(3,262 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
53,161 |
|
|
$ |
77,149 |
|
|
$ |
9,190 |
|
|
$ |
59,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with its acquisition of LipoSonix in July 2008, the Company recorded
$18.7 million of net deferred tax assets and decreased goodwill by $18.7 million as a result
of tax attributes acquired and basis differences in the net assets acquired.
At December 31, 2008, the Company has a federal net operating loss carryforward of
approximately $60.3 million, of which a portion will expire beginning in 2021 if not
previously utilized. $57.5 million of the net operating loss carryforward was acquired in
connection with the Company’s acquisition of LipoSonix. As a result of the related
ownership change for LipoSonix, the annual utilization of the net operating loss
carryforward is limited under Internal Revenue Code Section 382. The federal net operating
loss of $60.3 million is net of the Section 382 limitation, thus representing the Company’s
estimate of the net operating loss carryforward that will be realized.
At December 31, 2008 and 2007, the Company has an unrealized tax loss of $18.1 million
and $9.3 million, respectively, related to the Company’s option to acquire Revance or
license Revance’s product that is under development. The Company will not be able to
determine the character of the loss until the Company exercises or
F-36
fails to exercise its option. A realized loss characterized as a capital loss can only be utilized to offset
capital gains. At December 31, 2008 and 2007, the Company has recorded a valuation allowance of $6.7
million and $3.3 million, respectively, against the deferred tax asset associated with this
unrealized tax loss in order to reduce the carrying value of the deferred tax asset to $0,
which is the amount that management believes is more likely than not to be realized.
The Company recorded a deferred tax liability of $434,000 and $418,000 related to
unrealized gains on available-for-sale securities in 2008 and 2007, respectively, and
recorded a deferred tax asset of approximately $84,000 relating to unrealized losses on
available-for-sale securities in 2006. All amounts have been presented as a component of
other comprehensive income in stockholders’ equity.
During 2008, 2007 and 2006, the Company made net tax payments of $87.8 million, $35.4
million and $35.7 million, respectively.
The Company operates in multiple tax jurisdictions and is periodically subject to audit
in these jurisdictions. These audits can involve complex issues that may require an
extended period of time to resolve and may cover multiple years. The Company and its
domestic subsidiaries file a consolidated U.S. federal income tax return. Such returns have
either been audited or settled through statute expiration through fiscal 2004. The Internal
Revenue Service has recently informed the Company that the tax return for the period ending
December 31, 2007 has been selected for a limited scope examination.
The Company owns two subsidiaries that file corporate tax returns in Sweden. The
Swedish tax authorities examined the tax return of one of the subsidiaries for fiscal 2004.
The examiners issued a no change letter, and the examination is complete. The Company’s
other subsidiary in Sweden has not been examined by the Swedish tax authorities. The
Swedish statute of limitation may be open for up to five years from the date the tax return
was filed. Thus, all returns filed from fiscal 2004 forward are open under the statute of
limitation.
The Company and its consolidated subsidiaries received a final notice of proposed
assessment in January 2007 from the Arizona Department of Revenue for fiscal years ended
2001 through 2004. The Company and the Arizona Department of Revenue agreed to the
resolution of certain proposed adjustments and, accordingly, the Company paid $318,000
during 2008.
Effective January 1, 2007, the Company adopted FIN No. 48, Accounting for Uncertainty
in Income Taxes. In accordance with FIN No. 48, the Company recognized a cumulative-effect
adjustment of approximately $808,000, increasing its liability for unrecognized tax
benefits, interest, and penalties and reducing the January 1, 2007 balance of retained
earnings. A reconciliation of the 2008 and 2007 beginning and ending amount of unrecognized
tax benefits is as follows (amounts in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
3,410 |
|
|
$ |
4,310 |
|
Additions based on tax positions related to the current year |
|
|
— |
|
|
|
— |
|
Additions for tax positions of prior years |
|
|
— |
|
|
|
200 |
|
Reductions for tax positions of prior years |
|
|
— |
|
|
|
(1,100 |
) |
Settlements |
|
|
(898 |
) |
|
|
— |
|
Reductions due to lapse in statute of limitations |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
2,512 |
|
|
$ |
3,410 |
|
|
|
|
|
|
|
|
The amount of unrecognized tax benefits which, if ultimately recognized, could
favorably affect the effective tax rate in a future period is $2.1 million and $2.5 million
as of December 31, 2008 and 2007, respectively.
The Company recognizes accrued interest and penalties, if applicable, related to
unrecognized tax benefits in income tax expense. During the years ended December 31, 2008,
2007 and 2006, the Company did not recognize a material amount in interest and penalties.
The Company had approximately $290,000 and $280,000 for the payment of interest and
penalties accrued (net of tax benefit) at December 31, 2008, and 2007, respectively.
The Company estimates that it is reasonably possible that the amount of unrecognized
tax benefits will decrease by $1.3 million in the next twelve months due to normal statute
closures.
F-37
NOTE 16. SHARE REPURCHASE PROGRAM
On August 29, 2007, the Company’s Board of Directors approved a stock trading plan to
purchase up to $200.0 million in aggregate value of shares of Medicis’ Class A common stock
upon satisfaction of certain conditions. The number of shares to be repurchased and the
timing of the repurchases (if any) were dependent on factors such as the market price of
Medicis’ Class A common stock, economic and market conditions, and corporate and regulatory
requirements. The plan terminated on August 29, 2008, as it was scheduled to terminate on
the earlier of the first anniversary of the plan or at the time when the aggregate purchase
limit was reached. No shares were repurchased under this plan.
NOTE 17. DIVIDENDS DECLARED ON COMMON STOCK
During 2008, 2007 and 2006, the Company paid quarterly cash dividends aggregating $8.6
million, $6.8 million and $6.6 million, respectively, on its common stock. In addition, on
December 17, 2008, the Company declared a cash dividend of $0.04 per issued and outstanding
share of common stock payable on January 30, 2009 to stockholders of record at the close of
business on January 2, 2009. The $2.3 million dividend was recorded as a reduction of
accumulated earnings and is included in other current liabilities in the accompanying
consolidated balance sheets as of December 31, 2008. The Company has not adopted a
dividend policy.
NOTE 18. STOCK OPTION PLANS
As of December 31, 2007, the Company has seven active Stock Option Plans (the 2006,
2004, 2002, 1998, 1996, 1995 and 1992 Plans or, collectively, the “Plans”). Of these seven
Plans, only the 2006 Incentive Award Plan is eligible for the granting of future awards. As
of December 31, 2008, 10,707,357 options were outstanding under these Plans. Except for the
2002 Stock Option Plan, which only includes non-qualified incentive options, the Plans allow
the Company to designate options as qualified incentive or non-qualified on an as-needed
basis. Qualified and non-qualified stock options vest over a period determined at the time
the options are granted, ranging from one to five years, and generally have a maximum term
of ten years. Options are granted at the fair market value on the grant date. Options
outstanding at December 31, 2008 vary in price from $10.13 to $39.04, with a weighted
average exercise price of $27.98 as is set forth in the following chart:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
Average |
|
| Range of |
|
Number |
|
|
Contractual |
|
|
Exercise |
|
|
Number |
|
|
Exercise |
|
| Exercise Prices |
|
Outstanding |
|
|
Life |
|
|
Price |
|
|
Exercisable |
|
|
Price |
|
$10.13-$11.00 |
|
|
619,577 |
|
|
|
0.6 |
|
|
$ |
10.97 |
|
|
|
619,577 |
|
|
$ |
10.97 |
|
$11.53-$18.33 |
|
|
1,369,012 |
|
|
|
3.4 |
|
|
$ |
18.20 |
|
|
|
1,369,012 |
|
|
$ |
18.20 |
|
$18.57-$26.90 |
|
|
582,283 |
|
|
|
4.0 |
|
|
$ |
23.19 |
|
|
|
456,290 |
|
|
$ |
23.45 |
|
$26.95-$26.95 |
|
|
1,374,354 |
|
|
|
2.5 |
|
|
$ |
26.95 |
|
|
|
1,374,354 |
|
|
$ |
26.95 |
|
$27.30-$27.63 |
|
|
1,543,794 |
|
|
|
1.6 |
|
|
$ |
27.63 |
|
|
|
1,543,794 |
|
|
$ |
27.63 |
|
$27.70-$29.13 |
|
|
78,910 |
|
|
|
4.0 |
|
|
$ |
28.31 |
|
|
|
78,910 |
|
|
$ |
28.31 |
|
$29.20-$29.20 |
|
|
1,795,640 |
|
|
|
4.6 |
|
|
$ |
29.20 |
|
|
|
1,795,640 |
|
|
$ |
29.20 |
|
$29.30-$32.56 |
|
|
1,141,030 |
|
|
|
4.7 |
|
|
$ |
31.56 |
|
|
|
860,540 |
|
|
$ |
31.33 |
|
$32.81-$36.06 |
|
|
176,407 |
|
|
|
5.2 |
|
|
$ |
33.77 |
|
|
|
161,338 |
|
|
$ |
33.77 |
|
$38.45-39.04 |
|
|
2,026,350 |
|
|
|
5.6 |
|
|
$ |
38.49 |
|
|
|
1,557,674 |
|
|
$ |
38.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,707,357 |
|
|
|
3.7 |
|
|
$ |
27.98 |
|
|
|
9,817,129 |
|
|
$ |
27.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-38
A summary of stock options granted within the Plans and related information for 2008,
2007 and 2006 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
| |
|
Qualified |
|
Non-Qualified |
|
Total |
|
Price |
Balance at December 31, 2005 |
|
|
1,204,939 |
|
|
|
13,174,397 |
|
|
|
14,379,336 |
|
|
$ |
27.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
— |
|
|
|
91,125 |
|
|
|
91,125 |
|
|
$ |
31.38 |
|
Exercised |
|
|
(260,756 |
) |
|
|
(739,075 |
) |
|
|
(999,831 |
) |
|
$ |
20.43 |
|
Terminated/expired |
|
|
(18,394 |
) |
|
|
(463,225 |
) |
|
|
(481,619 |
) |
|
$ |
30.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
925,789 |
|
|
|
12,063,222 |
|
|
|
12,989,011 |
|
|
$ |
27.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
— |
|
|
|
119,553 |
|
|
|
119,553 |
|
|
$ |
33.75 |
|
Exercised |
|
|
(270,194 |
) |
|
|
(621,545 |
) |
|
|
(891,739 |
) |
|
$ |
20.65 |
|
Terminated/expired |
|
|
(29,948 |
) |
|
|
(519,922 |
) |
|
|
(549,870 |
) |
|
$ |
32.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
|
625,647 |
|
|
|
11,041,308 |
|
|
|
11,666,955 |
|
|
$ |
27.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
— |
|
|
|
127,702 |
|
|
|
127,702 |
|
|
$ |
22.22 |
|
Exercised |
|
|
(62,422 |
) |
|
|
(216,070 |
) |
|
|
(278,492 |
) |
|
$ |
15.59 |
|
Terminated/expired |
|
|
(58,936 |
) |
|
|
(749,872 |
) |
|
|
(808,808 |
) |
|
$ |
31.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
504,289 |
|
|
|
10,203,068 |
|
|
|
10,707,357 |
|
|
$ |
27.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-39
NOTE 19. NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of restated basic and diluted net income (loss)
per common share (in thousands, except per share amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
YEARS ENDED DECEMBER 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
| |
|
|
BASIC |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
10,276 |
|
|
$ |
70,436 |
|
|
$ |
(48,152 |
) |
Weighted average number of
common shares outstanding |
|
|
56,567 |
|
|
|
55,988 |
|
|
|
54,688 |
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share |
|
$ |
0.18 |
|
|
$ |
1.26 |
|
|
$ |
(0.88 |
) |
|
|
|
|
|
|
|
|
|
|
DILUTED |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
10,276 |
|
|
$ |
70,436 |
|
|
$ |
(48,152 |
) |
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax-effected interest expense and
issue costs related to Old Notes |
|
|
— |
|
|
|
2,950 |
|
|
|
— |
|
Tax-effected interest expense and
issue costs related to New Notes |
|
|
— |
|
|
|
3,357 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) assuming dilution |
|
$ |
10,276 |
|
|
$ |
76,743 |
|
|
$ |
(48,152 |
) |
Weighted average number of
common shares outstanding |
|
|
56,567 |
|
|
|
55,988 |
|
|
|
54,688 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Old Notes |
|
|
— |
|
|
|
5,823 |
|
|
|
— |
|
New Notes |
|
|
— |
|
|
|
7,325 |
|
|
|
— |
|
Stock options and restricted stock |
|
|
756 |
|
|
|
2,110 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
common shares assuming dilution |
|
|
57,323 |
|
|
|
71,246 |
|
|
|
54,688 |
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share |
|
$ |
0.18 |
|
|
$ |
1.08 |
|
|
$ |
(0.88 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share must be calculated using the “if-converted” method
in accordance with EITF 04-8, Effect of Contingently Convertible Debt on Diluted Earnings
per Share. Diluted net income per share is calculated by adjusting net income for
tax-effected net interest and issue costs on the Old Notes and New Notes, divided by the
weighted average number of common shares outstanding assuming conversion.
The diluted net income per common share computation for 2008 excludes 9,919,690 shares
of stock that represented outstanding stock options whose exercise price were greater than
the average market price of the common shares during the period and were anti-dilutive. The
diluted net income per common share computation for 2008 also excludes 5,822,551 and
3,124,742 shares of common stock, issuable upon conversion of the Old Notes and New Notes,
respectively, as they were anti-dilutive.
The diluted net income per common share computation for 2007 excludes 3,585,908 shares
of stock that represented outstanding stock options whose exercise price were greater than
the average market price of the common shares during the period and were anti-dilutive.
F-40
Due to the Company’s net loss during 2006, a calculation of diluted earnings per share
is not required. For 2006, potentially dilutive securities consisted of restricted stock
and stock options convertible into 2,228,059 shares
in the aggregate, and 5,822,894 and 7,324,819 shares of common stock, issuable upon
conversion of the Old Notes and New Notes, respectively.
NOTE 20. FINANCIAL INSTRUMENTS — CONCENTRATIONS OF CREDIT AND OTHER RISKS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents, short-term and
long-term investments and accounts receivable.
The Company maintains cash, cash equivalents and short-term and long-term investments
primarily with two financial institutions that invest funds in short-term, interest-bearing,
investment-grade, marketable securities. Financial instruments that potentially subject the
Company to concentrations of credit risk consist primarily of investments in debt securities
and trade receivables. The Company’s investment policy requires it to place its investments
with high-credit quality counterparties, and requires investments in debt securities with
original maturities of greater than six months to consist primarily of AAA rated financial
instruments and counterparties. The Company’s investments are primarily in direct
obligations of the United States government or its agencies and corporate notes and bonds.
At December 31, 2008 and 2007, two customers comprised approximately 64.7% and 93.9%,
respectively, of accounts receivable. The Company does not require collateral from its
customers, but performs periodic credit evaluations of its customers’ financial condition.
Management does not believe a significant credit risk exists at December 31, 2008.
The Company’s inventory is contract manufactured. The Company and the manufacturers of
its products rely on suppliers of raw materials used in the production of its products.
Some of these materials are available from only one source and others may become available
from only one source. Any disruption in the supply of raw materials or an increase in the
cost of raw materials to these manufacturers could have a significant effect on their
ability to supply the Company with its products. The failure of any such suppliers to meet
its commitment on schedule could have a material adverse effect on the Company’s business,
operating results and financial condition. If a sole-source supplier were to go out of
business or otherwise become unable to meet its supply commitments, the process of locating
and qualifying alternate sources could require up to several months, during which time the
Company’s production could be delayed. Such delays could have a material adverse effect on
the Company’s business, operating results and financial condition.
NOTE 21. DEFINED CONTRIBUTION PLAN
The Company has a defined contribution plan (the “Contribution Plan”) that is intended
to qualify under Section 401(k) of the Internal Revenue Code. All employees, except those
who have not attained the age of 21, are eligible to participate in the Contribution Plan.
Participants may contribute, through payroll deductions, up to 20.0% of their basic
compensation, not to exceed Internal Revenue Code limitations. Although the Contribution
Plan provides for profit sharing contributions by the Company, the Company had not made any
such contributions since its inception until April 2002. Beginning in April 2002, the
Company began matching employee contributions at 50% of the first 3% of basic compensation
contributed by the participants, and in April 2006 increased the matching contribution to
50% of the first 6% of basic compensation contributed by the participants. During 2008,
2007 and 2006, the Company also made a discretionary contribution to the plan. During 2008,
2007 and 2006, the Company recognized expense related to matching and discretionary
contributions under the Contribution Plan of $2.7 million, $2.3 million and $1.4 million,
respectively.
F-41
NOTE 22. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The tables below list the quarterly financial information for 2008 and 2007. All
figures are in thousands, except per share amounts, and certain amounts do not total the
annual amounts due to rounding.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
YEAR ENDED DECEMBER 31, 2008 |
|
|
| |
|
|
|
|
|
(FOR THE QUARTERS ENDED) |
|
|
| |
|
MARCH 31, 2008 (a) |
|
JUNE 30, 2008 (b) |
|
SEPTEMBER 30, 2008(c) |
|
DECEMBER 31, 2008(d) |
|
Net revenues |
|
$ |
128,903 |
|
|
$ |
137,450 |
|
|
$ |
115,425 |
|
|
$ |
135,971 |
|
Gross profit (1) |
|
|
117,771 |
|
|
|
128,246 |
|
|
|
104,577 |
|
|
|
128,442 |
|
Net income (loss) |
|
|
20,525 |
|
|
|
13,009 |
|
|
|
(14,657 |
) |
|
|
(8,601 |
) |
Basic net income (loss)
per common share |
|
$ |
0.36 |
|
|
$ |
0.23 |
|
|
$ |
(0.26 |
) |
|
$ |
(0.15 |
) |
Diluted net income (loss)
per common share |
|
$ |
0.31 |
|
|
$ |
0.21 |
|
|
$ |
(0.26 |
) |
|
$ |
(0.15 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
YEAR ENDED DECEMBER 31, 2007 |
|
|
| |
|
|
|
|
|
(FOR THE QUARTERS ENDED) |
|
|
| |
|
MARCH 31, 2007 (e) |
|
JUNE 30, 2007 (f) |
|
SEPTEMBER 30, 2007 (g) |
|
DECEMBER 31, 2007 (h) |
|
Net revenues |
|
$ |
98,665 |
|
|
$ |
113,606 |
|
|
$ |
110,983 |
|
|
$ |
134,140 |
|
Gross profit (1) |
|
|
87,103 |
|
|
|
98,340 |
|
|
|
92,400 |
|
|
|
123,442 |
|
Net income |
|
|
11,681 |
|
|
|
18,540 |
|
|
|
16,993 |
|
|
|
23,221 |
|
Basic net income
per common share |
|
$ |
0.21 |
|
|
$ |
0.33 |
|
|
$ |
0.30 |
|
|
$ |
0.41 |
|
Diluted net income
per common share |
|
$ |
0.19 |
|
|
$ |
0.28 |
|
|
$ |
0.26 |
|
|
$ |
0.35 |
|
|
|
|
| (1) |
|
Gross profit does not include amortization of the related intangibles. |
| |
| Quarterly results were impacted by the following items: |
| |
| (a) |
|
Operating expenses included approximately $4.4 million of compensation expense
related to stock options and restricted stock. |
| |
| (b) |
|
Operating expenses included a $25.0 million payment to Ipsen upon the FDA’s
acceptance of Ipsen’s BLA for RELOXIN® and approximately $4.7 million of
compensation expense related to stock options and restricted stock. |
| |
| (c) |
|
Operating expenses included $30.5 million of acquired in-process research and
development expense related to our acquisition of LipoSonix, approximately $4.8
million of lease exit costs related to our previous headquarters facility and
approximately $4.1 million of compensation expense related to stock options and
restricted stock. |
| |
| (d) |
|
Operating expenses included $40.0 million paid to IMPAX related to a development
agreement and approximately $3.4 million of compensation expense related to stock
options and restricted stock. |
| |
| (e) |
|
Operating expenses included approximately $5.5 million of compensation expense
related to stock options and restricted stock. |
| |
| (f) |
|
Operating expenses included approximately $5.6 million of compensation expense
related to stock options and restricted stock and approximately $4.1 million for the
write-down of an intangible asset. |
| |
| (g) |
|
Operating expenses included approximately $4.5 million of compensation expense
related to stock options and restricted stock and approximately $2.2 million of
professional fees related to the Company’s strategic collaboration with Hyperion. |
| |
| (h) |
|
Operating expenses included approximately $9.3 million related to the Company’s
option to acquire Revance or to license Revance’s product currently under
development, including approximately $1.3 million of professional fees incurred
related to the transaction, and approximately $5.5 million of compensation expense
related to stock options and restricted stock. |
F-42
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at |
|
Charged to |
|
|
|
|
|
|
|
|
| |
|
beginning of |
|
costs and |
|
Charged to other |
|
|
|
|
|
Balance at |
| |
|
period |
|
expenses |
|
accounts |
|
Deductions |
|
end of period |
| Description |
|
(in thousands) |
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
Deducted from Asset Accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances |
|
$ |
830 |
|
|
$ |
15,157 |
|
|
|
— |
|
|
$ |
(14,268 |
) |
|
$ |
1,719 |
|
Year Ended December 31, 2007
Deducted from Asset Accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances |
|
$ |
2,148 |
|
|
$ |
11,385 |
|
|
|
— |
|
|
$ |
(12,703 |
) |
|
$ |
830 |
|
Year Ended December 31, 2006
Deducted from Asset Accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances |
|
$ |
1,994 |
|
|
$ |
13,743 |
|
|
|
— |
|
|
$ |
(13,589 |
) |
|
$ |
2,148 |
|
S-1