e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2008
OR
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o |
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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
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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7720
North Dobson Road
Scottsdale, Arizona
85256-2740
(Address of principal executive offices)
(602) 808-8800
(Registrants telephone number,
including area code)
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 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):
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller Reporting Company
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Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule
12b-2) YES o
NO þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date:
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Class |
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Shares Outstanding at August 7, 2008 |
Class A Common Stock $.014 Par Value
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56,715,074 |
MEDICIS PHARMACEUTICAL CORPORATION
Table of Contents
2
Part I. Financial Information
Item 1. Financial Statements
MEDICIS PHARMACEUTICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
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June 30, 2008 |
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December 31, 2007 |
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(unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
215,603 |
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$ |
108,046 |
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Short-term investments |
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254,852 |
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686,634 |
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Accounts receivable, net |
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23,422 |
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12,377 |
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Inventories, net |
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23,859 |
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29,973 |
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Deferred tax assets, net |
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18,731 |
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Other current assets |
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17,586 |
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18,049 |
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Total current assets |
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554,053 |
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855,079 |
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Property and equipment, net |
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24,981 |
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13,850 |
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Intangible assets: |
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Intangible assets related to product line
acquisitions and business combinations |
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258,873 |
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258,873 |
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Other intangible assets |
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7,468 |
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7,063 |
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266,341 |
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265,936 |
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Less: accumulated amortization |
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103,170 |
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92,482 |
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Net intangible assets |
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163,171 |
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173,454 |
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Goodwill |
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63,107 |
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63,107 |
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Deferred tax assets, net |
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63,688 |
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59,445 |
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Long-term investments |
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98,200 |
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17,072 |
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Other assets |
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12,706 |
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12,622 |
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$ |
979,906 |
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$ |
1,194,629 |
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See accompanying notes to condensed consolidated financial statements.
3
MEDICIS PHARMACEUTICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
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June 30, 2008 |
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December 31, 2007 |
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(unaudited) |
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Liabilities |
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Current liabilities: |
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Accounts payable |
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$ |
43,299 |
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$ |
34,891 |
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Current portion of contingent convertible senior notes |
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181 |
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283,910 |
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Income taxes payable |
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34,138 |
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7,734 |
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Deferred tax liabilities, net |
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11,684 |
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Other current liabilities |
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60,853 |
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56,781 |
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Total current liabilities |
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138,471 |
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395,000 |
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Long-term liabilities: |
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Contingent convertible senior notes |
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169,145 |
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169,145 |
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Deferred revenue |
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5,417 |
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6,667 |
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Other liabilities |
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7,408 |
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1,862 |
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Stockholders Equity |
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Preferred stock, $0.01 par value; shares
authorized: 5,000,000; no shares issued |
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Class A common stock, $0.014 par value;
shares authorized: 150,000,000; issued and
outstanding: 69,277,786 and 69,005,019 at
June 30, 2008 and December 31, 2007,
respectively |
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968 |
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965 |
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Class B common stock, $0.014 par value; shares
authorized: 1,000,000; no shares issued |
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Additional paid-in capital |
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653,471 |
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641,907 |
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Accumulated other comprehensive income |
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867 |
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2,221 |
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Accumulated earnings |
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347,333 |
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319,872 |
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Less: Treasury stock, 12,668,410 and 12,656,503
shares at cost at June 30, 2008 and December 31,
2007, respectively |
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(343,174 |
) |
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(343,010 |
) |
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Total stockholders equity |
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659,465 |
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621,955 |
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$ |
979,906 |
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$ |
1,194,629 |
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See accompanying notes to condensed consolidated financial statements.
4
MEDICIS PHARMACEUTICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Net product revenues |
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$ |
128,121 |
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$ |
105,902 |
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$ |
255,577 |
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$ |
198,273 |
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Net contract revenues |
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4,410 |
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2,962 |
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8,260 |
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5,705 |
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Net revenues |
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132,531 |
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108,864 |
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263,837 |
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203,978 |
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Cost of product revenues (1) |
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9,121 |
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14,011 |
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20,223 |
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24,508 |
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Gross profit |
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123,410 |
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94,853 |
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243,614 |
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179,470 |
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Operating expenses: |
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Selling, general and administrative (2) |
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71,872 |
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59,894 |
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143,934 |
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122,155 |
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Impairment of long-lived assets |
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4,067 |
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4,067 |
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Research and development (3) |
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33,000 |
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7,148 |
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42,189 |
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15,154 |
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Depreciation and amortization |
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6,780 |
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5,878 |
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13,502 |
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11,332 |
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Operating income |
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11,758 |
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17,866 |
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43,989 |
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26,762 |
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Other expense |
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(2,871 |
) |
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Interest and investment income |
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7,449 |
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9,251 |
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16,649 |
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18,258 |
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Interest expense |
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(2,148 |
) |
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(2,568 |
) |
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(4,555 |
) |
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(5,226 |
) |
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Income before income tax expense |
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17,059 |
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24,549 |
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53,212 |
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39,794 |
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Income tax expense |
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7,061 |
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|
9,026 |
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21,160 |
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14,983 |
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Net income |
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$ |
9,998 |
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$ |
15,523 |
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$ |
32,052 |
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$ |
24,811 |
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Basic net income per share |
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$ |
0.18 |
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$ |
0.28 |
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$ |
0.57 |
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$ |
0.44 |
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Diluted net income per share |
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$ |
0.17 |
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$ |
0.24 |
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$ |
0.50 |
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$ |
0.39 |
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Cash dividend declared per common share |
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$ |
0.04 |
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$ |
0.03 |
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$ |
0.08 |
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$ |
0.06 |
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Basic common shares outstanding |
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56,493 |
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|
55,936 |
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|
56,425 |
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|
55,782 |
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Diluted common shares outstanding |
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68,443 |
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|
71,318 |
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|
69,343 |
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|
71,466 |
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(1) amounts exclude amortization of
intangible assets related to acquired
products |
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$ |
5,346 |
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$ |
5,165 |
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$ |
10,633 |
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$ |
9,963 |
|
(2) amounts include share-based
compensation expense |
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$ |
4,601 |
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$ |
5,524 |
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$ |
8,930 |
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$ |
10,900 |
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(3) amounts include share-based
compensation expense |
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$ |
51 |
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$ |
117 |
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$ |
112 |
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$ |
255 |
|
See accompanying notes to condensed consolidated financial statements.
5
MEDICIS PHARMACEUTICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
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Six Months Ended |
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June 30, 2008 |
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June 30, 2007 |
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Operating Activities: |
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Net income |
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$ |
32,052 |
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$ |
24,811 |
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Adjustments to reconcile net income to
net cash provided by operating activities: |
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Depreciation and amortization |
|
|
13,502 |
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|
11,332 |
|
Amortization of deferred financing fees |
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|
666 |
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|
982 |
|
Impairment of long-lived assets |
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|
4,067 |
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Loss on disposal of property and equipment |
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36 |
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|
19 |
|
Charge reducing value of investment in Revance |
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2,871 |
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Gain on sale of available-for-sale investments |
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(947 |
) |
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(48 |
) |
Share-based compensation expense |
|
|
9,042 |
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|
11,156 |
|
Deferred income tax (benefit) expense |
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(34,657 |
) |
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|
6,992 |
|
Tax (expense) benefit from exercise of stock options and vesting of
restricted stock awards |
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(1,007 |
) |
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|
2,387 |
|
Excess tax benefits from share-based payment arrangements |
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(167 |
) |
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|
(1,215 |
) |
Decrease in provision for doubtful accounts and returns |
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(542 |
) |
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|
(8,564 |
) |
Amortization of (discount)/premium on investments |
|
|
(919 |
) |
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|
(1,457 |
) |
Changes in operating assets and liabilities: |
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|
|
Accounts receivable |
|
|
(10,503 |
) |
|
|
54,227 |
|
Inventories |
|
|
6,113 |
|
|
|
(3,641 |
) |
Other current assets |
|
|
463 |
|
|
|
(3,176 |
) |
Accounts payable |
|
|
5,093 |
|
|
|
(6,999 |
) |
Income taxes payable |
|
|
26,405 |
|
|
|
(11,724 |
) |
Other current liabilities |
|
|
2,766 |
|
|
|
(612 |
) |
Other liabilities |
|
|
(1,891 |
) |
|
|
543 |
|
|
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|
|
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|
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|
Net cash provided by operating activities |
|
|
48,376 |
|
|
|
79,080 |
|
|
|
|
|
|
|
|
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|
Investing Activities: |
|
|
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|
|
|
Purchase of property and equipment |
|
|
(7,252 |
) |
|
|
(4,330 |
) |
Payment of direct merger costs |
|
|
(306 |
) |
|
|
|
|
Payments for purchase of product rights |
|
|
(405 |
) |
|
|
(29,700 |
) |
Purchase of available-for-sale investments |
|
|
(280,874 |
) |
|
|
(446,542 |
) |
Sale of available-for-sale investments |
|
|
364,739 |
|
|
|
114,889 |
|
Maturity of available-for-sale investments |
|
|
267,363 |
|
|
|
131,283 |
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
343,265 |
|
|
|
(234,400 |
) |
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Payment of dividends |
|
|
(3,992 |
) |
|
|
(3,363 |
) |
Payment of contingent convertible senior notes |
|
|
(283,729 |
) |
|
|
|
|
Excess tax benefits from share-based payment arrangements |
|
|
167 |
|
|
|
1,215 |
|
Proceeds from the exercise of stock options |
|
|
3,532 |
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|
|
15,754 |
|
|
|
|
|
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|
|
|
Net cash (used in) provided by financing activities |
|
|
(284,022 |
) |
|
|
13,606 |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash and cash equivalents |
|
|
(62 |
) |
|
|
410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
107,557 |
|
|
|
(141,304 |
) |
Cash and cash equivalents at beginning of period |
|
|
108,046 |
|
|
|
203,319 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
215,603 |
|
|
$ |
62,015 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
6
MEDICIS PHARMACEUTICAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(unaudited)
1. NATURE OF BUSINESS
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.
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®.
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 Companys subsidiaries are included in the
consolidated financial statements. All significant intercompany accounts and transactions
have been eliminated in consolidation.
The accompanying interim condensed consolidated financial statements of Medicis have
been prepared in conformity with U.S. generally accepted accounting principles, consistent
in all material respects with those applied in the Companys Annual Report on Form 10-K for
the year ended December 31, 2007. The financial information is unaudited, but reflects all
adjustments, consisting only of normal recurring adjustments and accruals, which are, in the
opinion of the Companys management, necessary to a fair statement of the results for the
interim periods presented. Interim results are not necessarily indicative of results for a
full year. The information included in this Form 10-Q should be read in conjunction with
the Companys Annual Report on Form 10-K for the year ended December 31, 2007.
2. SHARE-BASED COMPENSATION
At June 30, 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 Companys Class A common stock are issued. Effective July 1, 2005, the
Company adopted SFAS No. 123R 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 option awards is expensed ratably over the service period
of the employees receiving the awards. As of June 30, 2008, total unrecognized compensation
cost related to stock option awards, to be recognized as expense subsequent to June 30,
2008, was approximately $10.9 million and the related weighted-average period over which it
is expected to be recognized is approximately 1.4 years.
7
A summary of stock options activity within the Companys stock-based compensation plans
and changes for the six months ended June 30, 2008 is as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
(245,066 |
) |
|
$ |
15.57 |
|
|
|
|
|
|
|
|
|
Terminated/expired |
|
|
(586,377 |
) |
|
$ |
31.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008 |
|
|
10,963,214 |
|
|
$ |
28.01 |
|
|
|
4.2 |
|
|
$ |
9,961,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of options exercised during the six months ended June 30, 2008 was
$1,769,309. Options exercisable under the Companys share-based compensation plans at June
30, 2008 were 8,902,360, with a weighted average exercise price of $26.64, a weighted
average remaining contractual term of 3.8 years, and an aggregate intrinsic value of
$9,936,453.
A summary of fully vested stock options and stock options expected to vest, based on
historical forfeiture rates, as of June 30, 2008, is as follows:
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|
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|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
|
|
Number |
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
of Shares |
|
Price |
|
Term |
|
Value |
Outstanding |
|
|
10,070,950 |
|
|
$ |
28.19 |
|
|
|
4.3 |
|
|
$ |
8,545,131 |
|
Exercisable |
|
|
8,129,142 |
|
|
$ |
26.83 |
|
|
|
3.9 |
|
|
$ |
8,524,818 |
|
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:
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|
|
|
|
|
|
|
Six Months Ended |
|
Six Months Ended |
|
|
June 30, 2008 |
|
June 30, 2007 |
Expected dividend yield |
|
0.6% to 0.7% |
|
|
0.4 |
% |
Expected stock price volatility |
|
|
0.35 to 0.38 |
|
|
|
0.35 |
|
Risk-free interest rate |
|
3.0% to 3.4% |
|
4.5% to 4.8% |
Expected life of options |
|
7 Years |
|
7 Years |
The expected dividend yield is based on expected annual dividends to be paid by the
Company as a percentage of the market value of the Companys 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 the six months ended
June 30, 2008 and 2007 was $8.90 and $14.98, respectively.
The Company also grants restricted stock awards to certain employees. Restricted stock
awards are valued at the closing market value of the Companys 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 the six months ended June 30, 2008, 636,910
shares of restricted stock were granted to certain employees. Share-based compensation
expense related to all restricted stock awards outstanding during the three months and six
8
months ended June 30, 2008, was approximately $1.5 million and $2.6 million,
respectively. Share-based compensation expense related to all restricted stock awards
outstanding during the three months and six months ended June 30, 2007, was approximately
$1.1 million and $1.7 million, respectively. As of June 30, 2008, the total amount of
unrecognized compensation cost related to non-vested restricted stock awards, to be
recognized as expense subsequent to June 30, 2008, was approximately $22.6 million, and the
related weighted-average period over which it is expected to be recognized is approximately
3.7 years.
A summary of restricted stock activity within the Companys share-based compensation
plans and changes for the six months ended June 30, 2008 is as follows:
|
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|
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|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant-Date |
Non-vested Shares |
|
Shares |
|
Fair Value |
Non-vested at December 31, 2007 |
|
|
552,769 |
|
|
$ |
31.92 |
|
|
Granted |
|
|
636,910 |
|
|
$ |
19.79 |
|
Vested |
|
|
(91,540 |
) |
|
$ |
31.55 |
|
Forfeited |
|
|
(39,639 |
) |
|
$ |
25.74 |
|
|
|
|
|
|
|
|
|
|
|
Non-vested at June 30, 2008 |
|
|
1,058,500 |
|
|
$ |
24.88 |
|
|
|
|
|
|
|
|
|
|
The total fair value of restricted shares vested during the six months ended June 30,
2008 and the six months ended June 30, 2007 was approximately $2.9 million and $0.5 million,
respectively.
3. SHORT-TERM AND LONG-TERM INVESTMENTS
The Companys short-term and long-term investments are intended to establish a
high-quality portfolio that preserves principal, meets liquidity needs, avoids inappropriate
concentrations and delivers an appropriate yield in relationship to the Companys investment
guidelines and market conditions. Short-term and long-term investments consist of corporate
and various government agency and municipal debt securities. The Companys investments in
auction rate floating securities consist primarily of investments in student loans.
Management classifies the Companys 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 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 June 30,
2008, the Company has recorded the estimated fair value in available-for-sale securities for
short-term and long-term investments of approximately $254.9 million and $98.2 million,
respectively.
9
Available-for-sale securities consist of the following at June 30, 2008 (amounts in
thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JUNE 30, 2008 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Corporate notes and bonds |
|
$ |
111,430 |
|
|
$ |
244 |
|
|
$ |
(565 |
) |
|
$ |
111,109 |
|
Federal
agency notes and bonds |
|
|
153,879 |
|
|
|
889 |
|
|
|
(155 |
) |
|
|
154,613 |
|
Auction rate
floating securities |
|
|
44,900 |
|
|
|
|
|
|
|
(1,280 |
) |
|
|
43,620 |
|
Asset-backed securities |
|
|
42,412 |
|
|
|
415 |
|
|
|
(416 |
) |
|
|
42,411 |
|
Commercial paper |
|
|
1,299 |
|
|
|
|
|
|
|
|
|
|
|
1,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
$ |
353,920 |
|
|
$ |
1,548 |
|
|
$ |
(2,416 |
) |
|
$ |
353,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months and six months ended June 30, 2008, the gross realized gains on
sales of available-for-sale securities totaled $851,428 and $1,061,456, respectively, while
gross losses of $21,361 and $114,034, respectively, were realized. Such amounts of gains
and losses are determined based on the specific identification method. The net adjustment
to unrealized losses during the three months and six months ended June 30, 2008, on
available-for-sale securities included in stockholders equity totaled $2,405,463 and
$1,292,893, respectively. The amortized cost and estimated fair value of the
available-for-sale securities at June 30, 2008, by maturity, are shown below (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
JUNE 30, 2008 |
|
|
|
|
|
|
|
Estimated |
|
|
|
Cost |
|
|
Fair Value |
|
Available-for-sale |
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
180,169 |
|
|
$ |
180,178 |
|
Due after one year through five years |
|
|
128,851 |
|
|
|
129,254 |
|
Due after five years through 10 years |
|
|
|
|
|
|
|
|
Due after 10 years |
|
|
44,900 |
|
|
|
43,620 |
|
|
|
|
|
|
|
|
|
|
$ |
353,920 |
|
|
$ |
353,052 |
|
|
|
|
|
|
|
|
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
June 30, 2008, approximately $98.2 million in estimated fair value expected to mature
greater than one year has been classified as long-term investments because these investments
are in an unrealized loss position, and it is managements intent to hold these investments
until recovery of fair value, which may be maturity.
As of June 30, 2008, the Companys investments included $43.6 million of auction rate
floating securities. The Companys 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, the Company was 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 the
Company could be required to hold them until they are redeemed by the holder at maturity.
The Company may not be able to make the securities liquid until a future auction on these
investments is successful. As a result of the lack of liquidity of these investments, at
March 31, 2008, the Company recorded an unrealized loss of $0.8 million on its auction rate
floating securities in accumulated other comprehensive income. At June 30, 2008, the
Company recorded an additional unrealized loss of $0.5 million on its auction rate floating
securities in accumulated other comprehensive income.
10
The following table shows the gross unrealized losses and fair value of the Companys
investments with unrealized losses that are not 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 at June 30, 2008 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months |
|
|
Greater Than 12 Months |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
Corporate notes and bonds |
|
$ |
74,297 |
|
|
$ |
506 |
|
|
$ |
11,441 |
|
|
$ |
59 |
|
Federal agency notes and bonds |
|
|
64,431 |
|
|
|
155 |
|
|
|
|
|
|
|
|
|
Auction rate floating securities |
|
|
43,620 |
|
|
|
1,279 |
|
|
|
|
|
|
|
|
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
2,603 |
|
|
|
416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
$ |
182,348 |
|
|
$ |
1,940 |
|
|
$ |
14,044 |
|
|
$ |
475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008, the Company has concluded that the unrealized losses on its
investment securities are temporary in nature. 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 securitys
performance and the creditworthiness of the issuer. The Company believes that the changes
in the unrealized losses on the securities were caused by changes in credit spreads and
liquidity issues in the marketplace and other-than-temporary impairments do not exist.
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.
4. 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
Companys 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 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 June 30, 2008, the Company held certain assets that are required to be measured
at fair value on a recurring basis. These included certain of the Companys short-term and
long-term investments, including investments in auction rate floating securities, and the
Companys investment in Revance Therapeutics, Inc. (Revance).
The Company has invested in auction rate floating securities, which are classified as
available-for-sale securities and are reflected at fair value. However, 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 3). Therefore, the
fair values of these auction rate floating securities are estimated utilizing a discounted
cash flow analysis as of June 30, 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.
11
As a result of the temporary declines in fair value for the Companys auction rate
floating securities, which the Company attributes to liquidity issues rather than credit
issues, it has recorded an unrealized loss of $1.3 million in accumulated other
comprehensive (loss) income. The majority of the auction rate floating securities held by
the Company at June 30, 2008, totaling $43.6 million, were in securities collateralized by
student loan portfolios. These securities were included in long-term investments at June
30, 2008 in the accompanying condensed consolidated balance sheets. As of June 30, 2008,
the Company continued to earn interest on virtually all of its auction rate floating
securities. Any future fluctuation in fair value related to these investments that the
Company deems to be temporary, including any recoveries of previous write-downs, would be
recorded to accumulated other comprehensive income. If the Company determines that any
future valuation adjustment 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 the three
months ended March 31, 2008, the Company reduced the carrying value of its investment in
Revance by approximately $2.9 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 March 31, 2008. No further reduction in the carrying value of the Companys
investment in Revance was recorded as a result of using the hypothetical liquidation at book
value approach as of June 30, 2008.
The Companys assets measured at fair value on a recurring basis subject to the
disclosure requirements of SFAS No. 157 at June 30, 2008, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting Date Using |
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
June 30, 2008 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Auction rate floating securities |
|
$ |
43,620 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
43,620 |
|
Other available-for-sale securities |
|
|
309,432 |
|
|
|
309,432 |
|
|
|
|
|
|
|
|
|
Investment in Revance |
|
|
9,086 |
|
|
|
|
|
|
|
|
|
|
|
9,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
|
$ |
362,138 |
|
|
$ |
309,432 |
|
|
$ |
|
|
|
$ |
52,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. 157s hierarchy since the Companys initial adoption of SFAS No. 157 at January 1, 2008.
12
The following table presents the Companys assets measured at fair value on a recurring
basis using significant unobservable inputs
(Level 3) as defined in SFAS No. 157 at June 30,
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 gains (losses) included in earnings |
|
|
|
|
|
|
(2,871 |
) |
Total gains (losses) included in other
comprehensive income |
|
|
(1,280 |
) |
|
|
|
|
Purchases and settlements (net) |
|
|
(56,750 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008 |
|
$ |
43,620 |
|
|
$ |
9,086 |
|
|
|
|
|
|
|
|
5. STRATEGIC COLLABORATION
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 million payment was recognized as a charge to research and
development expense during the three months ended June 30, 2008.
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 Revances novel topical botulinum toxin type A product currently under
clinical development. The consideration to be paid to Revance upon the Companys 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 Companys $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. $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 Companys 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 Revances 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 Companys right to
exercise the option is triggered upon Revances successful completion
13
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.
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 Companys investment that will be
expensed periodically is uncertain due to the timing of Revances 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 Companys effective tax rate. Further equity
investments, if any, will also be subject to the same accounting treatment as the Companys
original equity investment. During the three months ended March 31, 2008, the Company
reduced the carrying value of its investment in Revance by approximately $2.9 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 March 31, 2008. The $2.9 million was
recognized as other expense during the three months ended March 31, 2008. No further
reduction in the carrying value of the Companys investment in Revance was recorded as a
result of using the hypothetical liquidation at book value approach as of June 30, 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 Companys 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 Companys relationship with Revance.
7. |
|
DEVELOPMENT AND DISTRIBUTION AGREEMENT WITH IPSEN FOR RIGHTS TO IPSENS
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
Aesthetica Ltd., a wholly-owned subsidiary of Medicis, rights to develop, distribute and
commercialize Ipsens 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 Ipsens Biologics License Application for
RELOXIN®, and in accordance with the agreement, Medicis 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.
Medicis will pay an additional $1.5 million upon the successful completion of a
regulatory milestone, $75.0 million upon the products 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 products approval in the U.S., Canada and Japan.
14
8. |
|
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 Companys use of the assets. Recoverability of assets that will
continue to be used in the Companys operations is measured by comparing the carrying amount
of the asset grouping to the Companys 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
groupings 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 assets carrying value. When it is determined
that the useful life 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.
During the quarter ended June 30, 2007, an intangible asset related to
OMNICEF® was determined to be impaired based on the Companys analysis of the
intangible assets 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 Companys agreement with Abbott, transitions the
Companys 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 become 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.
9. |
|
SEGMENT AND PRODUCT INFORMATION |
The Company operates in one significant business segment: pharmaceuticals. The
Companys 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 Companys 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, all products are sold primarily to
wholesalers and retail chain drug stores.
15
Net revenues and the percentage of net revenues for each of the product categories are
as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Acne and acne-related dermatological products |
|
$ |
79,462 |
|
|
$ |
55,435 |
|
|
$ |
163,168 |
|
|
$ |
101,383 |
|
Non-acne dermatological products |
|
|
40,931 |
|
|
|
46,173 |
|
|
|
78,697 |
|
|
|
86,816 |
|
Non-dermatological products |
|
|
12,138 |
|
|
|
7,256 |
|
|
|
21,972 |
|
|
|
15,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
132,531 |
|
|
$ |
108,864 |
|
|
$ |
263,837 |
|
|
$ |
203,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Acne and acne-related dermatological products |
|
|
60 |
% |
|
|
51 |
% |
|
|
62 |
% |
|
|
50 |
% |
Non-acne dermatological products |
|
|
31 |
|
|
|
42 |
|
|
|
30 |
|
|
|
42 |
|
Non-dermatological products |
|
|
9 |
|
|
|
7 |
|
|
|
8 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys 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.
Inventory costs associated with products that have not yet received regulatory approval
are capitalized if, in the view of the Companys 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 June 30, 2008 and December 31, 2007, there
are no costs capitalized into inventory for products that have not yet received regulatory
approval.
Inventories consist of the following at June 30, 2008 and December 31, 2007 (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
December 31, 2007 |
|
Raw materials |
|
$ |
7,807 |
|
|
$ |
9,002 |
|
Finished goods |
|
|
17,584 |
|
|
|
24,789 |
|
Valuation reserve |
|
|
(1,532 |
) |
|
|
(3,818 |
) |
|
|
|
|
|
|
|
Total inventories |
|
$ |
23,859 |
|
|
$ |
29,973 |
|
|
|
|
|
|
|
|
11. |
|
CONTINGENT CONVERTIBLE SENIOR NOTES |
In June 2002, the Company sold $400.0 million aggregate principal amount of its 2.5%
Contingent Convertible Senior 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 June 30, 2008 or December 31, 2007. The
Old Notes will mature on June 4, 2032.
16
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, and contingent interest, if any, 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 Companys Class A common stock in the following circumstances:
|
|
|
during any quarter commencing after June 30, 2002, if the closing price of the
Companys 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 Companys Class A common stock on that day multiplied by the
number of shares of the Companys Class A common stock issuable upon conversion of
$1,000 principal amount of the Old Notes; or |
|
|
|
|
upon the occurrence of specified corporate transactions. |
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 Companys
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 Companys 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 June 30,
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
17
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 will also be required to pay an accumulated deferred tax liability of approximately
$34.9 million related to the repurchased New Notes. This deferred tax liability, which is
included in income taxes payable as of June 30, 2008, will be settled and paid during the
three months ended September 30, 2008. Following the repurchase of these New Notes,
$181,000 of principal amount of New Notes remained outstanding as of June 30, 2008. The
Company intends to redeem the remaining $181,000 of principal amount of New Notes during the
second half of 2008.
The Company may redeem some or all of the remaining New Notes at any time on or after
June 11, 2008, at a redemption price, payable in cash, of 100% of the principal amount of
the New Notes, plus accrued and unpaid interest, including contingent interest, if any.
Holders of the remaining New Notes may require the Company to repurchase all or a portion of
their remaining New Notes on June 4, 2013 and June 4, 2018, and upon a change in control (as
defined in the indenture governing the New Notes), 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.
The remaining New Notes are convertible, at the holders option, prior to the maturity
date into shares of the Companys Class A common stock in the following circumstances:
|
|
|
during any quarter commencing after September 30, 2003, if the closing price of
the Companys 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 Companys Class A common stock on that day multiplied by the
number of shares of the Companys 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 Companys securities and do
not contain any financial covenants. The remaining 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.
During the quarter ended December 31, 2006, the Old Notes met the criteria for the
right of conversion into shares of the Companys Class A common stock. This right of
conversion of the holders of Old Notes was triggered by the Companys Class A common stock
closing above $31.96 on 20 of the last 30 trading days and the last trading day of the
quarter ended December 31, 2006. The holders of Old Notes had this conversion right only
until March 31, 2007. During the three months ended March 31, 2007, outstanding principal
amounts of $5,000 of Old Notes were converted into shares of the Companys
18
Class A common stock. During the quarters ended June 30, 2008, March 31, 2008 and
December 31, 2007, the Old Notes and New Notes did not meet the criteria for the right of
conversion. At the end of each future quarter, the conversion rights will be reassessed in
accordance with the bond indenture agreement to determine if the conversion trigger rights
have been achieved.
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, changes in valuation allowances against deferred tax assets, and differences in
tax rates in certain non-U.S. jurisdictions. The Companys 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 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 deferred tax assets to reduce the net carrying value to
amounts that management believes is more likely than not to be realized.
At June 30, 2008 the Company has an unrealized tax loss of $12.2 million related to the
Companys option to acquire Revance or license Revances product that is under development.
The Company has currently assessed that the unrealized loss would result in a capital loss
carryover if realized. Due to tax limitations on the utilization of capital loss
carryovers, the Company recorded a valuation allowance of $3.3 million against the capital
loss carryover as of December 31, 2007. The valuation allowance increased $1.1 million to
$4.4 million during the six months ended June 30, 2008.
During the three months ended June 30, 2008 and June 30, 2007, the Company made net tax
payments of $18.9 million and $4.9 million, respectively. During the six months ended June
30, 2008 and June 30, 2007, the Company made net tax payments of $30.2 million and $17.2
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 six-month
Transition Period ending December 31, 2005 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 Companys
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 since this entitys formation in fiscal 2003 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 the Company included a net $315,000
negotiated settlement amount in income taxes payable in its condensed consolidated balance
sheets as of December 31, 2007. The Company paid the $315,000 negotiated settlement amount
during the three months ended March 31, 2008.
At December 31, 2007, the Company had $2.1 million in unrecognized tax benefits, the
recognition of which would have a favorable effect of $1.4 million on the Companys
effective tax rate.
19
The amount of unrecognized tax benefits decreased $0.9 million from $2.1 million to
$1.2 million during the six months ended June 30, 2008 as part of the settlement with the
Arizona Department of Revenue. Recognition of the $1.2 million unrecognized tax benefits
would have a favorable effect of $800,000 on the Companys effective tax rate.
The Company recognizes accrued interest and penalties, if applicable, related to
unrecognized tax benefits in income tax expense. The Company has accrued approximately
$200,000 and $150,000 (net of tax benefits) for the payment of interest and penalties at
December 31, 2007, and June 30, 2008, respectively.
13. |
|
DIVIDENDS DECLARED ON COMMON STOCK |
On June 11, 2008, the Company declared a cash dividend of $0.04 per issued and
outstanding share of its Class A common stock payable on July 31, 2008 to stockholders of
record at the close of business on July 1, 2008. The $2.3 million dividend was recorded as
a reduction of accumulated earnings and is included in other current liabilities in the
accompanying condensed consolidated balance sheets as of June 30, 2008.
14. |
|
SHARE REPURCHASE PROGRAM |
On August 29, 2007, the Companys 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) will depend on factors such as the market price of
Medicis Class A common stock, economic and market conditions, and corporate and regulatory
requirements. The plan is scheduled to terminate on the earlier of the first anniversary of
the plan or at the time when the aggregate purchase limit is reached. As of August 11,
2008, no shares had been repurchased under this plan.
Total comprehensive income includes net income and other comprehensive income, which
consists of foreign currency translation adjustments and unrealized gains and losses on
available-for-sale investments. Total comprehensive income for the three months and six
months ended June 30, 2008 was $7.6 million and $30.7 million, respectively. Total
comprehensive income for the three months and six months ended June 30, 2007 was $15.6
million and $25.0 million, respectively.
20
16. |
|
NET INCOME PER COMMON SHARE |
The following table sets forth the computation of basic and diluted net income per
common share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
BASIC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,998 |
|
|
$ |
15,523 |
|
|
$ |
32,052 |
|
|
$ |
24,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
common shares outstanding |
|
|
56,493 |
|
|
|
55,936 |
|
|
|
56,425 |
|
|
|
55,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income
per common share |
|
$ |
0.18 |
|
|
$ |
0.28 |
|
|
$ |
0.57 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,998 |
|
|
$ |
15,523 |
|
|
$ |
32,052 |
|
|
$ |
24,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-effected interest expense and
issue costs related to Old Notes |
|
|
666 |
|
|
|
779 |
|
|
|
1,332 |
|
|
|
1,615 |
|
Tax-effected interest expense and
issue costs related to New Notes |
|
|
687 |
|
|
|
839 |
|
|
|
1,538 |
|
|
|
1,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income assuming dilution |
|
$ |
11,351 |
|
|
$ |
17,141 |
|
|
$ |
34,922 |
|
|
$ |
28,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
common shares |
|
|
56,493 |
|
|
|
55,936 |
|
|
|
56,425 |
|
|
|
55,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Old Notes |
|
|
5,823 |
|
|
|
5,823 |
|
|
|
5,823 |
|
|
|
5,823 |
|
New Notes |
|
|
5,233 |
|
|
|
7,325 |
|
|
|
6,279 |
|
|
|
7,325 |
|
Stock options and restricted stock |
|
|
894 |
|
|
|
2,234 |
|
|
|
816 |
|
|
|
2,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
common shares assuming dilution |
|
|
68,443 |
|
|
|
71,318 |
|
|
|
69,343 |
|
|
|
71,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income
per common share |
|
$ |
0.17 |
|
|
$ |
0.24 |
|
|
$ |
0.50 |
|
|
$ |
0.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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 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 the three and six months ended
June 30, 2008 excludes 9,618,647 and 9,725,260 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 the three and six months ended June 30, 2007 excludes 3,007,388 and
3,346,583 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.
21
On
April 30, 2008, the Company received notice from Perrigo Israel Pharmaceuticals Ltd.
(Perrigo Israel), a generic pharmaceutical company, that it had filed an Abbreviated New
Drug Application with the FDA for a generic version of the Companys VANOS®
fluocinonide cream 0.1%. Perrigo Israels 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. The complaint asserts that Perrigo Israel and Perrigo
Company have infringed both of the Companys patents for VANOS® Cream.
On January 15, 2008, IMPAX Laboratories, Inc. (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 IMPAXs filing of an Abbreviated New Drug Application 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
Courts order dismissing the case to the United States Court of Appeals for the Federal
Circuit.
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 Companys 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 the Companys
preliminary injunction motion was heard on March 8 and March 9, 2006.
On May 2, 2006, and 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 Associated
(IRA) seeking a declaration that Prascos 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 Companys motion
and dismissed the case. Prasco has appealed and the appeal is
pending before the U.S. Court of Appeal for the Federal Circuit. The
case was argued to the U.S. Court of Appeals on April 10, 2008.
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 Companys 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 or
financial condition of the Company.
18. |
|
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS |
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Statements and Financial Liabilities, which provides companies with an option to report
selected financial assets and liabilities at fair value. SFAS No. 159 requires companies to
provide additional information that will help investors and other users of financial
statements to more easily understand the effect of the companys choice to use fair value on
its earnings. It also requires entities to display the fair value of those assets and
liabilities for which the company has chosen to use fair value on the face of the balance
sheet. The new Statement does not eliminate disclosure requirements included in other
accounting standards, including requirements for disclosures about fair value measurements
included in FASB Statements No. 157, Fair Value Measurements, and No. 107, Disclosures about
Fair Value of Financial Instruments. The Company adopted SFAS No. 159 as of January 1, 2008,
and the Company has elected not to exercise the fair value irrevocable option. The adoption
of SFAS No. 159 did not have a material effect on the Companys consolidated results of
operations and financial condition.
In June 2007, the EITF reached a consensus on EITF 07-03, Accounting for Nonrefundable
Advance Payments for Goods or Services to Be Used in Future Research and Development
Activities. EITF 07-03 concludes that non-refundable advance payments for future research
and development activities should be deferred and capitalized until the goods have been
delivered or the related services have been performed. If an entity does not expect the
goods to be delivered or services to be rendered, the capitalized advance payment should be
charged to expense. This consensus is effective for financial statements issued for fiscal
years beginning after December 15, 2007, and interim periods within those fiscal years.
Earlier adoption is not permitted. The effect of applying the consensus will be prospective
for new contracts entered into on or after that date. The Company adopted EITF 07-03 as of
January 1, 2008, and it did not have a material impact on the Companys consolidated results
of operations and financial condition.
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
22
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 upon settlement;
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 Company is currently evaluating SFAS No. 141R and its impact, if any, on the
Companys consolidated results of operations and financial condition.
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 parents 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 parents 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 is currently evaluating SFAS No. 160 and its impact,
if any, 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 is currently evaluating EITF 07-01 and its impact, if any, 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 is currently
evaluating FSP 142-3 and its impact, if any, 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 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
23
issuers 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.
On July 1, 2008, the Company, through its wholly-owned subsidiary Donatello, Inc.,
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 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.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Executive Summary
We are 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 also market products in Canada for the treatment of
dermatological and aesthetic conditions. 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.
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 sales for the foreseeable future.
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
24
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 our 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 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 products. We believe the 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.
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.
Recent Developments
The following significant events and transactions occurred during the six months ended
June 30, 2008 and affected our results of operations, our cash flows and our financial
condition:
Reduction in the carrying value of our investment in Revance
On December 11, 2007, we announced a strategic collaboration with Revance Therapeutics,
Inc. (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
25
America Revances 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.
$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
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.
We estimate the impairment and/or 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 Revances 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 the three months ended March 31, 2008, we reduced the carrying value of our
investment in Revance by approximately $2.9 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 March 31, 2008. We recognized the $2.9 million as other expense in our
condensed consolidated statement of operations during the three months ended March 31, 2008.
No further reduction in the carrying value of our investment in Revance was recorded as a
result of using the hypothetical liquidation at book value approach as of June 30, 2008.
Acceptance of RELOXIN
® BLA by the FDA
On March 17, 2006, we entered into a development and distribution agreement with Ipsen
Ltd., a wholly-owned subsidiary of Ipsen, S.A. (Ipsen), whereby Ipsen granted Aesthetica
Ltd., our wholly-owned subsidiary, rights to develop, distribute and commercialize Ipsens
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 Ipsens Biologics License Application
(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
condensed consolidated statement of operations during the three months ended June 30, 2008.
We will pay an additional $1.5 million upon the successful completion of a future
regulatory milestone, $75.0 million upon the products approval by the FDA and $2.0 million
upon regulatory approval of the product in Japan.
Repurchase of New Notes
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
26
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 will also be required to pay an accumulated deferred tax
liability of approximately $34.9 million related to the repurchased New Notes. This
deferred tax liability, which is included in income taxes payable in our condensed
consolidated balance sheets as of June 30, 2008, will be settled and paid during the three
months ended September 30, 2008. Following the repurchase of these New Notes, $181,000 of
principal amount of New Notes remained outstanding as of June 30, 2008. We intend to redeem
the remaining $181,000 of principal amount of New Notes during the second half of 2008.
Subsequent Event Acquisition of LipoSonix
On July 1, 2008, we, through our wholly-owned subsidiary Donatello, Inc., 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
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.
Results of Operations
The following table sets forth certain data as a percentage of net revenues for the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
SIX MONTHS ENDED |
|
|
JUNE 30, |
|
JUNE 30, |
|
|
2008(a) |
|
2007(b) |
|
2008 (c) |
|
2007(d) |
Net revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Gross profit (e) |
|
|
93.1 |
|
|
|
87.1 |
|
|
|
92.3 |
|
|
|
88.0 |
|
Operating expenses |
|
|
84.2 |
|
|
|
70.6 |
|
|
|
75.6 |
|
|
|
74.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
8.9 |
|
|
|
16.5 |
|
|
|
16.7 |
|
|
|
13.1 |
|
Other expense |
|
|
|
|
|
|
|
|
|
|
1.1 |
|
|
|
|
|
Interest and investment (income) expense, net |
|
|
(4.0 |
) |
|
|
(6.1 |
) |
|
|
(4.6 |
) |
|
|
(6.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
expense |
|
|
12.9 |
|
|
|
22.6 |
|
|
|
20.2 |
|
|
|
19.5 |
|
Income tax expense |
|
|
5.4 |
|
|
|
8.3 |
|
|
|
8.1 |
|
|
|
7.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
7.5 |
% |
|
|
14.3 |
% |
|
|
12.1 |
% |
|
|
12.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Included in operating expenses is $25.0 million (18.9% of net revenues) paid to
Ipsen upon the FDAs acceptance of Ipsens BLA for RELOXIN® and $4.7 million
(3.5% of net revenues) of compensation expense related to stock options and restricted
stock. |
|
(b) |
|
Included in operating expenses is $5.6 million (5.2% of net revenues) of
compensation expense related to stock options and restricted stock and $4.1 million
(3.7% of net revenues) for the write-down of an intangible asset related to
OMNICEF®. |
|
(c) |
|
Included in operating expenses is $25.0 million (9.5% of net revenues) paid to
Ipsen upon the FDAs acceptance of Ipsens BLA for RELOXIN® and $9.0 million
(3.4% of net revenues) of compensation expense related to stock options and restricted
stock. |
|
(d) |
|
Included in operating expenses is $11.2 million (5.5% of net revenues) of
compensation expense related to stock options and restricted stock and $4.1 million
(2.0% of net revenues) for the write-down of an intangible asset related to
OMNICEF®. |
|
(e) |
|
Gross profit does not include amortization of the related intangibles as such
expense is included in operating expenses. |
27
Three Months Ended June 30, 2008 Compared to the Three Months Ended June 30, 2007
Net Revenues
The following table sets forth the net revenues for the three months ended June 30,
2008 (the second quarter of 2008) and June 30, 2007 (the second quarter of 2007), along
with the percentage of net revenues and percentage point change for each of our product
categories (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second |
|
|
Second |
|
|
|
|
|
|
|
|
|
Quarter |
|
|
Quarter |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Net product revenues |
|
$ |
128.1 |
|
|
$ |
105.9 |
|
|
$ |
22.2 |
|
|
|
21.0 |
% |
Net contract revenues |
|
$ |
4.4 |
|
|
$ |
3.0 |
|
|
$ |
1.4 |
|
|
|
48.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
132.5 |
|
|
$ |
108.9 |
|
|
$ |
23.6 |
|
|
|
21.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second |
|
|
Second |
|
|
|
|
|
|
|
|
|
Quarter |
|
|
Quarter |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Acne and acne-related
dermatological products |
|
$ |
79.5 |
|
|
$ |
55.4 |
|
|
$ |
24.1 |
|
|
$ |
43.3 |
% |
Non-acne dermatological
products |
|
|
40.9 |
|
|
|
46.2 |
|
|
|
(5.3 |
) |
|
|
(11.4 |
)% |
Non-dermatological products
(including contract revenues) |
|
|
12.1 |
|
|
|
7.3 |
|
|
|
4.8 |
|
|
|
67.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
132.5 |
|
|
$ |
108.9 |
|
|
$ |
23.6 |
|
|
|
21.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second |
|
Second |
|
Percentage |
|
|
Quarter |
|
Quarter |
|
Point |
|
|
2008 |
|
2007 |
|
Change |
Acne and acne-related
dermatological products |
|
|
60.0 |
% |
|
|
50.9 |
% |
|
|
9.1 |
% |
Non-acne dermatological
products |
|
|
30.9 |
% |
|
|
42.4 |
% |
|
|
(11.5 |
)% |
Non-dermatological products
(including contract revenues) |
|
|
9.1 |
% |
|
|
6.7 |
% |
|
|
2.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our total net revenues increased during the second quarter of 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 $24.1 million, or 43.3%, and by
9.1 percentage points as a percentage of net revenues during the second quarter of 2008 as
compared to the second quarter of 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 11.4% during the
second quarter of 2008 as compared to the second quarter of 2007, primarily due to the
year-over-year change in the economic and competitive environment of the non-acne product
category. Net revenues associated with our non-dermatological products increased by $4.8
million, or 67.3%, and by 2.4 percentage points as a percentage of net revenues during the
second quarter of 2008 as compared to the second quarter of 2007, primarily due to an
increase in sales of BUPHENYL® and an increase in contract revenue.
28
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 the second quarter of 2008 and 2007 was approximately
$5.3 million and $5.2 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 the second quarter of 2008 and
2007, along with the percentage of net revenues represented by such gross profit (dollar
amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second |
|
Second |
|
|
|
|
|
|
Quarter |
|
Quarter |
|
|
|
|
|
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
Gross profit |
|
$ |
123.4 |
|
|
$ |
94.9 |
|
|
$ |
28.5 |
|
|
|
30.1 |
% |
% of net revenues |
|
|
93.1 |
% |
|
|
87.1 |
% |
|
|
|
|
|
|
|
|
The increase in gross profit during the second quarter of 2008, compared to the second
quarter of 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 products
sold during the second quarter of 2008 as compared to the second quarter of 2007. Increased
sales of SOLODYN®, a higher margin product, during the second quarter of 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 the
second quarter of 2007 included a charge for an increase in our inventory obsolescence
reserve of approximately $3.3 million, which reduced gross margin as a percentage of net
revenues by approximately 3.0 percentage points.
Selling, General and Administrative Expenses
The following table sets forth our selling, general and administrative expenses for the
second quarter of 2008 and 2007, along with the percentage of net revenues represented by
selling, general and administrative expenses (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second |
|
Second |
|
|
|
|
|
|
Quarter |
|
Quarter |
|
|
|
|
|
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
Selling, general and administrative |
|
$ |
71.9 |
|
|
$ |
59.9 |
|
|
$ |
12.0 |
|
|
|
20.0 |
% |
% of net revenues |
|
|
54.2 |
% |
|
|
55.0 |
% |
|
|
|
|
|
|
|
|
Share-based compensation expense
included in selling, general and
administrative |
|
$ |
4.6 |
|
|
$ |
5.5 |
|
|
$ |
(0.9 |
) |
|
|
(16.7 |
)% |
The increase in selling, general and administrative expenses during the second quarter
of 2008 from the second quarter of 2007 was attributable to approximately $5.7 million of
increased personnel costs, primarily related to an increase in the number of employees from
467 as of June 30, 2007 to 502 as of June 30, 2008 and the effect of the annual salary
increase that occurred during February 2008, $5.7 million of increased professional and
consulting expenses, including costs related to patent litigation associated with our
SOLODYN® product, business development costs and the implementation of our new
enterprise resource planning (ERP) system, and $0.6 million of increased other additional
selling, general and administrative costs incurred during the second quarter of 2008.
We expect to continue to incur legal and other professional fees during the second half of
2008 as a result of patent protection related to our SOLODYN® and VANOS® products.
29
Impairment of Long-lived Assets
During the second quarter of 2007, a long-lived asset related to OMNICEF®
was determined to be impaired based on our analysis of the long-lived assets 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 long-lived asset.
Factors affecting the future cash flows of the OMNICEF® long-lived 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.
Research and Development Expenses
The following table sets forth our research and development expenses for the second
quarter of 2008 and 2007 (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second |
|
|
Second |
|
|
|
|
|
|
|
|
|
Quarter |
|
|
Quarter |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Research and development |
|
$ |
33.0 |
|
|
$ |
7.1 |
|
|
$ |
25.9 |
|
|
|
361.6 |
% |
Charges included in research
and development |
|
$ |
25.0 |
|
|
$ |
|
|
|
$ |
25.0 |
|
|
|
100.0 |
% |
Share-based compensation
expense included in
research and development |
|
$ |
0.1 |
|
|
$ |
0.1 |
|
|
$ |
|
|
|
|
|
% |
Included in research and development expenses for the second quarter of 2008 was a
$25.0 million milestone payment made to Ipsen after the FDAs May 19, 2008 acceptance of the
filing of Ipsens BLA for RELOXIN®. The primary product under development during
the second quarter of 2008 and the second quarter of 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 accordance with our development and distribution agreement with Ipsen for the
development of RELOXIN®, we will pay Ipsen $1.5 million upon successful
completion of a future regulatory milestone, and we will pay Ipsen $75.0 million upon the
FDAs approval of RELOXIN®.
Depreciation and Amortization Expenses
Depreciation and amortization expenses during the second quarter of 2008 increased $0.9
million, or 15.4%, to $6.8 million from $5.9 million during the second quarter of 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.
Interest and Investment Income
Interest and investment income during the second quarter of 2008 decreased $1.9
million, or 19.5%, to $7.4 million from $9.3 million during the second quarter of 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 a decrease in the interest rates achieved by our invested
funds during the second quarter of 2008. We expect interest and investment income to be
lower in the second half for 2008 as compared to the second half of 2007 due to the decrease
in funds available for investment due to the repurchase of $283.7 million of our New Notes
in June 2008. See Note 11 in our accompanying condensed consolidated financial statements
for further discussion on the New Notes.
30
Interest Expense
Interest expense during the second quarter of 2008 decreased $0.5 million, to $2.1
million during the second quarter of 2008 from $2.6 million during the second quarter of
2007. Our interest expense during the second quarter of 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 the second quarter of 2008 as compared to the second quarter of 2007 was primarily
due to the repurchase of $283.7 million of our New Notes in June 2008, and 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 11 in our accompanying condensed consolidated
financial statements for further discussion on the Old Notes and New Notes. We expect
interest expense to be lower in the second half for 2008 as compared to the second 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. The tax-effected net interest expense and issue cost amortization on the Old Notes
and New Notes are added back to net income when computing diluted net income per share.
Income Tax Expense
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, changes in valuation allowances against deferred tax assets, 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 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.
Our effective tax rate for the second quarter of 2008 was 41.4%, as compared to 36.8%
for the second quarter of 2007. The provision for income taxes generally reflects
managements estimate of the effective tax rate expected to be applicable for the full
fiscal year. Our effective rate was higher during the second quarter of 2008 as compared to
the second quarter of 2007 as we are not currently recording tax benefits on the charge
related to the reduction in carrying value of our investment in Revance.
31
Six Months Ended June 30, 2008 Compared to the Six Months Ended June 30, 2007
Net Revenues
The following table sets forth our net revenues for the six months ended June 30, 2008
(the 2008 six months) and the six months ended June 30, 2007 (the 2007 six months),
along with the percentage of net revenues and percentage point change for each of our
product categories (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Six |
|
|
2007 Six |
|
|
|
|
|
|
|
|
|
Months |
|
|
Months |
|
|
$ Change |
|
|
% Change |
|
Net product revenues |
|
$ |
255.6 |
|
|
$ |
198.3 |
|
|
$ |
57.3 |
|
|
|
28.9 |
% |
Net contract revenues |
|
$ |
8.2 |
|
|
$ |
5.7 |
|
|
$ |
2.5 |
|
|
|
44.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
263.8 |
|
|
$ |
204.0 |
|
|
$ |
59.8 |
|
|
|
29.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Six |
|
|
2007 Six |
|
|
|
|
|
|
|
|
|
Months |
|
|
Months |
|
|
$ Change |
|
|
% Change |
|
Acne and acne-related
dermatological products |
|
$ |
163.1 |
|
|
$ |
101.4 |
|
|
$ |
61.7 |
|
|
|
60.9 |
% |
Non-acne dermatological
products |
|
|
78.7 |
|
|
|
86.8 |
|
|
|
(8.1 |
) |
|
|
(9.4 |
)% |
Non-dermatological products
(including contract revenues) |
|
|
22.0 |
|
|
|
15.8 |
|
|
|
6.2 |
|
|
|
39.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
263.8 |
|
|
$ |
204.0 |
|
|
$ |
59.8 |
|
|
|
29.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
2008 Six |
|
|
2007 Six |
|
|
Point |
|
|
|
Months |
|
|
Months |
|
|
Change |
|
Acne and acne-related
dermatological products |
|
|
61.8 |
% |
|
|
49.7 |
% |
|
|
12.1 |
% |
Non-acne dermatological
products |
|
|
29.8 |
% |
|
|
42.6 |
% |
|
|
(12.8 |
)% |
Non-dermatological products
(including contract revenues) |
|
|
8.4 |
% |
|
|
7.7 |
% |
|
|
0.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our total net revenues increased during the 2008 six months primarily as a result of an
increase in sales of SOLODYN®. Net revenues associated with our acne and
acne-related dermatological products increased by $61.7 million, or 60.9%, and by 12.1
percentage points as a percentage of net revenues during the 2008 six months as compared to
the 2007 six months 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 9.4% during the 2008 six months as compared
to the 2007 six months, primarily due to the year-over-year change in the economic and
competitive environment of the non-acne product category. Net revenues associated with our
non-dermatological products increased by $6.2 million, or 39.2%, and by 0.7 percentage
points as a percentage of net revenues during the 2008 six months as compared to the 2007
six months, primarily due to an increase in sales of AMMONUL® and an increase in
contract revenue.
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 the 2008 six months and 2007 six months was
approximately $10.6 million and $10.0 million, respectively. Product mix plays a
significant role in our quarterly and annual gross profit as a percentage of net revenues.
Different products generate
32
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 the 2008 six months and the 2007
six months, along with the percentage of net revenues represented by such gross profit
(dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Six |
|
2007 Six |
|
|
|
|
|
|
Months |
|
Months |
|
$ Change |
|
% Change |
Gross profit |
|
$ |
243.6 |
|
|
$ |
179.5 |
|
|
$ |
64.1 |
|
|
|
35.7 |
% |
% of net revenues |
|
|
92.3 |
% |
|
|
88.0 |
% |
|
|
|
|
|
|
|
|
The increase in gross profit during the 2008 six months, compared to the 2007 six
months, 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 the 2008 six months as compared to the 2007 six months. Increased
sales of SOLODYN®, a higher margin product, during the 2008 six months, 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 the 2007 six months
included a charge for an increase in our inventory obsolescence reserve of approximately
$3.5 million, which reduced gross margin as a percentage of net revenues by approximately
1.3 percentage points. The increase in the inventory obsolescence reserve during the 2007
six months was due to an increase in inventory during the 2007 six months 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 the
2008 six months and 2007 six months, along with the percentage of net revenues represented
by selling, general and administrative expenses (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Six |
|
2007 Six |
|
|
|
|
|
|
Months |
|
Months |
|
$ Change |
|
% Change |
Selling, general and administrative |
|
$ |
143.9 |
|
|
$ |
122.2 |
|
|
$ |
21.7 |
|
|
|
17.8 |
% |
% of net revenues |
|
|
54.6 |
% |
|
|
59.9 |
% |
|
|
|
|
|
|
|
|
Share-based compensation expense
included in selling, general and
administrative |
|
$ |
8.9 |
|
|
$ |
10.9 |
|
|
$ |
(2.0 |
) |
|
|
(18.1 |
)% |
The increase in selling, general and administrative expenses during the 2008 six months
from the 2007 six months was attributable to approximately $10.1 million of increased
personnel costs, primarily related to an increase in the number of employees from 467 as of
June 30, 2007 to 502 as of June 30, 2008 and the effect of the annual salary increase that
occurred during February 2008, and $11.6 million of increased professional and consulting
expenses, including costs related to patent litigation associated with our
SOLODYN® product, business development costs and the implementation of our new
enterprise resource planning (ERP) system incurred during the 2008 six months.
Impairment of Long-lived Assets
During the second quarter of 2007, a long-lived asset related to OMNICEF®
was determined to be impaired based on our analysis of the long-lived assets 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 long-lived asset.
Factors affecting the future cash flows of the OMNICEF® long-lived 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.
33
Research and Development Expenses
The following table sets forth our research and development expenses for the 2008 six
months and 2007 six months (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Six |
|
2007 Six |
|
|
|
|
|
|
Months |
|
Months |
|
$ Change |
|
% Change |
Research and development |
|
$ |
42.2 |
|
|
$ |
15.2 |
|
|
$ |
27.0 |
|
|
|
178.4 |
% |
Charges included in research
and development |
|
$ |
25.0 |
|
|
$ |
|
|
|
$ |
25.0 |
|
|
|
100.0 |
% |
Share-based compensation
expense included in
research and development |
|
$ |
0.1 |
|
|
$ |
0.3 |
|
|
$ |
(0.2 |
) |
|
|
(56.2 |
)% |
Included in research and development expenses for the 2008 six months was a $25.0
million milestone payment made to Ipsen after the FDAs May 19, 2008 acceptance of the
filing of Ipsens BLA for RELOXIN®. The primary product under development during
the 2008 six months and the 2007 six months was RELOXIN®.
Depreciation and Amortization Expenses
Depreciation and amortization expenses during the 2008 six months increased $2.2
million, or 19.1%, to $13.5 million from $11.3 million during the 2007 six months. 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.
Other Expense
Other expense of $2.9 million recognized during the first quarter of 2008 represented a
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 March 31, 2008.
Interest and Investment Income
Interest and investment income during the 2008 six months decreased $1.7 million, or
8.8%, to $16.6 million from $18.3 million during the 2007 six months, 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 a decrease in the interest rates achieved by our invested funds during the
2008 six months. We expect interest and investment income to be lower in the second half
for 2008 as compared to the second half of 2007 due to the decrease in funds available for
investment due to the repurchase of $283.7 million of our New Notes in June 2008. See Note
11 in our accompanying condensed consolidated financial statements for further discussion on
the New Notes.
Interest Expense
Interest expense during the 2008 six months decreased $0.6 million, to $4.6 million
during the 2008 six months from $5.2 million during the 2007 six months. Our interest
expense during the 2008 six months and 2007 six months 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 the 2008 six months
as compared to the 2007 six months was primarily due to the repurchase of $283.7 million of
our New Notes in June 2008, and 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 11 in our accompanying condensed consolidated financial statements for further
discussion on the Old Notes and New Notes. We expect interest expense to be lower in the
second half for 2008 as compared to the second 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. The tax-effected net
interest expense and issue cost amortization on the Old Notes and New Notes are added back
to net income when computing diluted net income per share.
34
Income Tax Expense
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, changes in valuation allowances against deferred tax assets, 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 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.
Our effective tax rate for the 2008 six months was 39.8%, as compared to 37.7% for the
2007 six months. The provision for income taxes generally reflects managements estimate of
the effective tax rate expected to be applicable for the full fiscal year. Our effective
rate was higher during the 2008 six months as compared to the 2007 six months as we are not
currently recording tax benefits on the charge related to the reduction in carrying value of
our investment in Revance.
35
Liquidity and Capital Resources
Overview
The following table highlights selected cash flow components for the 2008 six months
and 2007 six months, and selected balance sheet components as of June 30, 2008 and December
31, 2007 (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Six |
|
2007 Six |
|
|
|
|
|
|
Months |
|
Months |
|
$ Change |
|
% Change |
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
48.4 |
|
|
$ |
79.1 |
|
|
$ |
(30.7 |
) |
|
|
(38.8 |
)% |
Investing activities |
|
$ |
343.3 |
|
|
$ |
(234.4 |
) |
|
$ |
577.7 |
|
|
|
246.4 |
% |
Financing activities |
|
$ |
(284.0 |
) |
|
$ |
13.6 |
|
|
$ |
(297.6 |
) |
|
|
(2,187.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
Dec. 31, 2007 |
|
$ Change |
|
% Change |
Cash, cash equivalents and
short-term investments |
|
$ |
470.5 |
|
|
$ |
794.7 |
|
|
$ |
(324.2 |
) |
|
|
(40.8 |
)% |
Working capital |
|
$ |
415.6 |
|
|
$ |
460.1 |
|
|
$ |
(44.5 |
) |
|
|
(9.7 |
)% |
Long-term investments |
|
$ |
98.2 |
|
|
$ |
17.1 |
|
|
$ |
81.1 |
|
|
|
475.2 |
% |
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 June 30, 2008 and December 31, 2007 consisted of the following
(dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
Dec. 31, 2007 |
|
|
$ Change |
|
|
% Change |
|
Cash, cash equivalents and
short-term investments |
|
$ |
470.5 |
|
|
$ |
794.7 |
|
|
$ |
(324.2 |
) |
|
|
(40.8 |
)% |
Accounts receivable, net |
|
|
23.4 |
|
|
|
12.4 |
|
|
|
11.0 |
|
|
|
89.2 |
% |
Inventories, net |
|
|
23.9 |
|
|
|
30.0 |
|
|
|
(6.1 |
) |
|
|
(20.4 |
)% |
Deferred tax assets, net |
|
|
18.7 |
|
|
|
|
|
|
|
18.7 |
|
|
|
100.0 |
% |
Other current assets |
|
|
17.6 |
|
|
|
18.0 |
|
|
|
(0.4 |
) |
|
|
(2.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
554.1 |
|
|
|
855.1 |
|
|
|
(301.0 |
) |
|
|
(35.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
43.3 |
|
|
|
34.9 |
|
|
|
8.4 |
|
|
|
24.1 |
% |
Current portion of long-
term debt |
|
|
0.2 |
|
|
|
283.9 |
|
|
|
(283.7 |
) |
|
|
(99.9 |
)% |
Income taxes payable |
|
|
34.1 |
|
|
|
7.7 |
|
|
|
26.4 |
|
|
|
341.4 |
% |
Deferred tax liabilities, net |
|
|
|
|
|
|
11.7 |
|
|
|
(11.7 |
) |
|
|
(100.0 |
)% |
Other current liabilities |
|
|
60.9 |
|
|
|
56.8 |
|
|
|
4.1 |
|
|
|
7.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
138.5 |
|
|
|
395.0 |
|
|
|
(256.5 |
) |
|
|
(64.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
415.6 |
|
|
$ |
460.1 |
|
|
$ |
(44.5 |
) |
|
|
(9.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
We had cash, cash equivalents and short-term investments of $470.5 million and working
capital of $415.6 million at June 30, 2008, as compared to $794.7 million and $460.1
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, and by a net transfer of $81.1 million of our short-term investments
into long-term investments, partially offset by the generation of $48.4 million of operating
cash flow during the 2008 six months. The decrease in working capital was primarily due to
a net transfer of $81.1 million of our short-term investments into long-term investments,
partially offset by the generation of $48.4 million of operating cash flow during the 2008
six months.
36
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,
strategic investments, acquisitions of companies or products complementary 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, 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 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 June 30, 2008, our short-term investments included $43.6 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. 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 make the securities liquid until a future auction on these
investments is successful. As a result of the lack of liquidity of these investments, at
June 30, 2008, we have recorded an unrealized loss of $1.3 million on our auction rate
floating securities in accumulated other comprehensive income in our condensed consolidated
balance sheets.
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 the 2008 six
months related to this property was approximately $1.5 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 will be required to record a charge for the estimated remaining net cost for
the lease, net of potential sublease income. Total lease payments remaining after June 30,
2008 on our previous headquarters facility total approximately $5.3 million.
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 the six months ended June 30, 2008, we invested approximately $9.5 million
and $4.2 million, respectively, on this project.
37
Operating Activities
Net cash provided by operating activities during the 2008 six months was approximately
$48.4 million, compared to net cash provided by operating activities during the 2007 six
months of approximately $79.1 million. The following is a summary of the primary
components of cash provided by operating activities during the 2008 six months and 2007 six
months (in millions):
|
|
|
|
|
|
|
|
|
|
|
2008 Six |
|
|
2007 Six |
|
|
|
Months |
|
|
Months |
|
Payments made to Ipsen related to development of RELOXIN® |
|
$ |
(25.0 |
) |
|
$ |
|
|
Income taxes paid |
|
|
(30.2 |
) |
|
|
(17.2 |
) |
Other cash provided by operating activities |
|
|
103.6 |
|
|
|
96.3 |
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
$ |
48.4 |
|
|
$ |
79.1 |
|
|
|
|
|
|
|
|
Investing Activities
Net cash provided by investing activities during the 2008 six months was approximately
$343.3 million, compared to net cash used in investing activities during the 2007 six months
of $234.4 million. The change was primarily due to the net purchases and sales of our
short-term and long-term investments during the respective six-month periods. In addition,
approximately $29.1 million was paid to Q-Med upon the FDAs approval of PERLANE®
during the second quarter of 2007.
Financing Activities
Net cash used in financing activities during the 2008 six months was $284.0 million,
compared to net cash provided by financing activities of $13.6 million during the 2007 six
months. Cash used in financing activities during the 2008 six months included the
repurchase of $283.7 million of New Notes during June 2008. Proceeds from the exercise of
stock options were $3.5 million during the 2008 six months compared to $15.8 million during
the 2007 six months. Dividends paid during the 2008 six months was $4.0 million, and
dividends paid during the 2007 six months was $3.4 million.
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 will also be required to pay an accumulated deferred
tax liability of approximately $34.9 million related to the repurchased New Notes. This
deferred tax liability, which is included in income taxes payable in our condensed
consolidated balance sheets as of June 30, 2008, will be settled and paid during the three
months ended September 30, 2008. Following the repurchase of these New Notes, $181,000 of
principal amount of New Notes remained outstanding as of June 30, 2008. We intend to redeem
the remaining $181,000 of principal amount of New Notes during the second half of 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 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
38
change in control, holders of the New Notes may require us to offer to repurchase their
New Notes for cash.
Except for the Old Notes, we had only $11.9 million of long-term liabilities and we had
only $138.5 million of current liabilities at June 30, 2008. Our other commitments and
planned expenditures consist principally of payments we will make in connection with the
acquisition of LipoSonix, strategic collaborations and research and development
expenditures, and we will continue to invest in sales and marketing infrastructure. In
addition, we will be continuing our implementation of a new ERP system during 2008, which
will require financial expenditures to complete.
We have made available to BioMarin Pharmaceutical Inc. (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 August
11, 2008, BioMarin has not requested any monies to be advanced under the Convertible Note,
and no amounts are outstanding.
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
is scheduled to terminate on the earlier of the first anniversary of the plan or at the time
when the aggregate purchase limit is reached. As of August 11, 2008, no shares had been
repurchased under this plan.
Dividends
We do not have a dividend policy. Since July 2003, we have paid quarterly cash
dividends aggregating approximately $32.5 million on our common stock. In addition, on June
11, 2008, we declared a cash dividend of $0.04 per issued and outstanding share of common
stock payable on July 31, 2008 to our stockholders of record at the close of business on
July 1, 2008. 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 4 to the unaudited condensed 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 $43.6 million at June 30, 2008. These securities were
included in long-term investments at June 30, 2008.
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 or other type of valuation model as of June 30, 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 a temporary unrealized decline in fair value of $1.3 million, with an offsetting
entry to
39
accumulated other comprehensive income, as of June 30, 2008. We currently believe
that this temporary decline in fair value is due entirely to liquidity issues, because the
underlying assets for the majority of securities are almost entirely backed by the U.S.
government. In addition, our holdings of auction rate floating securities represented less
than ten percent of our total cash and cash equivalents, restricted cash and short-term and
long-term investment balance at June 30, 2008, which we believe allows us sufficient time
for the securities to return to full value. Because we believe that the current decline in
fair value is temporary and based only on liquidity issues in the credit markets, any
difference between our estimate and an estimate that would be arrived at by another party
would have no impact on our earnings, since such difference would also be recorded to
accumulated other comprehensive income. We will re-evaluate each of these factors as market
conditions change in subsequent periods.
Off-Balance Sheet Arrangements
As of June 30, 2008, we are not involved in any off-balance sheet arrangements, as
defined in Item 303(a)(4)(ii) of Securities and Exchange Commission (SEC) Regulation S-K.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are
based upon our condensed consolidated financial statements, which have been prepared in
conformity with U.S. generally accepted accounting principles. The preparation of the
condensed consolidated financial statements requires us to make estimates and assumptions
that affect the amounts reported in the condensed 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 our Form 10-K for the year ended December 31, 2007. There were no
new significant accounting estimates in the second quarter of 2008, nor were there any
material changes to the critical accounting policies and estimates discussed in our Form
10-K for the year ended December 31, 2007.
Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Statements and Financial Liabilities, which provides companies with an option to report
selected financial assets and liabilities at fair value. SFAS No. 159 requires companies to
provide additional information that will help investors and other users of financial
statements to more easily understand the effect of the companys choice to use fair value on
its earnings. It also requires entities to display the fair value of those assets and
liabilities for which the company has chosen to use fair value on the face of the balance
sheet. SFAS No. 159 does not eliminate disclosure requirements included in other accounting
standards, including requirements for disclosures about fair value measurements included in
FASB Statements No. 157, Fair Value Measurements, and No. 107, Disclosures about Fair Value
of Financial Instruments. We adopted SFAS No. 159 as of January 1, 2008, and we have
elected not to exercise the fair value irrevocable option. The adoption of SFAS No. 159 did
not have a material effect on our consolidated results of operations and financial
condition.
In June 2007, the EITF reached a consensus on EITF 07-03, Accounting for Nonrefundable
Advance Payments for Goods or Services to Be Used in Future Research and Development
Activities. EITF 07-03 concludes that non-refundable advance payments for future research
and development activities should be deferred and capitalized until the goods have been
delivered or the related services have been performed. If an entity does not expect the
goods to be delivered or services to be rendered, the capitalized advance payment should be
charged to expense. This consensus is effective for financial statements issued for fiscal
years beginning after December 15, 2007, and interim periods within those fiscal years.
Earlier adoption is not permitted. The effect of applying the consensus will be prospective
for
40
new contracts entered into on or after that date. We adopted EITF 07-03 as of January
1, 2008 and it did not have a material impact on our consolidated results of operations and
financial condition.
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 upon settlement; 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. We are currently evaluating SFAS
No. 141R and its impact, if any, on our consolidated results of operations and financial
condition.
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 parents 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 parents 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 are currently evaluating SFAS No. 160 and its impact, if any,
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 are currently evaluating EITF 07-01 and its impact, if any, 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 are
41
currently evaluating
FSP 142-3 and its impact, if any, on our 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 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 issuers 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.
Forward-Looking Statements
This Quarterly Report on Form 10-Q and other documents we file with the SEC include
forward-looking statements. These include statements relating to future actions,
prospective products or product approvals, future performance or results of current and
anticipated products, sales and marketing efforts, expenses, the outcome of contingencies,
such as legal proceedings, and financial results. From time to time, we also may make
forward-looking statements in press releases or written statements, or in our communications
and discussions with investors and analysts in the normal course of business through
meetings, webcasts, phone calls, and conference calls. All statements other than statements
of historical fact are, or may be deemed to be, forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the Exchange Act). 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. We caution you that actual outcomes and results may
differ materially from what is expressed, implied, or forecast by our forward-looking
statements. Such statements are subject to a number of assumptions, risks and
uncertainties, many of which are beyond our control. You can identify these statements by
the fact that they do not relate strictly to historical or current facts. They use words
such as anticipate, estimate, expect, project, intend, plan, believe, will,
should, outlook, could, target, and other words and terms of similar meaning in
connection with any discussion of future operations or financial performance. Among the
factors that could cause actual results to differ materially from our forward-looking
statements are the following:
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competitive developments affecting our products, such as the recent FDA approvals of
Artefill®, Evolence®, Prevelle® Silk,
Radiesse®, Sculptra®, Elevess, Juvéderm
Ultra and Juvéderm Ultra Plus, competitors to RESTYLANE® and
PERLANE®, a generic form of our DYNACIN® Tablets product, generic
forms of our LOPROX® TS, LOPROX® Cream and LOPROX® Gel
products, and potential generic forms of our LOPROX® Shampoo,
TRIAZ®, PLEXION®, SOLODYN®, or VANOS®
products; |
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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 our products; |
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the success of research and development activities, including the development of
RELOXIN® and additional forms of SOLODYN®, and our ability to obtain regulatory approvals; |
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the speed with which regulatory authorizations and product launches may be achieved; |
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changes in the FDAs position on the safety or effectiveness of our products; |
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changes in our product mix; |
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the anticipated size of the markets and demand for our products; |
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changes in prescription levels; |
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the impact of acquisitions, divestitures and other significant corporate
transactions, including our acquisition of LipoSonix; |
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the effect of economic changes in hurricane-effected areas; |
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manufacturing or supply interruptions; |
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importation of other dermal filler products, including the unauthorized distribution
of products approved in countries neighboring the U.S; |
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changes in the prescribing or procedural practices of dermatologists, podiatrists
and/or plastic surgeons, including prescription levels; |
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the ability to successfully market both new and existing products; |
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difficulties or delays in manufacturing and packaging of our products, including
delays and quality control lapses of third party manufacturers and suppliers of our
products; |
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the availability of product supply or changes in the cost of raw materials; |
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the ability to compete against generic and other branded products; |
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trends toward managed care and health care cost containment; |
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inadequate protection of our intellectual property or challenges to the validity or
enforceability of our proprietary rights and our ability to secure patent protection
from filed patent applications for our primary products, including SOLODYN®; |
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possible federal and/or state legislation or regulatory action affecting, among
other things, pharmaceutical pricing and reimbursement, including Medicaid and Medicare
and involuntary approval of prescription medicines for over-the-counter use; |
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legal defense costs, insurance expenses, settlement costs and the risk of an adverse
decision or settlement related to product liability, patent protection, government
investigations, and other legal proceedings (see Part II, Item 1, Legal Proceedings); |
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changes in U.S. generally accepted accounting principles; |
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additional costs related to compliance with changing regulation of corporate
governance and public financial disclosure; |
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our ability to successfully design and implement our new enterprise resource
planning (ERP) system; |
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any changes in business, political and economic conditions due to the threat of
future terrorist activity in the U.S. and other parts of the world; |
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access to available and feasible financing on a timely basis; |
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the availability of product acquisition or in-licensing opportunities; |
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the risks and uncertainties normally incident to the pharmaceutical and medical
device industries, including product liability claims; |
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the risks and uncertainties associated with obtaining necessary FDA approvals; |
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the inability to obtain required regulatory approvals for any of our pipeline
products, such as RELOXIN®; |
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unexpected costs and expenses, or our ability to limit costs and expenses as our
business continues to grow; |
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downturns in general economic conditions that negatively affect our dermal
restorative and branded prescription products, and our ability to accurately forecast
our financial performance as a result; |
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failure to comply with our corporate integrity agreement, which could result in
substantial civil or criminal penalties and our being excluded from government health
care programs, which could materially reduce our sales and adversely affect our
financial condition and results of operations; and |
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the inability to successfully integrate newly-acquired entities, such as LipoSonix. |
We undertake no obligation to publicly update forward-looking statements, whether as a
result of new information, future events or otherwise. You are advised, however, to review
any future disclosures contained in the reports that we file with the SEC. Our Annual
Report on Form 10-K for the year ended December 31, 2007 and this Quarterly Report contain
discussions of various risks relating to our business that could cause actual results to
differ materially from expected and historical results, which you should review. You should
understand that it is not possible to predict or identify all such risks. Consequently, you
should not consider any such list or discussion to be a complete set of all potential risks
or uncertainties.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of June 30, 2008, there were no material changes to the information previously
reported under Item 7A in our Annual Report on Form 10-K for the year ended December 31,
2007.
Item 4. 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 SECs 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 June 30, 2008 and have concluded that, as of such date, our
disclosure controls and procedures were effective to ensure 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 SECs rules and
forms.
Although the management of the 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 errors 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 the 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.
44
During the three months ended June 30, 2008, there was no change in our internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the
Exchange Act) that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
On January 1, 2008, we transitioned our financial accounting and reporting processes to
our new ERP system as part of a phased implementation plan. The new ERP system, which we
began developing during 2007, was designed and implemented to integrate and improve the
financial and operational aspects of our business. The implementation of this new ERP
system involves changes to our procedures for control over financial reporting. We followed
a detailed implementation plan that required significant pre-implementation planning, design
and testing. We have also conducted and will continue to conduct extensive
post-implementation review and process modification to ensure that internal controls over
financial reporting are properly designed. To date, we have not experienced any significant
difficulties in our processes related to the implementation or operation of the new ERP
system.
Part II. Other Information
Item 1. Legal Proceedings
The following supplements and amends the discussion set forth under Part I, Item 3,
Legal Proceedings in our Annual Report on Form 10-K for the year ended December 31, 2007
and Part II, Item 1, Legal Proceedings in our Quarterly Report on Form 10-Q for the period
ended March 31, 2008.
On April 30, 2008, we received notice from Perrigo Israel Pharmaceuticals Ltd.
(Perrigo Israel), a generic pharmaceutical company, that it had filed an Abbreviated New
Drug Application with the FDA for a generic version of our VANOS® fluocinonide
cream 0.1%. Perrigo Israels 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.
The complaint asserts that Perrigo Israel and Perrigo Company have infringed both of our
patents for VANOS® Cream.
On January 15, 2008, IMPAX Laboratories, Inc. (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 related to SOLODYN® is
invalid and is not infringed by IMPAXs filing of an Abbreviated New Drug Application
(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 Courts order dismissing the case to the United States Court of Appeals for the Federal
Circuit.
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 us and
Imaginative Research Associates (IRA) seeking a declaration that Prascos 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.
45
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 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 1A. Risk Factors
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 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.
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 June
16, 2008, we announced that we received final rejections from the USPTO with respect to two
of our patent applications relating to SOLODYN® (application numbers 11/776,669
and 11/776,711). The failure to obtain additional patent protection could adversely affect
our ability to deter generic competition, which would adversely affect SOLODYN®
revenue and our results of operations.
In addition, SOLODYN® may face generic competition in the near future
without prior notice if a generic competitor decides to enter the market notwithstanding the
risk of a suit for patent infringement. Because SOLODYN® contains an antibiotic
drug that was first approved by the FDA prior to the enactment of the Food and Drug
Administration Modernization Act of 1997, or FDAMA, SOLODYN® does not have the
benefit of the protections offered under the Hatch-Waxman Act. Accordingly, we would not
receive a Paragraph IV notice regarding SOLODYN® from any potential generic
competitor and would not be entitled to an automatic 30-month stay of generic entry that
would be available to a patent owner filing an infringement suit based on receipt of such a
notice.
On January 15, 2008, we announced that IMPAX Laboratories, Inc. (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. IMPAX has not
advised us as to the status of the FDAs review of its filing, or whether IMPAX has complied
with recent FDA requirements for proving
46
bioequivalence. 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 related to SOLODYN® is invalid and is not infringed by
IMPAXs 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 Courts order dismissing the case to the United States Court of Appeals for the
Federal Circuit.
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 FDAs review of its filing. Perrigos certification letter
sets forth allegations that our U.S. Patent No. 6,765,001, is invalid, unenforceable and/or
will not be infringed by Perrigos 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 managements time. 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 related to SOLODYN® is invalid and is not infringed by IMPAXs 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 Courts order dismissing the case to the United States Court of Appeals for the
Federal Circuit. Also, on June, 16, 2008, we announced that a third party filed with the
USPTO a Request for Ex Parte Reexamination of our U.S. Patent No. 5,908,838 (838 patent)
related to SOLODYN®. The USPTO has three months to review the reexamination
request and to determine whether it believes that the request raises a substantial new
question of patentability as to the 838 patent. If reexamination is granted by the USPTO,
a result could be that one or more of the claims in the 838 patent is invalidated or
narrowed in scope, either of which could have a material adverse impact on our results of
operations. See Item 1 of Part II of this report, Legal Proceedings and Note 17,
Contingencies, in the notes to the condensed consolidated financial statements under Item
1 of Part I of this report, Financial Statements, 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
47
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 managements
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.
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 process of obtaining FDA and other regulatory approvals is time consuming and
expensive. Clinical trials are required and the marketing and manufacturing of
pharmaceutical products are 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. 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. For example, the FDA recently
stated it was reviewing the safety of two botulinum toxin products currently marketed in the
U.S. 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; |
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submitting products 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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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 FDAs 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 FDAs 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.
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. 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 manufacturers products from reimbursement under
government programs, criminal fines, and imprisonment. Because of the breadth of these laws
and the
49
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 governments 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 have 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) 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 Attorneys 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® and LOPROX® TS. In connection with
the government investigation, four employees, including Richard Havens, our former Executive
Vice President, Sales and Marketing, separated from the Company as of April 1, 2008. In May
2008, five of our former employees, including Mr. Havens, plead guilty to misdemeanors in
connection with their individual roles in the Companys alleged past off-label marketing and
promotion of LOPROX® and LOPROX® TS. See Item 1 of Part II of this
report, Legal Proceedings and Note 17, Contingencies, in the notes to the condensed
consolidated financial statements listed under Item 1 of Part I of this report, Financial
Statements, 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 U.S. federal and state regulations and/or laws or
all potentially applicable foreign regulations and/or laws. If we fail to comply with any
of
50
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.
In addition, we have entered into a five-year CIA with the OIG. 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 have 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) 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.
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 Health, McKesson, and major drug chains. We recently entered
into distribution services agreements with McKesson and Cardinal. During 2007, McKesson and
Cardinal accounted for 52.2% and 16.9%, 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.
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 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. On
June 5, 2006, Allergan announced that the FDA had approved its JuvédermTM dermal
filler family of products. Allergan began marketing these products in January 2007. Other
dermal filler products, such as Artefill®, Evolence®,
Prevelle® Silk, Radiesse®, Sculptra® and
ElevessTM 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. On January 15, 2008, we announced
that IMPAX 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. IMPAX has not advised us as to the status of the FDAs review of
its filing, or whether IMPAX has complied with recent FDA requirements for proving
bioequivalence. 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 related to SOLODYN® is invalid and is not
infringed by IMPAXs 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 Courts order dismissing the case to the United States Court of
Appeals for the Federal Circuit. On May 1, 2008, we announced that
51
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 FDAs review of its filing. Perrigos
certification letter sets forth allegations that our U.S. Patent No. 6,765,001, is invalid,
unenforceable and/or will not be infringed by Perrigos 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. |
Our continued growth depends upon our ability to develop new products.
We have internally developed potential pharmaceutical compounds and agents. We also
have acquired the rights to certain potential compounds and agents in various stages of
development. We currently have a variety of new products in various stages of research and
development and are working on possible improvements, extensions and reformulations of some
existing products. These research and development activities, as well as the clinical
testing and regulatory approval process, which must be completed before commercial
quantities of these developments can be sold, will require significant commitments of
personnel and financial resources. We cannot assure you that we will be able to develop a
product or technology in a timely manner, or at all. Delays in the research, development,
testing or approval processes will cause a corresponding delay in revenue generation from
those products. Regardless of whether they are ever released to the market, the expense of
such processes will have already been incurred. For example, on January 30, 2008, we
received a letter from the FDA stating that, upon a preliminary review of our BLA for the
botulinum toxin type A, RELOXIN®, in aesthetics, the FDA had determined not to
accept the BLA for filing because it is not sufficiently complete to permit a substantive
review. On March 17, 2008, we announced that the BLA had been re-submitted to the FDA, and
on May 19, 2008, the FDA accepted the filing of the BLA. However, the FDAs initial
determination not to accept the BLA may result in delays in the FDAs substantive response
to the BLA.
In addition to the research, development and regulatory challenges that we face in
developing new products and possible improvements, extensions and reformulations of existing
products, we also must obtain intellectual property protections for such products in order
to realize the benefit of our development efforts. We may not be able to obtain such
patents for our future products. See 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.
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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.
There is also 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.
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 of new competitive products or generics by others; |
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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; and |
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timing of 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.
Our investments in other companies and our collaborations with companies could adversely
affect our results of operations and financial condition.
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 provide to 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
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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 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 contractors 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. Medicis also offers products that are not VHCA
covered drugs on its FSS contract at negotiated pricing. 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 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 current Medicaid rebate rules which
then could impact this program as well.
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 Federal Supply
Schedule (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 been reviewing this issue and have identified certain customer class of
trade misclassifications. We are therefore 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 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. We also are conducting a review
of our administration of obligations under the Price Reductions Clause in our FSS contract
with the VA. It is unclear whether any issue that may be identified during this review may
result in any changes to our Medicaid rebate liability for prior quarters or to prices paid
under the FSS, 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.
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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. In
addition to testing and approval procedures, extensive regulations also govern marketing,
manufacturing, distribution, labeling and record-keeping procedures.
Completion of clinical trials may take several years. 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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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. For example, on
January 30, 2008, we received a letter from the FDA stating that, upon a
preliminary review of our BLA for the botulinum toxin type A,
RELOXIN®, in aesthetics, the FDA has determined not to accept the
BLA for filing because it is not sufficiently complete to permit a substantive
review. On March 17, 2008, we announced that the BLA had been re-submitted to
the FDA, and on May 19, 2008, the FDA accepted the filing of the BLA; |
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government or regulatory delays; 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, including our dermal restorative and branded prescription products, may
be adversely affected by downturns in general economic conditions. Economic conditions such
as employment levels, business conditions, interest rates, credit markets, 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.
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The current condition of the credit markets and our reduced cash balances 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 the second quarter of 2008 due to the repurchase of $283.7 million of New Notes, and
we made a $150.0 million payment of the initial purchase price for our acquisition of
LipoSonix in July 2008, 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 June 30,
2008, our investments included $43.6 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 make the securities liquid until a
future auction on these investments is successful.
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
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 10 to our
consolidated financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 2007, BioMarin will make license payments to us of $1.5 million per
quarter for the four quarters beginning in July 2008. While we did receive all scheduled
quarterly license payments during the first six months of 2008, 2007, 2006, the Transition
Period and fiscal 2005, we cannot give any assurances as to BioMarins 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 in 2009 for the purchase of all of the outstanding shares of Ascent
Pediatrics, we cannot give any assurances as to BioMarins ability to make this payment.
Should BioMarin be unable or unwilling to make the required payments, we may be required to
record an impairment of the related Ascent goodwill. If BioMarin
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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 (whether by acquisition, license or otherwise) 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.
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 managements 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.
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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 LipoSonixs product both in the
United States and worldwide, and the timing of such approvals; |
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the efficacy of LipoSonixs technology; |
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market acceptance of LipoSonixs 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 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. If we are unable to
obtain financing on terms acceptable to us, our reduced cash holdings could prevent us from
entering into transactions that could be beneficial to us. 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.
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.
Implementation of our new enterprise resource planning system could cause business
interruptions and negatively affect our profitability and cash flows.
During 2007, we began developing and implementing a new enterprise resource planning
(ERP) system to integrate and improve the financial and operational aspects of our
business. A significant portion our new ERP system began to be utilized on January 1, 2008.
The design and implementation of an ERP system, which will continue in 2008, involves risks
such as cost overruns, project delays and business interruption. A significant amount of
our resources have been committed to the ERP project, and we may experience challenges in
designing and implementing the new ERP system that could adversely affect our operations and
our ability to timely and accurately process and report key components of our financial
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position. If we experience a material business interruption as a result of our design
and implementation of our new ERP system, it could have a material adverse effect on our
business, results of operations and cash flows.
The consolidation of drug wholesalers could increase competition and pricing pressures throughout the pharmaceutical industry.
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.
We rely on others to manufacture our products.
Currently, we outsource all of our product manufacturing needs. 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 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.
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. The FDA requires that all manufacturers used by
pharmaceutical companies comply with the FDAs 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 mitigate the harm to us
from the interruption of the manufacturing of
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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 affect
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 SubQTM.
The manufacturing process to create bulk non-animal stabilized hyaluronic acid
necessary to produce RESTYLANE®, PERLANE®, RESTYLANE FINE
LINESTM and 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 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 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
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-Meds
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.
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 our products.
Overestimates of
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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 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.
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. 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
62
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 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.
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.
63
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, applicable laws and general economic conditions,
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.
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.
Our publicly-filed reports are reviewed by the SEC from time to time and any significant
changes required as a result of any such review may result in material liability to us, and
have a material adverse impact on the trading price of our common stock.
The reports of publicly-traded companies are subject to review by the SEC from time to
time for the purpose of assisting companies in complying with applicable disclosure
requirements and to enhance the overall effectiveness of companies public filings, and
comprehensive reviews of such reports are now required at least every three years under the
Sarbanes-Oxley Act of 2002. SEC reviews may be initiated at any time. While we believe
that our previously filed SEC reports comply, and we intend that all future reports will
comply in all material respects with the published rules and regulations of the SEC, we
could be required to modify or reformulate information contained in prior filings as a
result of an SEC review. Any modification or reformulation of information contained in such
reports could be significant and result in material liability to us and have a material
adverse impact on the trading price of our common stock.
64
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.
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.
65
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 FDAs 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 FDAs 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. See Item 1 of Part II of this report, Legal Proceedings and Note 17,
Contingencies, in the notes to the condensed consolidated financial statements listed
under Item 1 of Part I of this report, Financial Statements, for information concerning
our current compliance program.
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; |
66
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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.
67
Item 4. Submission of Matters to a Vote of Security Holders
On May 20, 2008, the Company held its 2008 Annual Meeting of Stockholders (the Annual
Meeting). The holders of 52,479,205 shares of Class A Common Stock were present in person
or represented by proxy at the meeting. The following is a summary of the results of the
voting by the Companys stockholders at the Annual Meeting:
1) Election of Directors
The stockholders elected the following persons to serve as directors of the Company
for a term of three years, or until their successors are duly elected and qualified
or until their earlier resignation or removal. Votes were cast as follows:
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Number of Votes |
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For |
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Against |
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Abstain |
Spencer Davidson |
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42,756,769 |
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9,693,450 |
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28,986 |
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Stuart Diamond |
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51,943,963 |
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501,185 |
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34,057 |
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Peter S. Knight, Esq |
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50,604,230 |
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1,849,112 |
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25,863 |
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The directors of the Company whose terms of office continued were Mr. Jonah
Shacknai, Mr. Arthur G. Altschul, Jr., Mr. Michael Pietrangelo, Mr. Philip S.
Schein, M.D. and Ms. Lottie Shackelford.
2) |
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The stockholders approved the appointment of Ernst & Young LLP as independent
auditors for the fiscal year ending December 31, 2008. Votes were cast as follows: |
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For |
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Against |
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Abstain |
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51,918,927 |
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537,965 |
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22,313 |
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Item 6. Exhibits
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Exhibit 2.1+
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Agreement and Plan of Merger by and among the Company, Donatello, Inc., and
LipoSonix, Inc. dated June 16, 2008 |
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Exhibit 31.1+
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Certification by the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
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Exhibit 31.2+
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Certification by the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
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Exhibit 32.1+
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Certification by the Chief Executive Officer and the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
69
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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MEDICIS PHARMACEUTICAL CORPORATION
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Date: August 11, 2008 |
By: |
/s/ Jonah Shacknai
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Jonah Shacknai |
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Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer) |
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Date: August 11, 2008 |
By: |
/s/ Richard D. Peterson
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Richard D. Peterson |
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Executive Vice President
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer) |
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70