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 September 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 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
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 o |
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 November 3, 2008 |
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Class A Common Stock $.014 Par Value
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56,717,496 |
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MEDICIS PHARMACEUTICAL CORPORATION
Table of Contents
2
Part I. Financial Information
Item 1. Financial Statements
MEDICIS PHARMACEUTICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
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September 30, 2008 |
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December 31, 2007 |
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(unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
59,021 |
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$ |
108,046 |
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Short-term investments |
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248,124 |
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686,634 |
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Accounts receivable, net |
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48,011 |
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22,205 |
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Inventories, net |
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25,433 |
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29,973 |
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Deferred tax assets, net |
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44,992 |
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9,190 |
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Other current assets |
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21,050 |
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18,049 |
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Total current assets |
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446,631 |
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874,097 |
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Property and equipment, net |
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26,214 |
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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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265,573 |
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258,873 |
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Other intangible assets |
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10,141 |
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6,695 |
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275,714 |
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265,568 |
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Less: accumulated amortization |
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108,686 |
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92,482 |
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Net intangible assets |
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167,028 |
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173,086 |
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Goodwill |
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156,774 |
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63,107 |
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Deferred tax assets, net |
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74,513 |
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59,577 |
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Long-term investments |
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93,422 |
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17,072 |
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Other assets |
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6,532 |
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12,622 |
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$ |
971,114 |
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$ |
1,213,411 |
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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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September 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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$ |
48,236 |
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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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Reserve for sales returns |
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59,295 |
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68,787 |
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Income taxes payable |
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7,731 |
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Other current liabilities |
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71,674 |
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55,807 |
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Total current liabilities |
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179,386 |
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451,126 |
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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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4,792 |
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6,667 |
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Other liabilities |
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10,896 |
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3,172 |
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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: 69,395,894 and 69,005,019 at
September 30, 2008 and December 31, 2007,
respectively |
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969 |
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965 |
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Class B common stock, $0.014 par value; shares
authorized: 1,000,000; no shares issued |
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Additional paid-in capital |
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658,645 |
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641,907 |
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Accumulated other comprehensive (loss) income |
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(2,543 |
) |
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2,221 |
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Accumulated earnings |
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293,190 |
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281,218 |
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Less: Treasury stock, 12,678,398 and 12,656,503
shares at cost at September 30, 2008 and December 31,
2007, respectively |
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(343,366 |
) |
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(343,010 |
) |
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Total stockholders equity |
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606,895 |
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583,301 |
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$ |
971,114 |
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$ |
1,213,411 |
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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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Nine Months Ended |
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September 30, |
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September 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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(Restated) |
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(Restated) |
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Net product revenues |
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$ |
110,574 |
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$ |
107,093 |
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$ |
368,668 |
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$ |
313,659 |
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Net contract revenues |
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4,851 |
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3,890 |
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13,111 |
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9,595 |
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Net revenues |
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115,425 |
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110,983 |
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381,779 |
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323,254 |
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Cost of product revenues (1) |
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10,848 |
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18,583 |
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31,185 |
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45,411 |
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Gross profit |
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104,577 |
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|
92,400 |
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350,594 |
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277,843 |
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Operating expenses: |
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Selling, general and administrative (2) |
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71,575 |
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58,877 |
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215,509 |
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178,712 |
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Impairment of long-lived assets |
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4,067 |
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Research and development (3) |
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7,143 |
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7,354 |
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49,333 |
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22,508 |
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In-process research and development |
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|
30,500 |
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30,500 |
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Depreciation and amortization |
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7,078 |
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6,461 |
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20,579 |
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17,793 |
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Operating (loss) income |
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(11,719 |
) |
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|
19,708 |
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34,673 |
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54,763 |
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Other expense |
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(2,593 |
) |
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(5,465 |
) |
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Interest and investment income |
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3,436 |
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|
9,842 |
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20,086 |
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|
28,100 |
|
Interest expense |
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|
(1,059 |
) |
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|
(2,396 |
) |
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(5,614 |
) |
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(7,622 |
) |
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(Loss) income before income tax expense |
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(11,935 |
) |
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|
27,154 |
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43,680 |
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75,241 |
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Income tax expense |
|
|
2,722 |
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|
10,161 |
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|
24,802 |
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|
28,027 |
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Net (loss) income |
|
$ |
(14,657 |
) |
|
$ |
16,993 |
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|
$ |
18,878 |
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$ |
47,214 |
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Basic net (loss) income per share |
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$ |
(0.26 |
) |
|
$ |
0.30 |
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$ |
0.33 |
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$ |
0.84 |
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Diluted net (loss) income per share |
|
$ |
(0.26 |
) |
|
$ |
0.26 |
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$ |
0.33 |
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$ |
0.73 |
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Cash dividend declared per common share |
|
$ |
0.04 |
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|
$ |
0.03 |
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$ |
0.12 |
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|
$ |
0.09 |
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|
|
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|
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Basic common shares outstanding |
|
|
56,698 |
|
|
|
56,120 |
|
|
|
56,517 |
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|
55,896 |
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Diluted common shares outstanding |
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|
56,698 |
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|
|
71,155 |
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|
|
57,358 |
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|
71,353 |
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(1) amounts exclude amortization of
intangible assets related to acquired
products |
|
$ |
5,454 |
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|
$ |
5,671 |
|
|
$ |
16,026 |
|
|
$ |
15,634 |
|
(2) amounts include share-based
compensation expense |
|
$ |
4,019 |
|
|
$ |
4,744 |
|
|
$ |
12,949 |
|
|
$ |
15,646 |
|
(3) amounts include share-based
compensation expense |
|
$ |
111 |
|
|
$ |
(215 |
) |
|
$ |
223 |
|
|
$ |
40 |
|
See accompanying notes to condensed consolidated financial statements.
5
MEDICIS PHARMACEUTICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, 2008 |
|
|
September 30, 2007 |
|
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|
|
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|
(Restated) |
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Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
18,878 |
|
|
$ |
47,214 |
|
Adjustments to reconcile net income to
net cash provided by operating activities: |
|
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|
|
|
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|
In-process research and development |
|
|
30,500 |
|
|
|
|
|
Depreciation and amortization |
|
|
20,579 |
|
|
|
17,793 |
|
Amortization of deferred financing fees |
|
|
666 |
|
|
|
1,249 |
|
Impairment of long-lived assets |
|
|
|
|
|
|
4,067 |
|
Loss on disposal of property and equipment |
|
|
36 |
|
|
|
19 |
|
Charge reducing value of investment in Revance |
|
|
5,465 |
|
|
|
|
|
Gain on sale of available-for-sale investments |
|
|
(1,021 |
) |
|
|
(49 |
) |
Share-based compensation expense |
|
|
13,172 |
|
|
|
15,686 |
|
Deferred income tax (benefit) expense |
|
|
(31,994 |
) |
|
|
9,328 |
|
Tax (expense) benefit from exercise of stock options and vesting of
restricted stock awards |
|
|
(1,276 |
) |
|
|
2,664 |
|
Excess tax benefits from share-based payment arrangements |
|
|
(169 |
) |
|
|
(1,365 |
) |
Increase (decrease) in provision for sales discounts and chargebacks |
|
|
1,314 |
|
|
|
(1,078 |
) |
Amortization of (discount)/premium on investments |
|
|
(438 |
) |
|
|
(2,405 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(26,615 |
) |
|
|
35,952 |
|
Inventories |
|
|
5,486 |
|
|
|
(1,526 |
) |
Other current assets |
|
|
(2,550 |
) |
|
|
262 |
|
Accounts payable |
|
|
12,911 |
|
|
|
3,030 |
|
Reserve for sales returns |
|
|
(9,492 |
) |
|
|
(19,652 |
) |
Income taxes payable |
|
|
(7,731 |
) |
|
|
(3,423 |
) |
Other current liabilities |
|
|
13,342 |
|
|
|
9,269 |
|
Other liabilities |
|
|
(338 |
) |
|
|
10,503 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
40,725 |
|
|
|
127,538 |
|
|
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(9,395 |
) |
|
|
(7,195 |
) |
LipoSonix acquisition, net of cash acquired |
|
|
(149,805 |
) |
|
|
|
|
Payment of direct merger costs |
|
|
(3,615 |
) |
|
|
|
|
Payments for purchase of product rights |
|
|
(746 |
) |
|
|
(30,090 |
) |
Increase in other assets |
|
|
(35 |
) |
|
|
|
|
Purchase of available-for-sale investments |
|
|
(329,021 |
) |
|
|
(570,463 |
) |
Sale of available-for-sale investments |
|
|
390,921 |
|
|
|
173,014 |
|
Maturity of available-for-sale investments |
|
|
297,038 |
|
|
|
173,396 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
195,342 |
|
|
|
(261,338 |
) |
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Payment of dividends |
|
|
(6,295 |
) |
|
|
(5,063 |
) |
Payment of contingent convertible senior notes |
|
|
(283,729 |
) |
|
|
(5 |
) |
Excess tax benefits from share-based payment arrangements |
|
|
169 |
|
|
|
1,365 |
|
Proceeds from the exercise of stock options |
|
|
4,846 |
|
|
|
17,052 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(285,009 |
) |
|
|
13,349 |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash and cash equivalents |
|
|
(83 |
) |
|
|
713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(49,025 |
) |
|
|
(119,738 |
) |
Cash and cash equivalents at beginning of period |
|
|
108,046 |
|
|
|
203,319 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
59,021 |
|
|
$ |
83,581 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
6
MEDICIS PHARMACEUTICAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 amended Annual Report on Form
10-K/A 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 amended Annual Report on Form 10-K/A for the year ended
December 31, 2007.
2. RESTATEMENT OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On November 10, 2008, the Company restated its financial statements for the annual,
transition and quarterly periods in fiscal years 2003 through 2007 and the first and second
quarters of 2008 in its amended Form 10-K/A for the year ended December 31, 2007 and its
amended Forms 10-Q/A for the quarterly periods ended March 31, 2008 and June 30, 2008.
Within this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008,
the Company has restated its condensed consolidated financial statements for the comparative
three and nine month periods ended September 30, 2007 in conjunction with this restatement.
The restatement primarily relates to an error in the Companys interpretation and
application of Statement of Financial Accounting Standards No. 48, Revenue Recognition When
Right of Return Exists (SFAS 48), as its applies to a component of the Companys sales
return reserve calculations. During the third quarter of 2008, management determined that
its method of accounting for returns of short-dated and expired goods in the periods covered
by the financial statements was not in conformity with generally accepted accounting
principles, as the returns for expired product did not qualify for warranty or exchange
accounting and, accordingly, under SFAS 48, the Company should have deferred the full sales
price of the product for the amount of estimated returns.
The Companys prior accounting method with respect to sales return reserves accrued
estimated future returns of short-dated and expired product, which were expected to be
replaced with similar products, at replacement cost, based on the Companys view of the
economic impact of returns on its business, rather than deferring the gross sales price.
The replacement of short-dated and expired product,
7
which was treated as a warranty or an exchange, was reserved for based on the estimated cost
associated with the exchange. In the course of the Companys review and analysis, the
Company determined that although the exchanged product was similar, it was not of the same
quality, strictly due to dating, as the Company was replacing nearly-expired or expired product with
newer, fresher product. Therefore, in accordance with SFAS 48, the Company has revised its
reserve calculations to defer the gross sales value of the estimated product returns that
were expected to be replaced with similar products. The revised reserve calculations were developed based on
conditions that existed at the end of each reporting period and in certain cases were revised
based on the Companys actual return experience. Additionally,
because of the impact of the changes in the sales returns reserve, the Company recorded
adjustments to certain managed care, Medicaid and consumer rebate accruals and have also
reflected the related income tax effects of these adjustments. The Companys reserve for
estimated future returns was previously included as an allowance reducing accounts
receivable in the Companys condensed consolidated balance sheets. As a result of the
restatement, the reserve for estimated future returns has been classified within current
liabilities, rather than as an allowance reducing accounts receivable, in the accompanying
condensed consolidated balance sheets.
The restated condensed consolidated financial statements include other adjustments,
including adjustments related to conforming the Companys historical accounting policies to
current accounting policies, that were previously identified, but not previously recorded,
as they were not material, either individually or in the aggregate. While none of these
other adjustments is individually material, they are being made as part of the restatement
process. These other adjustments include the reclassification of certain amounts in prior
year financial statements to conform to the 2007 financial statement presentation, including
the reclassification of donated product to charitable organizations from selling, general
and administrative expenses to cost of product revenues.
The following is a summary of the effects of the restatement on the Companys condensed
consolidated statements of operations for the three and nine months ended September 30, 2007
and its condensed consolidated statements of cash flows for the nine months ended September
30, 2007:
8
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 2007
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As |
|
|
|
|
|
|
|
|
|
Previously |
|
|
Restatement |
|
|
As |
|
|
|
Reported |
|
|
Adjustments |
|
|
Restated |
|
Net product revenues |
|
$ |
116,532 |
|
|
$ |
(9,439 |
) |
|
$ |
107,093 |
|
Net contract revenues |
|
|
3,890 |
|
|
|
|
|
|
|
3,890 |
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
120,422 |
|
|
|
(9,439 |
) |
|
|
110,983 |
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues (1) |
|
|
17,461 |
|
|
|
1,122 |
|
|
|
18,583 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
102,961 |
|
|
|
(10,561 |
) |
|
|
92,400 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative (2) |
|
|
60,285 |
|
|
|
(1,408 |
) |
|
|
58,877 |
|
Research and development (3) |
|
|
7,354 |
|
|
|
|
|
|
|
7,354 |
|
Depreciation and amortization |
|
|
6,461 |
|
|
|
|
|
|
|
6,461 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
28,861 |
|
|
|
(9,153 |
) |
|
|
19,708 |
|
Interest and investment income |
|
|
9,842 |
|
|
|
|
|
|
|
9,842 |
|
Interest expense |
|
|
(2,396 |
) |
|
|
|
|
|
|
(2,396 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income tax |
|
|
36,307 |
|
|
|
(9,153 |
) |
|
|
27,154 |
|
Income tax expense |
|
|
13,547 |
|
|
|
(3,386 |
) |
|
|
10,161 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
22,760 |
|
|
$ |
(5,767 |
) |
|
$ |
16,993 |
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.41 |
|
|
$ |
(0.11 |
) |
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
0.34 |
|
|
$ |
(0.08 |
) |
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
Cash dividend declared per common share |
|
$ |
0.03 |
|
|
|
|
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
Basic common shares outstanding |
|
|
56,120 |
|
|
|
|
|
|
|
56,120 |
|
|
|
|
|
|
|
|
|
|
|
Diluted common shares outstanding |
|
|
71,155 |
|
|
|
|
|
|
|
71,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) amount excludes amortization of intangible assets
related to acquired products |
|
$ |
5,671 |
|
|
|
|
|
|
$ |
5,671 |
|
(2) amount includes share-based compensation expense |
|
$ |
4,744 |
|
|
|
|
|
|
$ |
4,744 |
|
(3) amount includes share-based compensation expense |
|
$ |
(215 |
) |
|
|
|
|
|
$ |
(215 |
) |
9
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2007
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As |
|
|
|
|
|
|
|
|
|
Previously |
|
|
Restatement |
|
|
As |
|
|
|
Reported |
|
|
Adjustments |
|
|
Restated |
|
Net product revenues |
|
$ |
314,805 |
|
|
$ |
(1,146 |
) |
|
$ |
313,659 |
|
Net contract revenues |
|
|
9,595 |
|
|
|
|
|
|
|
9,595 |
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
324,400 |
|
|
|
(1,146 |
) |
|
|
323,254 |
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues (1) |
|
|
41,969 |
|
|
|
3,442 |
|
|
|
45,411 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
282,431 |
|
|
|
(4,588 |
) |
|
|
277,843 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative (2) |
|
|
182,440 |
|
|
|
(3,728 |
) |
|
|
178,712 |
|
Impairment of intangible assets |
|
|
4,067 |
|
|
|
|
|
|
|
4,067 |
|
Research and development (3) |
|
|
22,508 |
|
|
|
|
|
|
|
22,508 |
|
Depreciation and amortization |
|
|
17,793 |
|
|
|
|
|
|
|
17,793 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
55,623 |
|
|
|
(860 |
) |
|
|
54,763 |
|
Interest and investment income |
|
|
28,100 |
|
|
|
|
|
|
|
28,100 |
|
Interest expense |
|
|
(7,622 |
) |
|
|
|
|
|
|
(7,622 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income tax |
|
|
76,101 |
|
|
|
(860 |
) |
|
|
75,241 |
|
Income tax expense |
|
|
28,530 |
|
|
|
(503 |
) |
|
|
28,027 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
47,571 |
|
|
$ |
(357 |
) |
|
$ |
47,214 |
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.85 |
|
|
$ |
(0.01 |
) |
|
$ |
0.84 |
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
0.73 |
|
|
$ |
|
|
|
$ |
0.73 |
|
|
|
|
|
|
|
|
|
|
|
Cash dividend declared per common share |
|
$ |
0.09 |
|
|
|
|
|
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
Basic common shares outstanding |
|
|
55,896 |
|
|
|
|
|
|
|
55,896 |
|
|
|
|
|
|
|
|
|
|
|
Diluted common shares outstanding |
|
|
71,353 |
|
|
|
|
|
|
|
71,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) amount excludes amortization of intangible assets
related to acquired products |
|
$ |
15,634 |
|
|
|
|
|
|
$ |
15,634 |
|
(2) amount includes share-based compensation expense |
|
$ |
15,646 |
|
|
|
|
|
|
$ |
15,646 |
|
(3) amount includes share-based compensation expense |
|
$ |
40 |
|
|
|
|
|
|
$ |
40 |
|
10
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2007
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As |
|
|
|
|
|
|
|
|
|
Previously |
|
|
Restatement |
|
|
As |
|
|
|
Reported |
|
|
Adjustments |
|
|
Restated |
|
Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
47,571 |
|
|
$ |
(357 |
) |
|
$ |
47,214 |
|
Adjustments to reconcile net income to net cash provided
by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
17,793 |
|
|
|
|
|
|
|
17,793 |
|
Amortization of deferred financing fees |
|
|
1,249 |
|
|
|
|
|
|
|
1,249 |
|
Impairment of intangible assets |
|
|
4,067 |
|
|
|
|
|
|
|
4,067 |
|
Loss on disposal of property and equipment |
|
|
19 |
|
|
|
|
|
|
|
19 |
|
Gain on sale of available-for-sale investments |
|
|
(49 |
) |
|
|
|
|
|
|
(49 |
) |
Share-based compensation expense |
|
|
15,686 |
|
|
|
|
|
|
|
15,686 |
|
Deferred income tax expense |
|
|
9,732 |
|
|
|
(404 |
) |
|
|
9,328 |
|
Tax benefit from exericise of stock options and
vesting of restricted stock awards |
|
|
2,664 |
|
|
|
|
|
|
|
2,664 |
|
Excess tax benefits from share-based payment
arrangements |
|
|
(1,365 |
) |
|
|
|
|
|
|
(1,365 |
) |
Decrease in provision for sales discounts
and chargebacks |
|
|
(14,877 |
) |
|
|
13,799 |
|
|
|
(1,078 |
) |
Amortization of (discount) premium on investments |
|
|
(2,405 |
) |
|
|
|
|
|
|
(2,405 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
35,952 |
|
|
|
|
|
|
|
35,952 |
|
Inventories |
|
|
(1,526 |
) |
|
|
|
|
|
|
(1,526 |
) |
Other current assets |
|
|
262 |
|
|
|
|
|
|
|
262 |
|
Accounts payable |
|
|
3,030 |
|
|
|
|
|
|
|
3,030 |
|
Reserve for sales returns |
|
|
|
|
|
|
(19,652 |
) |
|
|
(19,652 |
) |
Income taxes payable |
|
|
(3,325 |
) |
|
|
(98 |
) |
|
|
(3,423 |
) |
Other current liabilities |
|
|
2,557 |
|
|
|
6,712 |
|
|
|
9,269 |
|
Other liabilities |
|
|
10,503 |
|
|
|
|
|
|
|
10,503 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
127,538 |
|
|
|
|
|
|
|
127,538 |
|
Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(7,195 |
) |
|
|
|
|
|
|
(7,195 |
) |
Payments for purchase of product rights |
|
|
(30,090 |
) |
|
|
|
|
|
|
(30,090 |
) |
Purchase of available-for-sale investments |
|
|
(570,463 |
) |
|
|
|
|
|
|
(570,463 |
) |
Sale of available-for-sale investments |
|
|
173,014 |
|
|
|
|
|
|
|
173,014 |
|
Maturity of available-for-sale investments |
|
|
173,396 |
|
|
|
|
|
|
|
173,396 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(261,338 |
) |
|
|
|
|
|
|
(261,338 |
) |
Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payment of dividends |
|
|
(5,063 |
) |
|
|
|
|
|
|
(5,063 |
) |
Payment of contingent convertible senior notes |
|
|
(5 |
) |
|
|
|
|
|
|
(5 |
) |
Excess tax benefits from share-based payment
arrangements |
|
|
1,365 |
|
|
|
|
|
|
|
1,365 |
|
Proceeds from the exercise of stock options |
|
|
17,052 |
|
|
|
|
|
|
|
17,052 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
13,349 |
|
|
|
|
|
|
|
13,349 |
|
Effect of exchange rate on cash and cash equivalents |
|
|
713 |
|
|
|
|
|
|
|
713 |
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(119,738 |
) |
|
|
|
|
|
|
(119,738 |
) |
Cash and cash equivalents at beginning of period |
|
|
203,319 |
|
|
|
|
|
|
|
203,319 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
83,581 |
|
|
$ |
|
|
|
$ |
83,581 |
|
|
|
|
|
|
|
|
|
|
|
3. SHARE-BASED COMPENSATION
At September 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
11
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 September 30, 2008, total unrecognized
compensation cost related to stock option awards, to be recognized as expense subsequent to
September 30, 2008, was approximately $8.2 million and the related weighted-average period
over which it is expected to be recognized is approximately 1.2 years.
A summary of stock options activity within the Companys stock-based compensation plans
and changes for the nine months ended September 30, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
|
|
Number |
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
of Shares |
|
Price |
|
Term |
|
Value |
Balance at December 31, 2007 |
|
|
11,666,955 |
|
|
$ |
27.99 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
127,702 |
|
|
$ |
22.22 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(278,492 |
) |
|
$ |
15.59 |
|
|
|
|
|
|
|
|
|
Terminated/expired |
|
|
(724,458 |
) |
|
$ |
31.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008 |
|
|
10,791,707 |
|
|
$ |
28.02 |
|
|
|
4.0 |
|
|
$ |
2,482,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of options exercised during the nine months ended September 30,
2008 was $1,914,487. Options exercisable under the Companys share-based compensation plans
at September 30, 2008 were 9,864,369, with a weighted average exercise price of $27.44 a
weighted average remaining contractual term of 3.8 years, and an aggregate intrinsic value
of $2,482,577.
A summary of fully vested stock options and stock options expected to vest, based on
historical forfeiture rates, as of September 30, 2008, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
|
|
Number |
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
of Shares |
|
Price |
|
Term |
|
Value |
Outstanding |
|
|
9,907,890 |
|
|
$ |
28.20 |
|
|
|
4.0 |
|
|
$ |
2,040,430 |
|
Exercisable |
|
|
9,042,469 |
|
|
$ |
27.64 |
|
|
|
3.9 |
. |
|
$ |
2,040,430 |
|
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:
|
|
|
|
|
|
|
Nine Months Ended |
|
Nine Months Ended |
|
|
September 30, 2008 |
|
September 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.
12
The weighted average fair value of stock options granted during the nine months ended
September 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 nine months ended September 30, 2008,
827,330 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 nine months ended September 30, 2008, was approximately $1.7 million and $4.3
million, respectively. Share-based compensation expense related to all restricted stock
awards outstanding during the three months and nine months ended September 30, 2007, was
approximately $1.0 million and $2.8 million, respectively. As of September 30, 2008, the
total amount of unrecognized compensation cost related to non-vested restricted stock
awards, to be recognized as expense subsequent to September 30, 2008, was approximately
$24.3 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 September 30, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant-Date |
Non-vested Shares |
|
Shares |
|
Fair Value |
Non-vested at December 31, 2007 |
|
|
552,769 |
|
|
$ |
31.92 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
827,330 |
|
|
$ |
19.51 |
|
Vested |
|
|
(122,222 |
) |
|
$ |
31.57 |
|
Forfeited |
|
|
(50,677 |
) |
|
$ |
25.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at September 30, 2008 |
|
|
1,207,200 |
|
|
$ |
23.73 |
|
|
|
|
|
|
|
|
|
|
The total fair value of restricted shares vested during the nine months ended September
30, 2008 and the nine months ended September 30, 2007 was approximately $3.9 million and
$1.3 million, respectively.
4. 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
September 30, 2008, the Company has recorded the estimated fair value in available-for-sale
securities for short-term and long-term investments of approximately $248.1 million and
$93.4 million, respectively.
13
Available-for-sale securities consist of the following at September 30, 2008 (amounts
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEPTEMBER 30, 2008 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Corporate notes and bonds |
|
$ |
97,678 |
|
|
$ |
94 |
|
|
$ |
(1,444 |
) |
|
$ |
96,328 |
|
Federal agency notes and bonds |
|
|
168,405 |
|
|
|
461 |
|
|
|
(170 |
) |
|
|
168,696 |
|
Auction rate floating securities |
|
|
44,750 |
|
|
|
|
|
|
|
(4,825 |
) |
|
|
39,925 |
|
Asset-backed securities |
|
|
36,944 |
|
|
|
48 |
|
|
|
(395 |
) |
|
|
46,597 |
|
Commercial paper |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
$ |
347,777 |
|
|
$ |
603 |
|
|
$ |
(6,834 |
) |
|
$ |
341,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months and nine months ended September 30, 2008, the gross realized
gains on sales of available-for-sale securities totaled $73,275 and $1,134,731,
respectively, while gross losses of $0 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 nine months ended September
30, 2008, on available-for-sale securities included in stockholders equity totaled
$3,387,942 and $4,680,781, respectively. The amortized cost and estimated fair value of the
available-for-sale securities at September 30, 2008, by maturity, are shown below (amounts
in thousands):
|
|
|
|
|
|
|
|
|
|
|
SEPTEMBER 30, 2008 |
|
|
|
|
|
|
|
Estimated |
|
|
|
Cost |
|
|
Fair Value |
|
Available-for-sale |
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
215,575 |
|
|
$ |
214,765 |
|
Due after one year through five years |
|
|
87,452 |
|
|
|
86,856 |
|
Due after five years through 10 years |
|
|
|
|
|
|
|
|
Due after 10 years |
|
|
44,750 |
|
|
|
39,925 |
|
|
|
|
|
|
|
|
|
|
$ |
347,777 |
|
|
$ |
341,546 |
|
|
|
|
|
|
|
|
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
September 30, 2008, approximately $93.4 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 September 30, 2008, the Companys investments included auction rate floating
securities with a fair value of $39.9 million. 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, the Company recorded unrealized losses of $0.8 million during the
three months ended March 31, 2008, $0.5 million during the three months ended June 30, 2008
and $3.5 million during the three months ended September 30, 2008 on its auction rate
floating securities in accumulated other comprehensive (loss) income.
14
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 September 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 |
|
$ |
70,475 |
|
|
$ |
1,345 |
|
|
$ |
11,400 |
|
|
$ |
100 |
|
Federal agency notes and bonds |
|
|
79,365 |
|
|
|
170 |
|
|
|
|
|
|
|
|
|
Auction rate floating securities |
|
|
39,925 |
|
|
|
4,825 |
|
|
|
|
|
|
|
|
|
Asset-backed securities |
|
|
12,718 |
|
|
|
43 |
|
|
|
2,394 |
|
|
|
352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
$ |
202,483 |
|
|
$ |
6,383 |
|
|
$ |
13,794 |
|
|
$ |
452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 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.
5. 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 September 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 4). Therefore, the
fair values of these auction rate floating securities are estimated utilizing a discounted
cash flow analysis as of September 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.
15
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 $4.8 million in accumulated other
comprehensive (loss) income. The majority of the auction rate floating securities held by
the Company at September 30, 2008, totaling $39.9 million, were in securities collateralized
by student loan portfolios. These securities were included in long-term investments at
September 30, 2008 in the accompanying condensed consolidated balance sheets. As of
September 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 (loss) 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 8). During the three
and nine month periods ended September 30, 2008, the Company reduced the carrying value of
its investment in Revance and recorded a related charge to earnings of approximately $2.6
million and $5.5 million, respectively, 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 September 30, 2008.
The Companys assets measured at fair value on a recurring basis subject to the
disclosure requirements of SFAS No. 157 at September 30, 2008, were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting Date Using |
|
|
|
|
|
|
|
Quoted |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Active |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Markets |
|
|
Inputs |
|
|
Inputs |
|
|
|
Sept. 30, 2008 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Auction rate floating securities |
|
$ |
39,925 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
39,925 |
|
Other available-for-sale securities |
|
|
301,621 |
|
|
|
301,621 |
|
|
|
|
|
|
|
|
|
Investment in Revance |
|
|
6,492 |
|
|
|
|
|
|
|
|
|
|
|
6,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
|
$ |
348,038 |
|
|
$ |
301,621 |
|
|
$ |
|
|
|
$ |
46,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
16
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 for the
three and nine months ended September 30, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant |
|
|
|
Unobservable Inputs (Level 3) |
|
|
|
Auction Rate |
|
|
Investment |
|
|
|
Floating |
|
|
in |
|
|
|
Securities |
|
|
Revance |
|
Balance at June 30, 2008 |
|
$ |
43,620 |
|
|
$ |
9,086 |
|
Transfers to Level 3 |
|
|
|
|
|
|
|
|
Total gains (losses) included in earnings |
|
|
|
|
|
|
(2,594 |
) |
Total gains (losses) included in other
comprehensive (loss) income |
|
|
(3,545 |
) |
|
|
|
|
Purchases and settlements (net) |
|
|
(150 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008 |
|
$ |
39,925 |
|
|
$ |
6,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
(5,465 |
) |
Total gains (losses) included in other
comprehensive (loss) income |
|
|
(4,825 |
) |
|
|
|
|
Purchases and settlements (net) |
|
|
(56,900 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008 |
|
$ |
39,925 |
|
|
$ |
6,492 |
|
|
|
|
|
|
|
|
6. ACQUISITION OF LIPOSONIX
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.
The following is a summary of the components of the LipoSonix purchase price (in
millions):
|
|
|
|
|
Cash consideration |
|
$ |
150.0 |
|
Transaction costs |
|
|
3.6 |
|
|
|
|
|
|
|
$ |
153.6 |
|
|
|
|
|
17
The following is a summary of the estimated fair values of the net assets acquired (in millions):
|
|
|
|
|
Current assets |
|
$ |
2.1 |
|
Deferred tax assets, short-term |
|
|
3.8 |
|
Deferred tax assets, long-term |
|
|
14.9 |
|
Property and equipment |
|
|
0.7 |
|
Identifiable intangible assets |
|
|
9.4 |
|
In-process research and development |
|
|
30.5 |
|
Goodwill |
|
|
93.7 |
|
Accounts payable and other current liabilities |
|
|
(1.5 |
) |
|
|
|
|
|
|
$ |
153.6 |
|
|
|
|
|
The Company believes the fair values assigned to the assets acquired and liabilities
assumed are based on reasonable assumptions.
Identifiable intangible assets of $9.4 million include existing technology of $6.7
million, with an estimated amortizable life of ten years, and trademarks and trade names of
$2.7 million, with an estimated indefinite amortizable life.
The $30.5 million of acquired in-process research and development has been recognized
as in-process research and development expense in the Companys statement of operations
during the three months ended September 30, 2008. No tax benefit has been recognized
related to this charge.
The results of operations of LipoSonix are included in the Companys condensed
consolidated financial statements beginning on July 1, 2008.
Unaudited pro forma financial information for the combined Company, assuming the
Companys acquisition of LipoSonix occurred on January 1, 2007, excluding the in-process
research and development charge, is as follows (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, 2008 |
|
September 30, 2007 |
|
September 30, 2007 |
Net revenues |
|
$ |
382.5 |
|
|
$ |
111.0 |
|
|
$ |
323.3 |
|
Net income |
|
|
7.7 |
|
|
|
14.5 |
|
|
|
39.4 |
|
Diluted net income per share |
|
$ |
0.13 |
|
|
$ |
0.22 |
|
|
$ |
0.62 |
|
7. 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.
8. 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
18
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 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 and nine month periods ended September 30,
2008, the Company reduced the carrying value of its investment in Revance and recorded a
related charge to earnings of approximately $2.6 million and $5.5 million, respectively, 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 September 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.
9.
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
19
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.
10. 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.
11. 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
20
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.
Net revenues and the percentage of net revenues for each of the product categories are
as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
|
(Restated) |
|
Acne and
acne-related dermatological products |
|
$ |
66,289 |
|
|
$ |
56,180 |
|
|
$ |
232,806 |
|
|
$ |
166,003 |
|
Non-acne dermatological products |
|
|
34,080 |
|
|
|
43,778 |
|
|
|
113,695 |
|
|
|
130,085 |
|
Non-dermatological products |
|
|
15,056 |
|
|
|
11,024 |
|
|
|
35,278 |
|
|
|
27,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
115,425 |
|
|
$ |
110,982 |
|
|
$ |
381,779 |
|
|
$ |
323,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
(Restated) |
Acne and
acne-related dermatological products |
|
|
57 |
% |
|
|
51 |
% |
|
|
61 |
% |
|
|
52 |
% |
Non-acne dermatological products |
|
|
30 |
|
|
|
39 |
|
|
|
30 |
|
|
|
40 |
|
Non-dermatological products |
|
|
13 |
|
|
|
10 |
|
|
|
9 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12. INVENTORIES
The Company utilizes third parties to manufacture and package inventories held for
sale, takes title to certain inventories once manufactured, and warehouses such goods until
packaged for final distribution and sale. Inventories consist of salable products held at
the 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 September 30, 2008, there was approximately
$0.6 million of costs capitalized into inventory for products that have not yet received
regulatory approval. As of December 31, 2007, there were no costs capitalized into
inventory for products that have not yet received regulatory approval.
21
Inventories consist of the following at September 30, 2008 and December 31, 2007
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
Raw materials |
|
$ |
7,637 |
|
|
$ |
9,002 |
|
Finished goods |
|
|
18,981 |
|
|
|
24,789 |
|
Valuation reserve |
|
|
(1,185 |
) |
|
|
(3,818 |
) |
|
|
|
|
|
|
|
Total inventories |
|
$ |
25,433 |
|
|
$ |
29,973 |
|
|
|
|
|
|
|
|
13. 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.
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. |
22
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 million of fees and other origination costs related to the issuance of
the New Notes. The Company amortized these costs over the first five-year Put period, which
ran through June 4, 2008.
Holders of the New Notes were able to require the Company to repurchase all or a
portion of their New Notes on June 4, 2008, at 100% of the principal amount of the New
Notes, plus accrued and unpaid interest, including contingent interest, if any, to the date
of the repurchase, payable in cash. Holders of approximately $283.7 million of New Notes
elected to require the Company to repurchase their New Notes on June 4, 2008. The Company
paid $283.7 million, plus accrued and unpaid interest of approximately $2.2 million, to the
holders of New Notes that elected to require the Company to repurchase their New Notes. The
Company was also required to pay an accumulated deferred tax liability of approximately
$34.9 million related to the repurchased New Notes. Approximately $26.2 million of this
$34.9 million deferred tax liability, which was included in income taxes payable as of June
30, 2008, was paid during the three months ended September 30, 2008. The remaining $8.7
million of this deferred tax liability will be paid during the three months ended December
31, 2008. Following the repurchase of these New Notes, $181,000 of principal amount of New
Notes remained outstanding as of June 30, 2008 and September 30, 2008. The Company intends
to redeem the remaining $181,000 of principal amount of New Notes during the fourth quarter
of 2008 or during 2009, when practicable.
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 |
23
|
|
|
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 Class A common
stock. During the quarters ended September 30, 2008, 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.
14. INCOME TAXES
Income taxes are determined using an annual effective tax rate, which generally differs
from the U.S. Federal statutory rate, primarily because of state and local income taxes,
enhanced charitable contribution deductions for inventory, tax credits available in the
U.S., the treatment of certain share-based payments under SFAS 123R that are not designed to
normally result in tax deductions, various expenses that are not deductible for tax
purposes, 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 tax benefits in accordance with FIN 48.
Under FIN 48, tax benefits are recognized only if the tax position is more likely than
not of being sustained. The Company recognizes deferred tax assets and liabilities for
temporary differences between the financial reporting basis and the tax basis of its assets
and liabilities, along with net operating losses and credit carryforwards. The Company
records valuation allowances against deferred tax assets to reduce the net carrying value to
amounts that management believes is more likely than not to be realized.
At September 30, 2008 the Company has an unrealized tax loss of $14.8 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 $2.0
million to $5.3 million during the nine months ended September 30, 2008.
24
During the three months ended September 30, 2008 and September 30, 2007, the Company
made net tax payments of $36.9 million and $2.5 million, respectively. During the nine
months ended September 30, 2008 and September 30, 2007, the Company made net tax payments of
$67.1 million and $19.7 million, respectively.
The Company operates in multiple tax jurisdictions and is periodically subject to audit
in these jurisdictions. These audits can involve complex issues that may require an
extended period of time to resolve and may cover multiple years. The Company and its
domestic subsidiaries file a consolidated U.S. federal income tax return. Such returns have
either been audited or settled through statute expiration through fiscal 2004. The Internal
Revenue Service is currently conducting a limited scope examination of the Companys tax
return for the six-month Transition Period ending December 31, 2005. To date, no
adjustments have been proposed.
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 $3.4 million in unrecognized tax benefits, the
recognition of which would have a favorable effect of $2.7 million on the Companys
effective tax rate. The amount of unrecognized tax benefits decreased $0.9 million from
$3.4 million to $2.5 million during the nine months ended September 30, 2008 as part of the
settlement with the Arizona Department of Revenue. Recognition of the $2.5 million
unrecognized tax benefits would have a favorable effect of $2.1 million on the Companys
effective tax rate. During the next twelve months, the Company estimates that it is
reasonably possible that the liability for unrecognized tax benefits may decrease by $1.3
million.
The Company recognizes accrued interest and penalties, if applicable, related to
unrecognized tax benefits in income tax expense. The Company has accrued approximately
$280,000 and $265,000 (net of tax benefits) for the payment of interest and penalties at
December 31, 2007, and September 30, 2008, respectively.
15. DIVIDENDS DECLARED ON COMMON STOCK
On September 17, 2008, the Company declared a cash dividend of $0.04 per issued and
outstanding share of its Class A common stock payable on October 31, 2008 to stockholders of
record at the close of business on October 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 September 30, 2008.
16. 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) were dependent on factors such as the market price of
Medicis Class A common stock, economic and market conditions, and corporate and regulatory
requirements. The plan terminated on August 29, 2008, as it was scheduled to terminate on
the earlier of the first anniversary of the plan or at the time when the aggregate purchase
limit was reached. No shares were repurchased under this plan.
25
17. COMPREHENSIVE (LOSS) INCOME
Total comprehensive (loss) income includes net (loss) income and other comprehensive
(loss) income, which consists of foreign currency translation adjustments and unrealized
gains and losses on available-for-sale investments. Total comprehensive (loss) income for
the three months and nine months ended September 30, 2008 was $(18.1) million and $14.1
million, respectively. Total comprehensive income for the three months and nine months
ended September 30, 2007 was $18.0 million and $48.4 million, respectively.
18. NET (LOSS) INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net (loss) income
per common share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
|
(Restated) |
|
BASIC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(14,657 |
) |
|
$ |
16,993 |
|
|
$ |
18,878 |
|
|
$ |
47,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
common shares outstanding |
|
|
56,698 |
|
|
|
56,120 |
|
|
|
56,517 |
|
|
|
55,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income
per common share |
|
$ |
(0.26 |
) |
|
$ |
0.30 |
|
|
$ |
0.33 |
|
|
$ |
0.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(14,657 |
) |
|
$ |
16,993 |
|
|
$ |
18,878 |
|
|
$ |
47,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-effected interest
expense and
issue costs related to
Old Notes |
|
|
|
|
|
|
669 |
|
|
|
|
|
|
|
2,284 |
|
Tax-effected interest
expense and
issue costs related to
New Notes |
|
|
|
|
|
|
841 |
|
|
|
|
|
|
|
2,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income assuming
dilution |
|
$ |
(14,657 |
) |
|
$ |
18,503 |
|
|
$ |
18,878 |
|
|
$ |
52,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
common shares |
|
|
56,698 |
|
|
|
56,120 |
|
|
|
56,517 |
|
|
|
55,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Old Notes |
|
|
|
|
|
|
5,823 |
|
|
|
|
|
|
|
5,823 |
|
New Notes |
|
|
|
|
|
|
7,325 |
|
|
|
|
|
|
|
7,325 |
|
Stock options and restricted
stock |
|
|
|
|
|
|
1,887 |
|
|
|
841 |
|
|
|
2,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
common shares assuming dilution |
|
|
56,698 |
|
|
|
71,155 |
|
|
|
57,358 |
|
|
|
71,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income
per common share |
|
$ |
(0.26 |
) |
|
$ |
0.26 |
|
|
$ |
0.33 |
|
|
$ |
0.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
26
Due to the Companys net loss during the three months ended September 30, 2008, a
calculation of diluted earnings per share is not required. For the three months ended
September 30, 2008, potentially dilutive securities consisted of restricted stock and stock
options convertible into 633,923 shares in the aggregate, and 5,822,551 and 4,685 shares of
common stock, issuable upon conversion of the Old Notes and New Notes, respectively.
The diluted net income per common share computation for the nine months ended September
30, 2008 excludes 9,947,263 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
nine months ended September 30, 2008 also excludes 5,822,551 and 4,172,353 shares of common
stock, issuable upon conversion of the Old Notes and New Notes, respectively, as they were
anti-dilutive.
The diluted net income per common share computation for the three and nine months ended
September 30, 2007 excludes 3,509,873 and 3,599,647 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.
19. COMMITMENTS AND CONTINGENCIES
Lease Exit Costs
During July 2006, the Company executed a lease agreement for new headquarter office
space. The first phase is for approximately 150,000 square feet with the right to expand.
The term of the lease is twelve years. Occupancy of the new headquarter office space, which
is located approximately one mile from the Companys prior headquarter office space in
Scottsdale, Arizona, occurred in the quarter ended September 30, 2008.
In connection with occupancy of the new headquarter office, the Company ceased use of
the prior headquarter office in July 2008, which consists of approximately 75,000 square
feet of office space, at an average annual expense of approximately $2.1 million, under an
amended lease agreement that expires in December 2010. The Company has adopted SFAS 146,
Accounting for Costs Associated with Exit or Disposal Activities, effective for exit or
disposal activities initiated after December 31, 2002. Under SFAS 146, a liability for the
costs associated with an exit or disposal activity is recognized when the liability is
incurred. In accordance with SFAS 146, the Company recorded lease exit costs of
approximately $4.8 million during the three months ended September 30, 2008 consisting of
the initial liability of $4.7 million and accretion expense of $0.1 million. These amounts
were recorded as selling, general and administrative expenses in the Companys condensed
consolidated statements of operations. The Company has not recorded any other costs related
to the lease for the prior headquarters.
As of September 30, 2008, approximately $4.5 million of lease exit costs remain accrued
and are expected to be paid by December 2010 of which $1.9 million is classified in other
current liabilities and $2.6 million is classified in other liabilities. Although the
facilities are no longer in use by the Company, the lease exit cost accrual has not been
offset by an adjustment for estimated sublease rentals. After considering sublease market
information as well as factors specific to the lease, the Company concluded it was probable
it would be unable to reasonably obtain sublease rentals for the prior headquarters and
therefore it would not be subleased for the remaining lease term. The Company will continue
to monitor the sublease market conditions and reassess the impact on the lease exit cost
accrual.
27
The following is a summary of the activity in the liability for lease exit costs for
the three months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability as of |
|
Amounts Charged |
|
Cash Payments |
|
Cash Received |
|
Liability as of |
|
|
June 30, 2008 |
|
to Expense |
|
Made |
|
from Sublease |
|
Sept. 30, 2008 |
Lease exit costs
liability |
|
$ |
|
|
|
$ |
4,812,928 |
|
|
$ |
(356,352 |
) |
|
$ |
|
|
|
$ |
4,456,576 |
|
Legal Matters
On October 3, 10, and 27, 2008, purported stockholder class action lawsuits styled
Andrew Hall v. Medicis Pharmaceutical Corp., et al. (Case No. 2:08-cv-01821-MHB);
Steamfitters Local 449 Pension Fund v. Medicis Pharmaceutical Corp., et al. (Case No.
2:08-cv-01870-DKD); and Darlene Oliver v. Medicis Pharmaceutical Corp., et al. (Case No.
2:08-cv-01964-JAT) were filed in the United States District Court for the District of
Arizona on behalf of stockholders who purchased securities of the Company during the period
between October 30, 2003 and approximately September 24, 2008. The complaints name as
defendants Medicis Pharmaceutical Corp. and the Companys Chief Executive Officer and
Chairman of the Board, Jonah Shacknai, the Companys Chief Financial Officer, Executive Vice
President and Treasurer, Richard D. Peterson, and the Companys Chief Operating Officer and
Executive Vice President, Mark A. Prygocki. Plaintiffs claims arise in connection with the
restatement of the Companys annual, transition, and quarterly periods in fiscal years 2003
through 2007 and the first and second quarters of 2008. The complaints allege violations of
federal securities laws, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and
Rule 10b-5, based on alleged material misrepresentations to the market that had the effect
of artificially inflating the market price of the Companys stock. The plaintiffs seek to
recover unspecified damages and costs, including counsel and expert fees. The Company has
discussed the matters relating to the restatement with the SECs Division of Enforcement and
has committed to cooperating fully with the SEC in connection with any questions they may
have.
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, 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.
28
On May 25, 2006, Prasco Laboratories of Cincinnati, Ohio filed suit against the Company
and Imaginative Research Associates (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
Appeals 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.
20. 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 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
29
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. The Company will apply SFAS No.
141R to business combinations for which the acquisition date is on or after January 1, 2009.
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 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.
In
June 2008, the FASB reached a consensus on EITF 07-5, Determining
Whether an Instrument (or Embedded Feature) Is Indexed to an
Entitys Own Stock. EITF 07-5 addresses the determination of whether an instrument (or an embedded feature) is indexed to an entitys own stock. EITF 07-5 is effective for fiscal years beginning after December 15, 2008.
The Company is currently evaluating EITF 07-5 and the impact, if any, on its consolidated results of operations and financial condition.
In October 2008, the FASB issued FSP 157-3, Determining the Fair Value of a Financial
Asset When the Market for That Asset is Not Active. FSP 157-3 clarifies the application of
SFAS No. 157, Fair Value Measurements, in a market that is not active and provides an
example to illustrate key considerations in determining fair value of financial assets when
the market for that financial asset is not active. FSP 157-3
30
applies to financial assets within the scope of accounting pronouncements that
require or permit fair value measurements in accordance with SFAS No. 157. FSP 157-3 was
effective upon issuance and included prior periods for which financial statements had not
been issued. The application of FSP 157-3 did not have a material impact on the Companys
consolidated financial statements.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Restatement
On November 10, 2008, we restated our financial statements for the annual, transition
and quarterly periods in fiscal years 2003 through 2007 and the first and second quarters of
2008 in our amended Form 10-K/A for the year ended December 31, 2007 and our amended Forms
10-Q/A for the quarterly periods ended March 31, 2008 and June 30, 2008. Within this
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008, we have
restated our condensed consolidated financial statements for the comparative three and nine
month periods ended September 30, 2007 in conjunction with this restatement.
The restatement primarily relates to an error in our interpretation and application of
Statement of Financial Accounting Standards No. 48, Revenue Recognition When Right of Return
Exists (SFAS 48), as it applies to a component of our sales return reserve calculations.
During the third quarter of 2008, management determined that the method of accounting for
returns of short dated and expired goods in the periods covered by the financial statements
was not in conformity with generally accepted accounting principles, as the returns for
expired product did not qualify for warranty or exchange accounting and, accordingly, under
SFAS 48, the Company should have deferred the full sales price of the product for the amount
of estimated returns.
Our prior accounting method with respect to sales return reserves accrued estimated
future returns of short-dated and expired products, which were expected to be replaced with
similar products, at replacement cost, based on our view of the economic impact of returns
on our business, rather than deferring the gross price. The replacement of short-dated and
expired products, which was treated as a warranty or an exchange, was reserved for based on the estimated
cost associated with the exchange. In the course of our review and analysis, we determined
that, although the exchanged product was similar, it was not of the same quality, strictly
due to dating, as we were replacing nearly-expired or expired product with newer/fresher product.
Therefore, in accordance with SFAS 48, we have revised our reserve calculations to defer the
gross sales value of the estimated product returns that were expected to be replaced with
similar products. The revised reserve calculations were developed based on conditions that existed at
the end of each reporting period and in certain cases were revised
based on the Companys actual return experience. Additionally, because of the impact of the changes in the
sales returns reserve, we recorded adjustments to certain managed care, Medicaid and
consumer rebate accruals and have also reflected the related income tax effects of these
adjustments. In addition, related to the modification of the reserve calculation
methodology, the reserve for estimated future returns has been classified within current
liabilities rather than as an allowance reducing accounts receivable.
The restated condensed consolidated financial statements include other adjustments,
including adjustments related to conforming our historical accounting policies to current
accounting policies, that were previously identified, but not previously recorded, as they
were not material, either individually or in the aggregate. While none of these other
adjustments is individually material, they are being made as part of the restatement
process. These other adjustments include the reclassification of certain amounts in prior
year financial statements to conform to the 2007 financial statement presentation, including
the reclassification of donated product to charitable organizations from selling, general
and administrative expenses to cost of product revenues.
Note 2 to our condensed consolidated financial statements discloses the nature of the
restatement adjustments and details the impact of the restatement adjustments on our
condensed consolidated financial statements for the three and nine months ended September
30, 2007.
Throughout the following MD&A, all referenced amounts for the three and nine months
ended September 30, 2007 reflect the balances and amounts on a restated basis.
31
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 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.
32
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 nine months ended
September 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 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.
33
During the three and nine month periods ended September 30, 2008, we reduced the
carrying value of our investment in Revance and recorded a related charge to earnings of
approximately $2.6 million and $5.5 million, respectively, 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 September 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 approximately $283.7 million
of New Notes elected to require us to repurchase their New Notes on June 4, 2008. We paid
$283.7 million, plus accrued and unpaid interest of approximately $2.2 million, to the
holders of New Notes that elected to require us to repurchase their New Notes. We also were
required to pay an accumulated deferred tax liability of approximately $34.9 million related
to the repurchased New Notes. Approximately $26.2 million of this $34.9 million deferred
tax liability, which was included in income taxes payable in our condensed consolidated
balance sheets as of June 30, 2008, was paid during the three months ended September 30,
2008. The remaining $8.7 million of this deferred tax liability will be paid during the
three months ended December 31, 2008. Following the repurchase of these New Notes, $181,000
of principal amount of New Notes remained outstanding as of June 30, 2008 and September 30,
2008. We intend to redeem the remaining $181,000 of principal amount of New Notes during
the fourth quarter of 2008 of during 2009, when practicable.
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
U.S.
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.
34
As part of the acquisition of LipoSonix, the estimated fair value of LipoSonix
in-process research and development was determined to be $30.5 million. This $30.5 million
amount was recognized as in-process research and development expense during the three months
ended September 30, 2008.
The operating results of LipoSonix for the three months ended September 30, 2008 are
included in our condensed consolidated statement of operations for the full quarterly
period, as the acquisition closed on July 1, 2008. The operating results of LipoSonix are
not included in our condensed consolidated statement of operations for any other periods.
Lease Exit Costs Related to Our Previous Headquarters Facility
In connection with occupancy of our new headquarter office, we ceased use of the prior
headquarter office, which consists of approximately 75,000 square feet of office space, at
an average annual expense of approximately $2.1 million, under an amended lease agreement
that expires in December 2010. We have adopted SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities, effective for exit or disposal activities initiated after
December 31, 2002. Under SFAS 146, a liability for the costs associated with an exit or
disposal activity is recognized when the liability is incurred. In accordance with SFAS
146, we recorded lease exit costs of approximately $4.8 million during the three months
ended September 30, 2008 consisting of the initial liability of $4.7 million and accretion
expense of $0.1 million. These amounts were recorded as selling, general and administrative
expenses in our condensed consolidated statements of operations.
Results of Operations
The following table sets forth certain data as a percentage of net revenues for the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
NINE MONTHS ENDED |
|
|
SEPTEMBER 30, |
|
SEPTEMBER 30, |
|
|
2008 (a) |
|
2007 (b) |
|
2008 (c) |
|
2007 (d) |
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
(Restated) |
Net revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Gross profit (e) |
|
|
90.6 |
|
|
|
83.3 |
|
|
|
91.8 |
|
|
|
86.0 |
|
Operating expenses |
|
|
100.8 |
|
|
|
65.5 |
|
|
|
82.7 |
|
|
|
69.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
(10.2 |
) |
|
|
17.8 |
|
|
|
9.1 |
|
|
|
17.0 |
|
Other expense |
|
|
2.2 |
|
|
|
|
|
|
|
1.4 |
|
|
|
|
|
Interest and investment
(income) expense, net |
|
|
(2.1 |
) |
|
|
(6.7 |
) |
|
|
(3.7 |
) |
|
|
(6.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income tax
expense |
|
|
(10.3 |
) |
|
|
24.5 |
|
|
|
11.4 |
|
|
|
23.3 |
|
Income tax expense |
|
|
2.4 |
|
|
|
9.2 |
|
|
|
6.5 |
|
|
|
8.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
(12.7 |
)% |
|
|
15.3 |
% |
|
|
4.9 |
% |
|
|
14.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Included in operating expenses is $30.5 million (26.4% of net revenues) of
acquired in-process research and development expense related to our acquisition of
LipoSonix, $4.8 million (4.2% of net revenues) of lease exit costs related to our
previous headquarters facility and $4.1 million (3.6% of net revenues) of compensation
expense related to stock options and restricted stock. |
|
(b) |
|
Included in operating expenses is $4.5 million (4.1% of net revenues) of
compensation expense related to stock options and restricted stock and $2.2 million
(1.9% of net revenues) of professional fees related to the strategic collaboration with
Hyperion Therapeutics, Inc. (Hyperion). |
|
(c) |
|
Included in operating expenses is $30.5 million (8.0% of net revenues) of
acquired in-process research and development expense related to our acquisition of
LipoSonix, $25.0 million (6.5% of net revenues) paid to Ipsen upon the FDAs acceptance
of Ipsens BLA for RELOXIN®, $13.2 million (3.5% of net revenues) of
compensation expense related to stock options and restricted stock and $4.8 million
(1.3% of net revenues) of lease exit costs related to our previous headquarters
facility. |
|
(d) |
|
Included in operating expenses is $15.7 million (4.9% of net revenues) of
compensation expense related to stock options and restricted stock, $4.1 million (1.3%
of net revenues) for the write-down of an intangible asset related to OMNICEF®
and $2.2 million (0.7% of net revenues) of professional fees related to the
strategic collaboration with Hyperion. |
|
(e) |
|
Gross profit does not include amortization of the related intangibles as such
expense is included in operating expenses.
|
35
Three Months Ended September 30, 2008 Compared to the Three Months Ended September 30, 2007
Net Revenues
The following table sets forth the net revenues for the three months ended September
30, 2008 (the third quarter of 2008) and the net revenues for the three months ended
September 30, 2007 (the third quarter of 2007), along with the percentage of net revenues
and percentage point change for each of our product categories (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third |
|
|
Third |
|
|
|
|
|
|
|
|
|
Quarter |
|
|
Quarter |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
|
|
|
|
Net product revenues |
|
$ |
110.6 |
|
|
$ |
107.1 |
|
|
$ |
3.5 |
|
|
|
3.3 |
% |
Net contract revenues |
|
$ |
4.8 |
|
|
$ |
3.9 |
|
|
$ |
0.9 |
|
|
|
24.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
115.4 |
|
|
$ |
111.0 |
|
|
$ |
4.4 |
|
|
|
4.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third |
|
|
Third |
|
|
|
|
|
|
|
|
|
Quarter |
|
|
Quarter |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
|
|
|
|
Acne and acne-related
dermatological products |
|
$ |
66.3 |
|
|
$ |
56.2 |
|
|
$ |
10.1 |
|
|
|
18.0 |
% |
Non-acne dermatological
products |
|
|
34.1 |
|
|
|
43.8 |
|
|
|
(9.7 |
) |
|
|
(22.2 |
)% |
Non-dermatological products
(including contract revenues) |
|
|
15.0 |
|
|
|
11.0 |
|
|
|
4.0 |
|
|
|
36.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
115.4 |
|
|
$ |
111.0 |
|
|
$ |
4.4 |
|
|
|
4.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third |
|
Third |
|
Percentage |
|
|
Quarter |
|
Quarter |
|
Point |
|
|
2008 |
|
2007 |
|
Change |
|
|
|
|
|
|
(Restated) |
|
|
|
|
Acne and acne-related
dermatological products |
|
|
57.4 |
% |
|
|
50.6 |
% |
|
|
6.8 |
% |
Non-acne dermatological
products |
|
|
29.6 |
% |
|
|
39.4 |
% |
|
|
(9.8 |
)% |
Non-dermatological products
(including contract revenues) |
|
|
13.0 |
% |
|
|
10.0 |
% |
|
|
3.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues associated with our acne and acne-related dermatological products
increased by $10.1 million, or 18.0%, and by 6.8 percentage points as a percentage of net
revenues during the third quarter of 2008 as compared to the third quarter of 2007 primarily
as a result of the increased sales of TRIAZ® and DYNACIN®. Net
revenues associated with our non-acne dermatological products decreased as a percentage of
net revenues, and decreased in net dollars by 22.2% during the third quarter of 2008 as
compared to the third quarter of 2007, primarily due to decreased sales of
RESTYLANE® due to economic and competitive pressures in the marketplace. Net
revenues associated with our non-dermatological products increased by $4.0 million, or
36.6%, and by 3.0 percentage points as a percentage of net revenues during the third quarter
of 2008 as compared to the third quarter of 2007, primarily due to an increase in sales of
BUPHENYL® and an increase in contract revenue.
36
The restatement had the following affect on the previously-reported net revenues for
the third quarter of 2007:
|
|
|
|
|
|
|
Third Quarter |
|
|
|
2007 |
|
|
|
(in millions) |
|
Net revenues, as previously reported |
|
$ |
120.4 |
|
Restatement adjustments: |
|
|
|
|
Sales return reserve adjustment |
|
|
(10.8 |
) |
Other miscellaneous adjustments |
|
|
1.4 |
|
|
|
|
|
Net revenues, as restated |
|
$ |
111.0 |
|
|
|
|
|
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 third quarter of 2008 and 2007 was approximately
$5.5 million and $5.7 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 third quarter of 2008 and 2007,
along with the percentage of net revenues represented by such gross profit (dollar amounts
in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third |
|
Third |
|
|
|
|
|
|
Quarter |
|
Quarter |
|
|
|
|
|
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
104.6 |
|
|
$ |
92.4 |
|
|
$ |
12.2 |
|
|
|
13.2 |
% |
% of net revenues |
|
|
90.6 |
% |
|
|
83.3 |
% |
|
|
|
|
|
|
|
|
The increase in gross profit during the third quarter of 2008, compared to the third
quarter of 2007, was due to the increase in our net revenues and the effect of an increase
in our inventory valuation reserve of approximately $4.7 million during the third quarter of
2007, which decreased gross profit during the third quarter of 2007. The increase in our
inventory valuation reserve during the third quarter of 2007 was primarily related to
certain inventories that, during the third quarter of 2007, were determined to be unsalable.
This increase in our inventory valuation reserve during the third quarter of 2007 decreased
gross profit as a percentage of net revenues by approximately 4.2 percentage points. In
addition, the amount of expense related to the cost of product donated to charitable
organizations, which is a reduction of gross profit, decreased from $1.4 million during the
third quarter of 2007 to $0.6 million during the third quarter of 2008.
37
The restatement had the following effect on the previously-reported gross profit for
the third quarter of 2007:
|
|
|
|
|
|
|
Third Quarter |
|
|
|
2007 |
|
|
|
(in millions) |
|
Gross profit, as previously reported
|
|
$ |
103.0 |
|
Restatement adjustments: |
|
|
|
|
Net revenue restatement adjustments |
|
|
(9.4 |
) |
Reclassification of donated product from
selling, general and administrative expense
to cost of product revenues |
|
|
(1.4 |
) |
Other |
|
|
0.2 |
|
|
|
|
|
Gross profit, as restated |
|
$ |
92.4 |
|
|
|
|
|
Selling, General and Administrative Expenses
The following table sets forth our selling, general and administrative expenses for the
third quarter of 2008 and 2007, along with the percentage of net revenues represented by
selling, general and administrative expenses (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third |
|
Third |
|
|
|
|
|
|
Quarter |
|
Quarter |
|
|
|
|
|
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
$ |
71.6 |
|
|
$ |
58.9 |
|
|
$ |
12.7 |
|
|
|
21.6 |
% |
% of net revenues |
|
|
62.0 |
% |
|
|
53.1 |
% |
|
|
|
|
|
|
|
|
Share-based compensation expense
included in selling, general and
administrative |
|
$ |
4.0 |
|
|
$ |
4.7 |
|
|
$ |
(0.7 |
) |
|
|
(15.3 |
)% |
The increase in selling, general and administrative expenses during the third quarter
of 2008 from the third quarter of 2007 was attributable to approximately $3.6 million of
increased personnel costs, primarily related to an increase in the number of employees from
465 as of September 30, 2007 to 577 as of September 30, 2008 and the effect of the annual
salary increase that occurred during February 2008, $4.8 million related to a lease
retirement obligation recorded during the third quarter of 2008 related to our prior
headquarters location, $4.0 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 $0.3 million of increased other additional selling, general and
administrative costs incurred during the third quarter of 2008. We expect to continue to
incur legal and other professional fees during the fourth quarter of 2008 as a result of
patent protection related to our SOLODYN® and VANOS® products and the
recent purported stockholder class action lawsuits styled Andrew Hall v. Medicis
Pharmaceutical Corp., et al. (Case No. 2:08-cv-01821-MHB); Steamfitters Local 449 Pension
Fund v. Medicis Pharmaceutical Corp., et al. (Case No. 2:08-cv-01870-DKD); and Darlene
Oliver v. Medicis Pharmaceutical Corp., et al. (Case No. 2:08-cv-01964-JAT).
38
The restatement had the following effect on the previously-reported selling, general
and administrative expense for the third quarter of 2007:
|
|
|
|
|
|
|
Third Quarter |
|
|
|
2007 |
|
|
|
(in millions) |
|
Selling, general and administrative expense,
as previously reported |
|
$ |
60.3 |
|
Restatement adjustment: |
|
|
|
|
Reclassification of donated product from
selling, general and administrative expense
to cost of product revenues |
|
|
(1.4 |
) |
|
|
|
|
Selling, general and administrative expense,
as restated |
|
$ |
58.9 |
|
|
|
|
|
Research and Development Expenses
The following table sets forth our research and development expenses for the third
quarter of 2008 and 2007 (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third |
|
Third |
|
|
|
|
|
|
Quarter |
|
Quarter |
|
|
|
|
|
|
2008 |
|
2007 |
|
$ Change |
|
% Change |
Research and development |
|
$ |
7.1 |
|
|
$ |
7.4 |
|
|
$ |
(0.3 |
) |
|
|
(2.9 |
)% |
Share-based compensation
expense included in
research and development |
|
$ |
0.1 |
|
|
$ |
(0.2 |
) |
|
$ |
0.3 |
|
|
|
151.5 |
% |
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 $75.0 million upon the FDAs approval of
RELOXIN®.
In-Process Research and Development Expense
On July 1, 2008, we acquired LipoSonix, a medical device company developing
non-invasive body sculpting technology. As part of the acquisition, we recorded a $30.5
million charge for acquired in-process research and development during the third quarter of
2008. No income tax benefit was recognized related to this charge. See Note 6 in our
accompanying condensed consolidated financial statements for further discussion on our
acquisition of LipoSonix.
Depreciation and Amortization Expenses
Depreciation and amortization expenses during the third quarter of 2008 increased $0.6
million, or 9.5%, to $7.1 million from $6.5 million during the third quarter of 2007. This
increase was primarily due to depreciation incurred in the third quarter of 2008 related to
our new ERP system and our new headquarters facility.
Other Expense
Other expense of $2.6 million recognized during the third 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
39
value of the investment using the hypothetical liquidation at book value approach as of
September 30, 2008.
Interest and Investment Income
Interest and investment income during the third quarter of 2008 decreased $6.4 million,
or 65.1%, to $3.4 million from $9.8 million during the third 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 our $150.0 million acquisition of LipoSonix in July 2008, and
a decrease in the interest rates achieved by our invested funds during the third quarter of
2008. We expect interest and investment income to be lower in the fourth quarter of 2008 as
compared to the fourth quarter 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 and the $150.0 million
acquisition of LipoSonix in July 2008. See Note 13 in our accompanying condensed
consolidated financial statements for further discussion on the New Notes.
Interest Expense
Interest expense during the third quarter of 2008 decreased $1.3 million, to $1.1
million during the third quarter of 2008 from $2.4 million during the third quarter of 2007.
Our interest expense during the third quarter of 2008 consisted of interest expense on our
Old Notes, which accrue interest at 2.5% per annum and our New Notes, which accrue interest
at 1.5% per annum. Our interest expense during the third quarter of 2007 consisted of
interest expense on our Old Notes, our New Notes, and amortization of fees and other
origination costs related to the issuance of the New Notes. The decrease in interest
expense during the third quarter of 2008 as compared to the third 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 New Notes becoming fully
amortized during the second quarter of 2008. See Note 13 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 fourth quarter of 2008 as compared to the fourth
quarter 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
Our effective tax rate for the third quarter of 2008 was (22.8)%, as compared to 37.4%
for the third 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. We recorded a tax provision in spite of the pre-tax loss for the third quarter
of 2008 as no tax benefits were recorded related to the charge associated with the reduction
in carrying value of our investment in Revance or on the in-process research and development
charge related to our acquisition of LipoSonix.
The effect of the restatement on income tax expense for the third quarter of 2007 was a
decrease of $3.4 million, due to a decrease of $9.2 million of pre-tax income as a result of
the restatement. The effect of the restatement on the effective tax rate for the third
quarter of 2007 was an increase from 37.3% to 37.4%.
40
Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007
Net Revenues
The following table sets forth our net revenues for the nine months ended September 30,
2008 (the 2008 nine months) and the nine months ended September 30, 2007 (the 2007 nine
months), along with the percentage of net revenues and percentage point change for each of
our product categories (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Nine |
|
|
2007 Nine |
|
|
|
|
|
|
|
|
|
Months |
|
|
Months |
|
|
$ Change |
|
|
%
Change |
|
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
|
|
|
|
Net product revenues |
|
$ |
368.7 |
|
|
$ |
313.7 |
|
|
$ |
55.0 |
|
|
|
17.5 |
% |
Net contract revenues |
|
$ |
13.1 |
|
|
$ |
9.6 |
|
|
$ |
3.5 |
|
|
|
36.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
381.8 |
|
|
$ |
323.3 |
|
|
$ |
58.5 |
|
|
|
18.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Nine |
|
|
2007 Nine |
|
|
|
|
|
|
|
|
|
Months |
|
|
Months |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
|
|
|
|
Acne and acne-related
dermatological products |
|
$ |
232.8 |
|
|
$ |
166.0 |
|
|
$ |
66.8 |
|
|
|
40.2 |
% |
Non-acne dermatological
products |
|
|
113.7 |
|
|
|
130.1 |
|
|
|
(16.4 |
) |
|
|
(12.6 |
)% |
Non-dermatological products
(including contract revenues) |
|
|
35.3 |
|
|
|
27.2 |
|
|
|
8.1 |
|
|
|
29.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
381.8 |
|
|
$ |
323.3 |
|
|
$ |
58.5 |
|
|
|
18.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
2008 Nine |
|
2007 Nine |
|
Point |
|
|
Months |
|
Months |
|
Change |
|
|
|
|
|
|
(Restated) |
|
|
|
|
Acne and acne-related
dermatological products |
|
|
61.0 |
% |
|
|
51.4 |
% |
|
|
9.6 |
% |
Non-acne dermatological
products |
|
|
29.8 |
% |
|
|
40.2 |
% |
|
|
(10.4 |
)% |
Non-dermatological products
(including contract revenues) |
|
|
9.2 |
% |
|
|
8.4 |
% |
|
|
0.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our total net revenues increased during the 2008 nine 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 $66.8 million, or 40.2%, and by 9.6
percentage points as a percentage of net revenues during the 2008 nine months as compared to
the 2007 nine 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 12.6% during the 2008 nine months as
compared to the 2007 nine months, primarily due to decreased sales of RESTYLANE®
due to economic and competitive pressures in the marketplace. Net revenues associated with
our non-dermatological products increased by $8.1 million, or 29.9%, and by 0.8 percentage
points as a percentage of net revenues during the 2008 nine months as compared to the 2007
nine months, primarily due to an increase in sales of BUPHENYL® and
AMMONUL® and an increase in contract revenue.
41
The restatement had the following effect on the previously-reported net revenues for
the 2007 nine months:
|
|
|
|
|
|
|
2007 |
|
|
|
Nine Months |
|
|
|
(in millions) |
|
Net revenues, as previously reported |
|
$ |
324.4 |
|
Restatement adjustments: |
|
|
|
|
Sales return reserve adjustment |
|
|
(1.9 |
) |
Other miscellaneous adjustments |
|
|
0.8 |
|
|
|
|
|
Net revenues, as restated |
|
$ |
323.3 |
|
|
|
|
|
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 nine months and 2007 nine months was
approximately $16.0 million and $15.2 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 2008 nine months and the 2007
nine months, along with the percentage of net revenues represented by such gross profit
(dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Nine |
|
2007 Nine |
|
|
|
|
|
|
Months |
|
Months |
|
$ Change |
|
% Change |
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
350.6 |
|
|
$ |
277.8 |
|
|
$ |
72.8 |
|
|
|
26.2 |
% |
% of net revenues |
|
|
91.8 |
% |
|
|
86.0 |
% |
|
|
|
|
|
|
|
|
The increase in gross profit during the 2008 nine months, compared to the 2007 nine
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 nine months as compared to the 2007 nine 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 nine months
included a charge for an increase in our inventory obsolescence reserve of approximately
$8.3 million, which reduced gross margin as a percentage of net revenues by approximately
2.6 percentage points. The increase in the inventory obsolescence reserve during the 2007
nine months was due to an increase in inventory during the 2007 nine months projected to not
be sold by expiry dates, and certain inventories that, during the third quarter of 2007,
were determined to be unsalable.
42
The restatement had the following effect on the previously-reported gross profit for
the 2007 nine months:
|
|
|
|
|
|
|
2007 |
|
|
|
Nine Months |
|
|
|
(in millions) |
|
Gross profit, as previously reported |
|
$ |
282.4 |
|
Restatement adjustments: |
|
|
|
|
Net revenue restatement adjustments |
|
|
(1.1 |
) |
Reclassification of donated product from
selling, general and administrative expense
to cost of product revenues |
|
|
(3.7 |
) |
Other |
|
|
0.2 |
|
|
|
|
|
Gross profit, as restated |
|
$ |
277.8 |
|
|
|
|
|
Selling, General and Administrative Expenses
The following table sets forth our selling, general and administrative expenses for the
2008 nine months and 2007 nine months, along with the percentage of net revenues represented
by selling, general and administrative expenses (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Nine |
|
2007 Nine |
|
|
|
|
|
|
Months |
|
Months |
|
$ Change |
|
% Change |
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
$ |
215.5 |
|
|
$ |
178.7 |
|
|
$ |
36.8 |
|
|
|
20.6 |
% |
% of net revenues |
|
|
56.4 |
% |
|
|
55.3 |
% |
|
|
|
|
|
|
|
|
Share-based compensation expense
included in selling, general and
administrative |
|
$ |
12.9 |
|
|
$ |
15.6 |
|
|
$ |
(2.7 |
) |
|
|
(17.2 |
)% |
The increase in selling, general and administrative expenses during the 2008 nine
months from the 2007 nine months was attributable to approximately $13.7 million of
increased personnel costs, primarily related to an increase in the number of employees from
465 as of September 30, 2007 to 577 as of September 30, 2008 and the effect of the annual
salary increase that occurred during February 2008, $15.6 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, $4.8 million related to a lease retirement
obligation recorded during the third quarter of 2008 related to our prior headquarters
location, and $2.7 million of increased other additional selling, general and administrative
costs incurred during the 2008 nine months.
The restatement had the following effect on the previously-reported selling, general
and administrative expense for the 2007 nine months:
|
|
|
|
|
|
|
2007 |
|
|
|
Nine Months |
|
|
|
(in millions) |
|
Selling, general and administrative expense,
as previously reported |
|
$ |
182.4 |
|
Restatement adjustment: |
|
|
|
|
Reclassification of donated product from
selling, general and administrative expense
to cost of product revenues |
|
|
(3.7 |
) |
|
|
|
|
Selling, general and administrative expense,
as restated |
|
$ |
178.7 |
|
|
|
|
|
43
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 2008 nine
months and 2007 nine months (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Nine |
|
2007 Nine |
|
|
|
|
|
|
Months |
|
Months |
|
$ Change |
|
% Change |
Research and development |
|
$ |
49.3 |
|
|
$ |
22.5 |
|
|
$ |
26.8 |
|
|
|
119.2 |
% |
Charges included in research
and development |
|
$ |
25.0 |
|
|
$ |
|
|
|
$ |
25.0 |
|
|
|
100.0 |
% |
Share-based compensation
expense included in
research and development |
|
$ |
0.2 |
|
|
$ |
0.0 |
|
|
$ |
0.2 |
|
|
|
453.2 |
% |
Included in research and development expenses for the 2008 nine 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 nine months and the 2007 nine months was RELOXIN®.
In-Process Research and Development Expense
On July 1, 2008, we acquired LipoSonix, a medical device company developing
non-invasive body sculpting technology. As part of the acquisition, we recorded a $30.5
million charge for acquired in-process research and development during the third quarter of
2008. No income tax benefit was recognized related to this charge. See Note 6 in our
accompanying condensed consolidated financial statements for further discussion on our
acquisition of LipoSonix.
Depreciation and Amortization Expenses
Depreciation and amortization expenses during the 2008 nine months increased $2.8
million, or 15.7%, to $20.6 million from $17.8 million during the 2007 nine 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 and depreciation incurred in the 2008 nine months related to our new ERP
system and our new headquarters facility.
Other Expense
Other expense of $5.5 million recognized during the 2008 nine months represented a $2.9
million and $2.6 million reduction in the carrying value of our investment in Revance as a
result of a reduction in the estimated net realizable value of the investment using the
hypothetical liquidation at book value approach as of March 31, 2008 and September 30, 2008,
respectively.
44
Interest and Investment Income
Interest and investment income during the 2008 nine months decreased $8.0 million, or
28.5%, to $20.1 million from $28.1 million during the 2007 nine 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 our $150.0 million acquisition of LipoSonix in July 2008, and a
decrease in the interest rates achieved by our invested funds during the 2008 nine months.
We expect interest and investment income to be lower in the fourth quarter of 2008 as
compared to the fourth quarter 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 and our $150 million
acquisition of LipoSonix in July 2008. See Note 13 in our accompanying condensed
consolidated financial statements for further discussion on the New Notes.
Interest Expense
Interest expense during the 2008 nine months decreased $2.0 million, to $5.6 million
during the 2008 nine months from $7.6 million during the 2007 nine months. Our interest
expense during the 2008 nine months and 2007 nine 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
nine months as compared to the 2007 nine months was primarily due to the repurchase of
$283.7 million of our New Notes in June 2008, the fees and origination costs related to the
issuance of the Old Notes becoming fully amortized during the second quarter of 2007, and
the fees and origination costs related to the issuance of the New Notes becoming fully
amortized during the second quarter of 2008. See Note 13 in our accompanying condensed
consolidated financial statements for further discussion on the Old Notes and New Notes. We
expect interest expense to be lower in the fourth quarter of 2008 as compared to the fourth
quarter 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
Our effective tax rate for the 2008 nine months was 56.8%, as compared to 37.2% for the
2007 nine 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 nine months as compared to the 2007 nine months as no tax
benefits were recorded related to the charge associated with the reduction in carrying value
of our investment in Revance or on the in-process research and development charge related to
our acquisition of LipoSonix.
The effect of the restatement on income tax expense for the 2007 nine months was a
decrease of $0.5 million, due to a decrease of $0.9 million of pre-tax income as a result of
the restatement. The effect of the restatement on the effective tax rate for the 2007 nine
months was a decrease from 37.5% to 37.2%.
45
Liquidity and Capital Resources
Overview
The following table highlights selected cash flow components for the 2008 nine months
and 2007 nine months, and selected balance sheet components as of September 30, 2008 and
December 31, 2007 (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Nine |
|
2007 Nine |
|
|
|
|
|
|
Months |
|
Months |
|
$ Change |
|
% Change |
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
40.7 |
|
|
$ |
127.5 |
|
|
$ |
(86.8 |
) |
|
|
(68.1 |
)% |
Investing activities |
|
$ |
195.3 |
|
|
$ |
(261.3 |
) |
|
$ |
456.6 |
|
|
|
174.7 |
% |
Financing activities |
|
$ |
(285.0 |
) |
|
$ |
13.3 |
|
|
$ |
(298.4 |
) |
|
|
(2,235.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30, 2008 |
|
Dec. 31, 2007 |
|
$ Change |
|
% Change |
Cash, cash equivalents and
short-term investments |
|
$ |
307.1 |
|
|
$ |
794.7 |
|
|
$ |
(487.6 |
) |
|
|
(61.4 |
)% |
Working capital |
|
$ |
267.2 |
|
|
$ |
423.0 |
|
|
$ |
(155.8 |
) |
|
|
(36.8 |
)% |
Long-term investments |
|
$ |
93.4 |
|
|
$ |
17.1 |
|
|
$ |
76.3 |
|
|
|
446.2 |
% |
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 September 30, 2008 and December 31, 2007 consisted of the
following (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30, 2008 |
|
|
Dec. 31, 2007 |
|
|
$ Change |
|
|
% Change |
|
Cash, cash equivalents and
short-term investments |
|
$ |
307.1 |
|
|
$ |
794.7 |
|
|
$ |
(487.6 |
) |
|
|
(61.4 |
)% |
Accounts receivable, net |
|
|
48.0 |
|
|
|
22.2 |
|
|
|
25.8 |
|
|
|
116.2 |
% |
Inventories, net |
|
|
25.4 |
|
|
|
30.0 |
|
|
|
(4.6 |
) |
|
|
(15.3 |
)% |
Deferred tax assets, net |
|
|
45.0 |
|
|
|
9.2 |
|
|
|
35.8 |
|
|
|
389.1 |
% |
Other current assets |
|
|
21.1 |
|
|
|
18.0 |
|
|
|
3.1 |
|
|
|
17.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
446.6 |
|
|
|
874.1 |
|
|
|
(427.5 |
) |
|
|
(48.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
48.2 |
|
|
|
34.9 |
|
|
|
13.3 |
|
|
|
38.1 |
% |
Current portion of long-
term debt |
|
|
0.2 |
|
|
|
283.9 |
|
|
|
(283.7 |
) |
|
|
(99.9 |
)% |
Reserve for sales returns |
|
|
59.3 |
|
|
|
68.8 |
|
|
|
(9.5 |
) |
|
|
(13.8 |
)% |
Income taxes payable |
|
|
|
|
|
|
7.7 |
|
|
|
(7.7 |
) |
|
|
100.0 |
% |
Other current liabilities |
|
|
71.7 |
|
|
|
55.8 |
|
|
|
15.9 |
|
|
|
28.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
179.4 |
|
|
|
451.1 |
|
|
|
(271.7 |
) |
|
|
(60.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
267.2 |
|
|
$ |
423.0 |
|
|
$ |
(155.8 |
) |
|
|
(36.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
We had cash, cash equivalents and short-term investments of $307.1 million and working
capital of $267.2 million at September 30, 2008, as compared to $794.7 million and $423.0
million, respectively, at December 31, 2007. The decrease in cash, cash equivalents and
short-term investments was primarily due to the repurchase of $283.7 million of our New
Notes during June 2008, the $150.0 million acquisition of LipoSonix, and by a net transfer
of $76.3 million of our short-term investments into long-term investments, partially offset
by the generation of $42.7 million of operating cash flow during the 2008 nine months. The
decrease in working capital was primarily due to the $150.0 million acquisition of LipoSonix
and a net transfer of $76.3 million of our short-term investments into long-term
investments, partially offset by the generation of $40.7 million of operating cash flow
during the 2008 nine months.
46
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, 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 September 30, 2008, our short-term investments included $39.9 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
September 30, 2008, we have recorded an unrealized loss of $4.8 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 nine
months related to this property was approximately $2.2 million. During the first quarter of
2008, we received approximately $6.7 million in tenant improvement incentives from the
landlord. This amount has been capitalized into leasehold improvements and is being
depreciated on a straight-line basis over the lesser of the useful life or the term of the
lease. The tenant improvement incentives are also included in other long-term liabilities
as deferred rent, and will be recognized as a reduction of rent expense on a straight-line
basis over the term of the lease. In 2008, upon vacating our previous headquarters
facility, we recorded a charge for the estimated remaining net cost for the lease, net of
potential sublease income, of $4.8 million. See Contingent Convertible Senior Notes and
Other Long-Term Commitments.
During 2007, we began designing and implementing a new enterprise resource planning
(ERP) system to integrate and improve the financial and operational aspects of our business.
During 2007 and the nine months ended September 30, 2008, we invested approximately $9.5
million and $4.0 million, respectively, on this project.
47
Operating Activities
Net cash provided by operating activities during the 2008 nine months was approximately
$40.7 million, compared to net cash provided by operating activities during the 2007 nine
months of approximately $127.5 million. The following is a summary of the primary
components of cash provided by operating activities during the 2008 nine months and 2007
nine months (in millions):
|
|
|
|
|
|
|
|
|
|
|
2008 Nine |
|
|
2007 Nine |
|
|
|
Months |
|
|
Months |
|
Payments made to Ipsen related to development of RELOXIN® |
|
$ |
(25.0 |
) |
|
$ |
|
|
Income taxes paid |
|
|
(67.1 |
) |
|
|
(19.7 |
) |
Payment received from Hyperion related to strategic collaboration |
|
|
|
|
|
|
10.0 |
|
Other cash provided by operating activities |
|
|
132.8 |
|
|
|
137.2 |
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
$ |
40.7 |
|
|
$ |
127.5 |
|
|
|
|
|
|
|
|
Investing Activities
Net cash provided by investing activities during the 2008 nine months was approximately
$195.3 million, compared to net cash used in investing activities during the 2007 nine
months of $261.3 million. The change was primarily due to the net purchases and sales of
our short-term and long-term investments during the respective nine-month periods. During
the 2008 nine months, $150.0 million was used for the acquisition of LipoSonix and during
the 2007 nine months, $29.1 million was paid to Q-Med upon the FDAs approval of
PERLANE®.
Financing Activities
Net cash used in financing activities during the 2008 nine months was $285.0 million,
compared to net cash provided by financing activities of $13.3 million during the 2007 nine
months. Cash used in financing activities during the 2008 nine months included the
repurchase of $283.7 million of New Notes during June 2008. Proceeds from the exercise of
stock options were $4.8 million during the 2008 nine months compared to $17.1 million during
the 2007 nine months. Dividends paid during the 2008 nine months was $6.3 million, and
dividends paid during the 2007 nine months was $5.1 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 also were required to pay an accumulated deferred tax
liability of approximately $34.9 million related to the repurchased New Notes.
Approximately $26.2 million of this $34.9 million deferred tax liability, which was included
in income taxes payable in our condensed consolidated balance sheets as of June 30, 2008,
was paid during the three months ended September 30, 2008. The remaining $8.7 million of
this deferred tax liability will be paid during the three months ended December 31, 2008.
Following the repurchase of these New Notes, $181,000 of principal amount of New Notes
remained outstanding as of June 30, 2008 and September 30, 2008. We intend to redeem the
remaining $181,000 of principal amount of New Notes during the fourth quarter of 2008 or
during 2009, when practicable.
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
48
require an adjustment to the conversion price if the cumulative aggregate of all
current and prior dividend increases above $0.025 per share would result in at least a one
percent (1%) increase in the conversion price. This threshold has not been reached and no
adjustment to the conversion price has been made. On June 4, 2012 and 2017 or upon the
occurrence of a change in control, holders of the Old Notes may require us to offer to
repurchase their Old Notes for cash. On June 4, 2013 and 2018 or upon the occurrence of a
change in control, holders of the New Notes may require us to offer to repurchase their New
Notes for cash.
Except for the Old Notes, we had only $15.7 million of long-term liabilities and we had
only $179.4 million of current liabilities at September 30, 2008. Our other commitments and
planned expenditures consist principally of payments we will make in connection with
strategic collaborations and research and development expenditures, and we will continue to
invest in sales and marketing infrastructure. 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 November
10, 2008, BioMarin has not requested any monies to be advanced under the Convertible Note,
and no amounts are outstanding.
In connection with occupancy of the new headquarter office, we ceased use of the prior
headquarter office, which consists of approximately 75,000 square feet of office space, at
an average annual expense of approximately $2.1 million, under an amended lease agreement
that expires in December 2010. We have adopted SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities, effective for exit or disposal activities initiated after
December 31, 2002. Under SFAS 146, a liability for the costs associated with an exit or
disposal activity is recognized when the liability is incurred. In accordance with SFAS
146, we recorded lease exit costs of approximately $4.8 million during the three months
ended September 30, 2008 consisting of the initial liability of $4.7 million and accretion
expense of $0.1 million. These amounts were recorded as selling, general and administrative
expenses in our condensed consolidated statements of operations. We have not recorded any
other costs related to the lease for the prior headquarters.
As of September 30, 2008, approximately $4.5 million of lease exit costs remain accrued
and are expected to be paid by December 2010 of which $1.9 million is classified in other
current liabilities and $2.6 million is classified in other liabilities. Although we no
longer use the facilities, the lease exit cost accrual has not been offset by an adjustment
for estimated sublease rentals. After considering sublease market information as well as
factors specific to the lease, we concluded it was probable we would be unable to reasonably
obtain sublease rentals for the prior headquarters and therefore we would not be subleased
for the remaining lease term. We will continue to monitor the sublease market conditions
and reassess the impact on the lease exit cost accrual.
The following is a summary of the activity in the liability for lease exit costs for
the three months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability as of |
|
Amounts Charged |
|
Cash Payments |
|
Cash Received |
|
Liability as of |
|
|
June 30, 2008 |
|
to Expense |
|
Made |
|
from Sublease |
|
Sept. 30, 2008 |
Lease exit costs
liability |
|
$ |
|
|
|
$ |
4,812,928 |
|
|
$ |
(356,352 |
) |
|
$ |
|
|
|
$ |
4,456,576 |
|
49
Repurchases of Common Stock
On August 29, 2007, our Board of Directors approved a stock trading plan to purchase up
to $200.0 million in aggregate value of shares of our Class A common stock upon satisfaction
of certain conditions. The number of shares to be repurchased and the timing of the
repurchases (if any) will depend on factors such as the market price of our Class A common
stock, economic and market conditions, and corporate and regulatory requirements. The plan
terminated on August 29, 2008, as it was scheduled to terminate on the earlier of the first
anniversary of the plan or at the time when the aggregate purchase limit was reached. No
shares were repurchased under this plan.
Dividends
We do not have a dividend policy. Since July 2003, we have paid quarterly cash
dividends aggregating approximately $34.8 million on our common stock. In addition, on
September 17, 2008, we declared a cash dividend of $0.04 per issued and outstanding share of
common stock payable on October 31, 2008 to our stockholders of record at the close of
business on October 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 5 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 $39.9 million at September 30, 2008. These securities
were included in long-term investments at September 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 September 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 $4.8
million, with an offsetting entry to accumulated other comprehensive (loss) income, as of
September 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 September
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 (loss)
income. We will re-evaluate each of these factors as market conditions change in subsequent
periods.
Off-Balance Sheet Arrangements
As of September 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.
50
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 3 to the consolidated financial
statements included in our Form 10-K/A for the year ended December 31, 2007. There were no
new significant accounting estimates in the third quarter of 2008, nor were there any
material changes to the critical accounting policies and estimates discussed in our Form
10-K/A 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 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
51
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 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.
In June 2008, the FASB reached a consensus on EITF 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entitys Own Stock. EITF 07-5 addresses the determination of whether an instrument (or an embedded feature) is indexed to an entitys own stock. EITF 07-5 is effective for fiscal years beginning after December 15, 2008.
We are currently evaluating EITF 07-5 and the impact, if any, on our consolidated results of operations and financial condition.
In October 2008, the FASB issued FSP 157-3, Determining the Fair Value of a Financial
Asset When the Market for That Asset is Not Active. FSP 157-3 clarifies the application of
SFAS No. 157, Fair
52
Value Measurements, in a market that is not active and provides an example to
illustrate key considerations in determining fair value of financial assets when the market
for that financial asset is not active. FSP 157-3 applies to financial assets within the
scope of accounting pronouncements that require or permit fair value measurements in
accordance with SFAS No. 157. FSP 157-3 was effective upon issuance and included prior
periods for which financial statements had not been issued. The application of FSP 157-3
did not have a material impact on our consolidated financial statements.
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; |
53
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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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adverse developments relating to the restatement of our consolidated financial
statements; |
54
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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 amended
Annual Report on Form 10-K/A 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 September 30, 2008, there were no material changes to the information previously
reported under Item 7A in our amended Annual Report on Form 10-K/A 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. In connection with the restatement discussed elsewhere in this Form
10-Q and in Note 2 to our condensed consolidated financial statements, under the direction
of our Chief Executive Officer and Chief Financial Officer, management conducted a
reevaluation of the effectiveness of our internal control over financial reporting as of
September 30, 2008. The framework on which such evaluation was based is contained in the
report entitled Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO Report). Based on the
evaluation and the criteria set forth in the COSO Report, management identified a material
weakness in internal control over financial reporting described in the managements report
on internal control over financial reporting included in Item 9A to our 2007 Form 10-K/A and
outlined below. Under Audit Standard No. 5, a material weakness is a control deficiency, or
combination of control deficiencies, that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be prevented or
detected. Management identified the following material weakness that continued to exist as
of September 30, 2008 and the date of this filing:
There was a material
weakness in our internal controls over the interpretation
and application of Statement of Financial Accounting Standards No.
48, Revenue Recognition When Right
of Return Exists (SFAS 48), as it applies to the calculation of our sales returns
reserve. Specifically, the design of controls over the preparation and review of
the sales return reserve did not detect that our method of accounting for returns of
short-dated and expired goods was not in conformity with generally accepted
accounting principles. The lack of sufficient oversight and supervision of
operational and accounting personnel led to our failure to identify the
misinterpretation of SFAS 48, with respect to our sales return reserve calculation.
As a result, management did not detect its error in accounting for sales return
reserves, resulting in the restatement of our previously issued consolidated
financial statements for the annual, transition and quarterly periods in fiscal
years 2003 through 2007 and the first and second quarters of 2008.
Based on its assessment, including consideration of the aforementioned material
weakness, and the criteria discussed above, management concluded that our internal control
over financial reporting was not effective at a reasonable assurance level as of September
30, 2008 and the date of this filing.
55
Remediation Steps to Address Material Weakness
As disclosed in our 2007 Form 10-K/A, management has dedicated significant resources to
correct the accounting error relating to our sales return reserve and to ensure that we take
proper steps to improve our internal controls and remedy our material weakness in our
financial reporting and disclosure controls. Management is committed to implementing
effective control policies and procedures and will continually update our Audit Committee as
to the progress and status of our remediation efforts to ensure that they are adequately
implemented. We believe that the following actions that we have taken and are taking will
be sufficient to remediate the material weakness described above:
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conduct a full review of our accounting methodology for sales return reserves; |
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assess the technical accounting capabilities of the accounting and finance
departments to ensure the proper knowledge, skills, and training; and |
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finance and accounting personnel to attend training sessions covering relevant
topics, which include revenue recognition and related accounting concepts. |
Consistent with good corporate governance, the Audit Committee of our Board of
Directors, working with its independent counsel and forensic accountants, conducted an
independent inquiry into the matters giving rise to the Companys need to restate its
financial statements (the Internal Inquiry). After completing the Internal Inquiry, the
Audit Committee concluded that the need to restate our consolidated financial statements was
not the result of any fraud or intentional wrongdoing on the part of any of our directors,
officers or other employees. The Audit Committee also noted that our independent registered
public accounting firm, Ernst & Young LLP, was aware of and
discussed with us on several occasions in the past our methodology of
accounting for sales return reserves. Neither the Company nor Ernst
& Young LLP has previously identified
the misinterpretation and misapplication of generally accepted accounting principles with
respect to our sales return reserves prior to the PCAOB review, and Ernst & Young LLP
expressed unqualified opinions on our consolidated financial statements and our internal
control over financial reporting for each of the now-restated annual and transition periods.
Management believes that the actions described above will remediate the material
weakness we have identified and strengthen our internal control over financial reporting.
We expect that the material weakness will be fully remediated prior to December 31, 2008.
As management improves our internal control over financial reporting and implements
remediation measures, we may supplement or modify the remediation measures described above.
Further, management believes that, as a result of managements in-depth review of its
accounting processes, the utilization of external resources and the additional procedures
management has implemented, there are no material inaccuracies or omissions of material fact
in this Form 10-Q and, to the best of our knowledge, we believe that the consolidated
financial statements in this Form 10-Q fairly present in all material aspects the financial
condition, results of operations and cash flows of the Company in conformity with generally
accepted accounting principles.
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.
Other than described above, during the three months ended September 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.
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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 amended Annual Report on Form 10-K/A for the year ended
December 31, 2007 and Part II, Item 1, Legal Proceedings in our amended Quarterly Report
on Form 10-Q/A for the period ended June 30, 2008.
As discussed elsewhere in this Form 10-Q and in Note 2 to our condensed consolidated
financial statements, we have restated our financial statements for the annual, transition
and quarterly periods in fiscal years 2003 through 2007 and the first and second quarters of
2008 in an amended Form 10-K/A for the year ended December 31, 2007 and amended Forms 10-Q/A
for the quarterly periods ended March 31, 2008 and June 30, 2008. We have discussed this
matter with the SECs Division of Enforcement and have committed to cooperating fully with
the SEC in connection with any questions they may have. Consistent with good corporate
governance, the Audit Committee of our Board of Directors, working with its independent
counsel and forensic accountants, conducted an independent inquiry into the matters giving
rise to our need to restate our financial statements (the Internal Inquiry). After
completing the Internal Inquiry, the Audit Committee concluded that the need to restate our
consolidated financial statements was not the result of any fraud or intentional wrongdoing
on the part of any of our directors, officers or other employees. The Audit Committee also
noted that our independent registered public accounting firm, Ernst & Young LLP, was aware
of and discussed with us on several occasions in the past our methodology of accounting for sales return reserves. Neither the Company nor
Ernst & Young LLP has previously identified the misinterpretation and misapplication of generally accepted
accounting principles with respect to our sales return reserves prior to the PCAOB review,
and Ernst & Young LLP expressed unqualified opinions on our consolidated financial
statements and our internal control over financial reporting for each of the now-restated
annual and transition periods.
On October 3, 10, and 27, 2008, purported stockholder class action lawsuits styled
Andrew Hall v. Medicis Pharmaceutical Corp., et al. (Case No. 2:08-cv-01821-MHB);
Steamfitters Local 449 Pension Fund v. Medicis Pharmaceutical Corp., et al. (Case No.
2:08-cv-01870-DKD); and Darlene Oliver v. Medicis Pharmaceutical Corp., et al. (Case No.
2:08-cv-01964-JAT) were filed in the United States District Court for the District of
Arizona on behalf of stockholders who purchased our securities during the period between
October 30, 2003 and approximately September 24, 2008. The complaints name as defendants
Medicis Pharmaceutical Corp. and our Chief Executive Officer and Chairman of the Board,
Jonah Shacknai, our Chief Financial Officer, Executive Vice President and Treasurer, Richard
D. Peterson, and our Chief Operating Officer and Executive Vice President, Mark A. Prygocki.
Plaintiffs claims arise in connection with the restatement of our annual, transition, and
quarterly periods in fiscal years 2003 through 2007 and the first and second quarters of
2008. The complaints allege violations of federal securities laws, Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934 and Rule 10b-5, based on alleged material
misrepresentations to the market that had the effect of artificially inflating the market
price of our stock. The plaintiffs seek to recover unspecified damages and costs, including
counsel and expert fees. We intend to vigorously defend the claims in these matters. There
can be no assurance, however, that we will be successful, and an adverse resolution of the
lawsuits could have a material adverse effect on our financial position and results of
operations in the period in which the lawsuits are resolved. We are not presently able to
reasonably estimate potential losses, if any, related to the lawsuits.
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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.
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.
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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. The risk factors presented
below supplement and amend the risk factors previously disclosed by us in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2007 and our subsequent reports on Forms
10-Q and 8-K.
Risks Related To Our Business
The restatement of our consolidated financial statements has subjected us to a number of
additional risks and uncertainties, including increased costs for accounting and legal fees
and the increased possibility of legal proceedings.
As discussed elsewhere in this Form 10-Q and in Note 2 to our condensed consolidated
financial statements, we determined that our consolidated financial statements for the
annual, transition and quarterly periods in fiscal years 2003 through 2007 and the first and
second quarters of 2008 should be restated due to an error in our interpretation and
application of SFAS 48 as it applies to a component of our sales return reserve
calculations. As a result of the restatement, we have become subject to a number of
additional risks and uncertainties, including:
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We incurred substantial unanticipated costs for accounting and legal fees in
connection with the restatement. Although the restatement is complete, we
expect to continue to incur accounting and legal costs as noted below. |
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As a result of the restatement, we have been named in a number of lawsuits
as discussed in Item 1 of Part II of this report, Legal Proceedings and Note
19, Commitments and Contingencies. The plaintiffs in these lawsuits may make
additional claims, expand existing claims and/or expand the time periods
covered by the complaints. Other plaintiffs may bring additional actions with
other claims, based on the restatement. If such events occur, we may incur
substantial defense costs regardless of the outcome of these actions and
insurance and indemnification may not be sufficient to cover the losses we may
incur. Likewise, such events might cause a diversion of our managements time
and attention. If we do not prevail in one or more of these actions, we could
be required to pay substantial damages or settlement costs, which could
adversely affect our business, financial condition, results of operations and
liquidity. |
Management recently identified a material weakness in our internal control over financial
reporting with respect to our interpretation and application of SFAS 48 to the calculation
of sales return reserves. Additionally, management may identify material weaknesses in the
future that could adversely affect investor confidence, impair the value of our common stock
and increase our cost of raising capital.
In connection with the restatement, we have assessed the effectiveness of our
disclosure controls and procedures. Management identified a material weakness in our
internal control over financial reporting with respect to our interpretation and application
of SFAS 48 to the calculation of sales return reserves. As a result of this material
weakness, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were not effective at a reasonable assurance level as of
December 31, 2007 and the date of the date of this filing. In response, we have adopted a
sales return reserve methodology that we believe complies with the requirements of SFAS 48.
Management has taken and is taking steps to remediate the material weakness in our internal
control over financial reporting. There can be no assurance as to how quickly or
effectively our remediation steps will remediate the material weakness in our internal
control over financial reporting or that additional material weaknesses will not be
identified in the future.
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Any failure to remedy additional deficiencies in our internal control over financial
reporting that may be discovered in the future or to implement new or improved controls, or
difficulties encountered in the implementation of such controls, could harm our operating
results, cause us to fail to meet our reporting obligations or result in material
misstatements in our financial statements. Any such failure could, in turn, affect the
future ability of our management to certify that our internal control over our financial
reporting is effective and, moreover, affect the results of our independent registered
public accounting firms attestation report regarding our managements assessment. Inferior
internal control over financial reporting could also subject us to the scrutiny of the SEC
and other regulatory bodies and could cause investors to lose confidence in our reported
financial information, which could have an adverse effect on the trading price of our common
stock.
In addition, if we or our independent registered public accounting firm identify
additional deficiencies in our internal control over financial reporting, the disclosure of
that fact, even if quickly remedied, could reduce the markets confidence in our financial
statements and harm our share price. Furthermore, additional deficiencies could result in
future non-compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Such
non-compliance could subject us to a variety of administrative sanctions, including the
suspension or delisting of our ordinary shares from the NYSE and review by the NYSE, the
SEC, or other regulatory authorities.
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 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 (the 838
Patent) 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
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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 August 18, 2008, we announced that the United States Patent and Trademark Office
(USPTO) has granted a Request for Ex Parte Reexamination of our 838 Patent. During the
reexamination process, the USPTO will review the 838 Patent and could determine that the
patent claims, as written, were properly allowed. This determination would assist us in
defending challenges to the validity of the 838 Patent. Alternatively, the USPTO could
narrow or reject certain or all of the claims of the 838 Patent. Depending upon the
specifics of what narrowing amendments are required and the claims rejected, these
determinations of the USPTO could have a material adverse impact on our results of
operations. The timing of the USPTOs completion of the reexamination is uncertain. We
believe that the USPTO should reconfirm the validity of the 838 Patent. However, there can
be no guarantee as to the outcome.
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.
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 September
30, 2008, our investments included $39.9 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.
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Item 6. Exhibits
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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 |
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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: November 10, 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: November 10, 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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