KING PHARMACEUTICALS, INC. - FORM 10-K
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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OR
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TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File Number
001-15875
King Pharmaceuticals,
Inc.
(Exact name of registrant as
specified in its charter)
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Tennessee
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54-1684963
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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501 Fifth Street
Bristol, Tennessee
(Address of Principal
Executive Offices)
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37620
(Zip Code)
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Registrants telephone number, including area code:
(423) 989-8000
Securities registered under Section 12(b) of the
Exchange Act:
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(Title of Each Class)
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(Name of Each Exchange on Which Registered)
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Common Stock and Associated
Preferred Stock Purchase Rights
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New York Stock
Exchange
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Securities registered under Section 12(g) of the
Exchange Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No
o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of
1934. Yes o No þ
Indicate by check mark whether the registrant (1) filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer
o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price
at which the common equity was last sold as of June 30,
2006 was $4,123,494,007. The number of shares of Common Stock,
no par value, outstanding at February 23, 2007 was
243,199,774.
Documents Incorporated by Reference:
Certain information required in Part III of this Annual
Report on
Form 10-K
is incorporated
by reference from the registrants Proxy Statement for
its 2007 annual meeting of shareholders.
PART I
King Pharmaceuticals, Inc. was incorporated in the State of
Tennessee in 1993. Our wholly owned subsidiaries are Monarch
Pharmaceuticals, Inc.; King Pharmaceuticals Research and
Development, Inc.; Meridian Medical Technologies, Inc.;
Parkedale Pharmaceuticals, Inc.; King Pharmaceuticals of Nevada,
Inc.; and Monarch Pharmaceuticals Ireland Limited.
Our principal executive offices are located at 501 Fifth Street,
Bristol, Tennessee 37620. Our telephone number is
(423) 989-8000
and our facsimile number is
(423) 274-8677.
Our website is www.kingpharm.com where you may view our
Corporate Code of Conduct and Ethics (Code). To the
extent permitted by U.S. Securities and Exchange Commission
(SEC) and New York Stock Exchange (NYSE)
regulations, we intend to disclose information as to any
amendments to the Code and any waivers from provisions of the
Code for our principal executive officer, principal financial
officer, and certain other officers by posting the information
on our website, to the extent such matters arise. We make
available through our website, free of charge, our annual
reports on
Form 10-K,
our quarterly reports on
Form 10-Q,
our current reports on
Form 8-K
and any amendments, as well as other documents, as soon as
reasonably practicable after their filing with the SEC. These
filings are also available to the public through the Internet at
the website of the SEC, at www.sec.gov. You may also read and
copy any document that we file at the SECs Public
Reference Room located at 100 F Street, NE, Washington, DC
20549. Please call the SEC at
1-800-SEC-0330
for further information on the Public Reference Room.
Our Chief Executive Officer, Brian A. Markison, submitted to the
NYSE an Annual Written Affirmation on June 22, 2006,
pursuant to Section 303A.12 of the NYSEs listing
standards, certifying that he was not aware of any violation by
King of the NYSEs corporate governance listing standards
as of that date.
King is a vertically integrated pharmaceutical company that
performs basic research and develops, manufactures, markets and
sells branded prescription pharmaceutical products. By
vertically integrated, we mean that we have the
following capabilities:
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research and development,
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manufacturing,
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packaging,
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quality control and assurance,
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distribution,
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sales and marketing,
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business development, and
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regulatory management.
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Through our national sales force we market our branded
prescription pharmaceutical products to general/family
practitioners, internal medicine physicians, cardiologists,
endocrinologists, psychiatrists, neurologists, pain specialists,
sleep specialists, and hospitals across the United States and in
Puerto Rico. Branded pharmaceutical products are innovative
products sold under a brand name that enjoy, or previously
enjoyed, some degree of market exclusivity.
Our corporate strategy is focused on three key therapeutic
areas: cardiovascular/metabolic, neuroscience, and
hospital/acute care products. We believe each of our key
therapeutic areas has significant market potential and our
organization is aligned accordingly.
Under our corporate strategy we work to achieve organic growth
by maximizing the potential of our currently marketed products
through sales and marketing and prudent product life-cycle
management. By product life-cycle management, we
mean the extension of the economic life of a product, including
seeking and gaining all necessary related governmental
approvals, by such means as:
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securing from the U.S. Food and Drug Administration, which
we refer to as the FDA, additional approved uses
(indications) for our branded pharmaceutical
products;
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developing and producing different strengths;
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producing different package sizes;
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developing new dosage forms; and
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developing new product formulations.
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Our strategy also focuses on growth through the acquisition of
novel branded pharmaceutical products in various stages of
development and the acquisition of pharmaceutical technologies,
particularly those products and technologies that we believe
have significant market potential and complement our three key
therapeutic areas. Using our internal resources and a
disciplined business development process, we strive to be a
leader and partner of choice in bringing innovative,
clinically-differentiated therapies and technologies to market
in our key therapeutic areas. We may also seek company
acquisitions that add products or products in development,
technologies or sales and marketing capabilities to our key
therapeutic areas or that otherwise complement our operations.
We also work to achieve organic growth by continuing to develop
investigational drugs.
Business
Segments
Branded pharmaceutical products constitute our largest business
segment. In accordance with our corporate strategy, our branded
pharmaceutical products can be divided into the following
therapeutic areas:
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cardiovascular/metabolic,
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neuroscience,
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hospital/acute care, and
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other.
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Our Meridian Medical Technologies segment consists of our
auto-injector business, which includes
EpiPen®.
Royalties, another of our business segments, are derived from
products we successfully developed and have licensed to third
parties. Additionally, we manufacture third-party pharmaceutical
products under contracts with a variety of pharmaceutical and
biotechnology companies. Accordingly, contract manufacturing is
a segment of our business.
The following table summarizes net revenues by operating segment
(in thousands), almost all of which are derived from activities
within the United States.
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For the Years Ended December 31,
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2006
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2005
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2004
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Branded pharmaceuticals
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$
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1,724,701
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$
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1,542,124
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$
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1,076,517
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Meridian Medical Technologies
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164,760
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129,261
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123,329
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Royalties
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80,357
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78,128
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78,474
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Contract manufacturing
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16,501
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22,167
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26,045
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Other
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2,181
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1,201
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(1
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Total
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$
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1,988,500
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$
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1,772,881
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$
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1,304,364
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For information regarding profit and loss and total assets
associated with each segment, see Note 19, Segment
Information in Part 15(a)(1) Exhibits and Financial
Statement Schedules.
Recent
Developments
On February 26, 2007, we acquired all the rights to
Avinza®
in the United States, its territories and Canada from Ligand
Pharmaceuticals Incorporated.
Avinza®
is an extended release formulation of morphine and is indicated
as a once-daily treatment for moderate to severe pain in
patients who require continuous opioid therapy for an extended
period of time.
On January 9, 2007, we obtained an exclusive license to the
hemostatic products designed for use outside of catheterization
and electrophysiology laboratories by Vascular Solutions, Inc.
(Vascular Solutions), which include products which
we expect to market as
Thrombi-Padtm
and
Thrombi-Gel®
hemostats. The license also includes a product we expect to
market as
Thrombi-Pastetm,
which is currently in development. Each of these products
includes
Thrombin-JMI®
as a component. Vascular Solutions will manufacture and supply
the products for us.
3
On June 27, 2006, we entered into a co-exclusive agreement
with Depomed, Inc. to commercialize Depomeds
Glumetzatm
product.
Glumetzatm
is a once-daily, extended-release formulation of metformin for
the treatment of patients with Type II diabetes that
Depomed developed utilizing its proprietary
Acuformtm
drug delivery technology. Under the terms of the agreement, we
assumed responsibility for promoting
Glumetzatm
in the United States and Puerto Rico, while Depomed has the
right to co-promote the product using its own sales force in the
future. Depomed will pay us a fee from gross profit, as defined
in the agreement, generally net sales less cost of goods sold
less a royalty Depomed must pay a third party. Depomed is
responsible for the manufacture and distribution of
Glumetzatm,
while we bear all costs related to the use of our sales force to
promote the product. We launched the promotion of
Glumetzatm
in the third quarter of 2006.
On June 22, 2000, we entered into a Co-Promotion Agreement
with Wyeth to
promote Altace®
in the United States and Puerto Rico through October 29,
2008, with possible extensions as outlined in the Co-Promotion
Agreement. Under the agreement, Wyeth paid us an upfront fee of
$75,000. In connection with the Co-Promotion Agreement, we
agreed to pay Wyeth a promotional fee based on annual net sales
of
Altace®.
On July 5, 2006 we entered into an Amended and Restated
Co-Promotion Agreement (Amended
Co-Promotion
Agreement) with Wyeth regarding
Altace®
as a result of which, effective January 1, 2007, we assumed
full responsibility for selling and marketing
Altace®.
During 2006, the Wyeth sales force continued to co-promote the
product with us and also shared in the marketing expenses. Under
the Amended Co-Promotion Agreement, we have paid and will pay
Wyeth a reduced annual fee.
On March 1, 2006, we acquired substantially all of the
assets of Allerex Laboratory LTD. The primary asset purchased
from Allerex was the exclusive right to market and sell
EpiPen®
throughout Canada. We also obtained from Dey, L.P. an extension
of those exclusive rights to market and sell
EpiPen®
in Canada through 2015.
In February 2006, we entered into a collaboration with Arrow
International Limited and certain of its affiliates, excluding
Cobalt Pharmaceuticals, Inc. (collectively, Arrow),
to commercialize one or more novel formulations of ramipril, the
active ingredient in our
Altace®
product. Under a series of agreements, Arrow has granted us
rights to certain current and future New Drug Applications
(NDAs) regarding novel formulations of ramipril and
intellectual property, including patent rights and technology
licenses relating to these novel formulations. Under certain
conditions, Arrow will be responsible for the manufacture and
supply of new formulations of ramipril for us.
On December 6, 2005, we entered into a cross-license
agreement with Mutual Pharmaceutical Company, Inc. Under the
terms of the agreement, each party granted the other a license
to certain intellectual property relating to metaxalone.
On November 9, 2005, we entered into a collaborative
agreement with Pain Therapeutics, Inc. to develop and
commercialize Pain Therapeutics drug candidate
Remoxytm
and other abuse-deterrent opioid painkillers.
Remoxytm,
an abuse-deterrent version of long-acting oxycodone, is an
investigational drug in late-stage clinical development for the
treatment of severe to chronic pain. We have worldwide exclusive
rights to commercialize
Remoxytm
and the other abuse-deterrent opioid drugs that are developed
pursuant to the collaboration, other than in Australia and New
Zealand.
On August 12, 2004, we entered into a collaborative
agreement with Palatin Technologies, Inc. to jointly develop
and, on obtaining necessary regulatory approvals, commercialize
Palatins bremelanotide compound, which was formerly known
as PT-141, for the treatment of male and female sexual
dysfunction. Pursuant to the terms of the agreement, Palatin has
granted us a co-exclusive license with Palatin to bremelanotide
in North America and an exclusive right to collaborate in the
licensing or sublicensing of bremelanotide with Palatin outside
North America. Bremelanotide is the first compound in a new drug
class called melanocortin receptor agonists under development to
treat sexual dysfunction. This new chemical entity is being
evaluated in Phase II clinical trials studying the efficacy
and safety profile of varying doses of this novel compound in
men experiencing erectile dysfunction (known as ED)
and women experiencing female sexual dysfunction (known as
FSD).
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Industry
The pharmaceuticals industry is a highly competitive global
business composed of a variety of participants, including large
and small branded pharmaceutical companies, specialty and
niche-market pharmaceutical companies, biotechnology firms,
large and small research and drug development organizations, and
generic drug manufacturers. These participants compete on a
number of bases, including technological innovation or novelty,
clinical efficacy, safety, convenience or ease of administration
and cost-effectiveness. In order to promote their products to
physicians and consumers, industry participants devote
considerable resources to advertising, marketing and sales force
personnel, distribution mechanisms and relationships with
medical and research centers, physicians and patient advocacy
and support groups.
The industry is affected by the following factors, among others:
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the aging of the patient population, including diseases specific
to the aging process and demographic factors, including obesity,
diabetes, cardiovascular disease, and patient and physician
demand for products that meet chronic or unmet medical needs;
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technological innovation, both in drug discovery and corporate
processes;
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merger and acquisition activity whereby pharmaceutical companies
are acquiring one another or smaller biotechnology companies,
and divestitures of products deemed non-strategic;
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cost containment and downward price pressure from managed care
organizations and governmental entities, both in the United
States and overseas;
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increased drug development, manufacturing and compliance costs
for pharmaceutical producers;
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the rise of generic companies and challenges to patent
protection and sales exclusivity;
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more frequent product liability litigation;
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increased governmental scrutiny of the healthcare sector,
including issues of patient safety, cost, efficacy and
reimbursement/insurance matters; and
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the cost of advertising and marketing, including
direct-to-consumer
advertising on television and in print.
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Branded
Pharmaceuticals Segment
We market a variety of branded prescription products that
primarily can be divided into the following therapeutic areas:
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cardiovascular/metabolic (including
Altace®,
Corzide®,
Corgard®,
Levoxyl®
and
Cytomel®),
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neuroscience (including
Skelaxin®,
Avinza®
and
Sonata®),
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hospital/acute care (including
Thrombin-JMI®,
Bicillin®,
Synercid®
and
Intal®), and
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other.
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Our branded pharmaceutical products are generally in high-volume
therapeutic categories and we believe they are well known for
their treatment indications (for example,
Altace®,
Skelaxin®,
Avinza®,
Sonata®
and
Levoxyl®).
Branded pharmaceutical products represented approximately 87% of
our total net revenues for each of the years ended
December 31, 2006 and 2005.
Cardiovascular/Metabolic. Altace®,
an angiotensin converting enzyme (ACE) inhibitor, is
our primary product within this category. In August 1999, the
results of the Heart Outcomes Prevention Evaluation trial (the
HOPE trial) were released. The HOPE trial determined
that
Altace®
significantly reduces the rates of stroke, myocardial infarction
(heart attack) and death from cardiovascular causes in a broad
range of high-risk cardiovascular patients. On October 4,
2000, the FDA approved our supplemental NDA (sNDA)
related to
Altace®.
This approval permits the promotion of
Altace®
to reduce the risk of stroke, myocardial infarction (heart
attack) and death from cardiovascular causes in patients 55 and
over, with either a history of coronary
5
artery disease, stroke or peripheral vascular disease, or with
diabetes and one other cardiovascular risk factor (hypertension,
elevated total cholesterol levels, low high-density lipoprotein
(HDL) levels, cigarette smoking or documented
microalbuminuria).
Corzide®
is a beta-blocker diuretic combination product indicated for the
management of hypertension.
Corgard®
is a beta-blocker indicated for the management of hypertension
as well as long-term management of patients with angina
pectoris.
Altace®,
Corzide®
and
Corgard®
are marketed primarily to primary care physicians and
cardiologists.
Levoxyl®
and
Cytomel®,
which are indicated for the treatment of thyroid disorders, are
marketed primarily to primary care physicians and
endocrinologists.
Neuroscience. Products in this category
include
Skelaxin®,
Avinza®,
and
Sonata®.
Skelaxin®
is a muscle relaxant indicated for the relief of discomforts
associated with acute, painful musculoskeletal conditions.
Avinza®
is an extended release formulation of morphine and is indicated
as a once-daily treatment for moderate to severe pain in
patients who require continuous, opioid therapy for an extended
period of time.
Skelaxin®
and
Avinza®
are marketed primarily to primary care physicians, neurologists,
orthopedic surgeons and pain specialists.
Sonata®
is a nonbenzodiazepine treatment for insomnia which is promoted
primarily to primary care physicians, neurologists,
psychiatrists and sleep specialists.
Hospital/Acute Care. Products in this category
are marketed primarily to hospitals. Our largest products in
this category are
Thrombin-JMI®,
Bicillin®
and
Synercid®.
Thrombin-JMI®
aids in controlling minor bleeding during surgery.
Synercid®
is an injectable antibiotic, primarily administered in
hospitals, indicated for treatment of vancomycin-resistant
enterococcus faecium and treatment of some complicated skin and
skin structure infections. This category also includes several
anti-infective products, including
Bicillin®,
that are marketed primarily to general/family practitioners and
internal medicine physicians and are prescribed to treat
uncomplicated infections of the respiratory tract, urinary
tract, eyes, ears and skin. These products are generally in
technologically mature product segments.
Intal®,
an oral multi-dose inhaler of non-steroidal anti-inflammatory
agent indicated for the preventive management of asthma, is
marketed primarily to primary care physicians, allergists and
pediatricians.
Other. We also have other products that are
marketed primarily to primary care physicians and certain
specialists.
Some of our branded prescription products are described below:
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Product
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Product Description and Indication
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Cardiovascular/Metabolic |
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Altace®(1) |
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A hard-shell capsule for oral administration indicated for the
treatment of hypertension and reduction of the risk of stroke,
myocardial infarction (heart attack) and death from
cardiovascular causes in patients 55 and over with either a
history of coronary artery disease, stroke or peripheral
vascular disease or with diabetes and one other cardiovascular
risk factor (such as elevated cholesterol levels or cigarette
smoking).
Altace®
is also indicated in stable patients who have demonstrated
clinical signs of congestive heart failure after sustaining
acute myocardial infarction. |
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Corzide® |
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A beta-blocker diuretic combination tablet, indicated for the
management of hypertension. |
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Corgard®(2) |
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A beta-blocker tablet, indicated for the management of
hypertension as well as long-term management of patients with
angina pectoris. |
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Levoxyl® |
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Color-coded, potency-marked tablets indicated for thyroid
hormone replacement or supplemental therapy for hypothyroidism. |
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Cytomel® |
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A tablet indicated in the medical treatment of hypothyroidism.
The only commercially available thyroid hormone tablet
containing T(3) as a single entity. |
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Neuroscience |
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Skelaxin® |
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A muscle relaxant tablet indicated for the relief of discomforts
associated with acute, painful musculoskeletal conditions. |
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Avinza® |
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An extended-release formulation of morphine indicated as a
once-daily
treatment for moderate to severe pain in patients who require
continuous opioid therapy for an extended period of time. |
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Sonata® |
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A nonbenzodiazepine capsule treatment for insomnia. |
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Hospital/Acute Care |
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Thrombin-JMI® |
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A chromatographically purified topical (bovine) thrombin
solution indicated as an aid to hemostasis whenever oozing blood
and minor bleeding from capillaries and small venules is
accessible. |
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Synercid® |
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An injectable antibiotic indicated for treatment of certain
complicated skin and skin structure infections. |
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Bicillin® |
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A penicillin-based antibiotic suspension for deep muscular
injection indicated for the treatment of infections due to
penicillin-G-susceptible
microorganisms that are susceptible to serum levels common to
this particular dosage form. |
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Intal® |
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An oral multi-dose inhaler of a non-steroidal anti-inflammatory
agent for the preventive management of asthma. |
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Brevital® |
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An anesthetic solution for intravenous use in adults and only
for rectal and intramuscular use in pediatric patients. |
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Other |
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Menest® |
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A film-coated esterified estrogen tablet for the treatment of
vasomotor symptoms of menopause, atrophic vaginitis, kraurosis
valvae, female hypogonadism, female castration, primary ovarian
failure, breast cancer and prostatic carcinoma. |
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Delestrogen® |
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An injectable estrogen replacement therapy. |
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Aplisol® |
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Aids in the detection of infections with mycobacterium
tuberculosis. |
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Neosporin®(3) |
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A prescription strength ophthalmic ointment and solution
indicated for the topical treatment of ocular infections. It is
also formulated as a prescription strength genito-urinary
concentrated sterile irrigant indicated for short-term use as a
continuous irrigant or rinse to help prevent infections
associated with the use of indwelling catheters. |
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(1) |
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We acquired licenses for the exclusive rights in the United
States under various patents to the active ingredient in
Altace®. |
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(2) |
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We acquired a license to
Corgard®
in the United States. |
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(3) |
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We have exclusive licenses to manufacture and market
prescription formulations of
Neosporin®. |
7
Net sales of certain of our branded prescription products for
the year ended December 31, 2006 are set forth in the
tables below.
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Net Sales
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(In millions)
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Cardiovascular/Metabolic
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Altace®
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$
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653.0
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Levoxyl®
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111.8
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Cytomel®
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42.0
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Corgard®
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9.6
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Corzide®
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6.1
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Neuroscience
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Skelaxin®
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$
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415.2
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Sonata®
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85.8
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Hospital/Acute Care
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Thrombin-JMI®
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$
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246.5
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Bicillin®
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42.8
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Intal®
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15.0
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Synercid®
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14.7
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Brevital®
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6.0
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Other
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Aplisol®
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$
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18.6
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Neosporin®
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9.1
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Menest®
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9.1
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Delestrogen®
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8.9
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Meridian
Medical Technologies Segment
Our Meridian Medical Technologies segment consists primarily of
our auto-injector business. An auto-injector is a pre-filled,
pen-like device that allows a patient or caregiver to
automatically inject a precise drug dosage quickly, easily,
safely and reliably. Auto-injectors are a convenient,
disposable, one-time use drug delivery system designed to
improve the medical and economic value of injectable drug
therapies. We pioneered the development, and are a manufacturer,
of auto-injectors for the self-administration of injectable
drugs.
The commercial pharmaceutical business of our Meridian segment
primarily consists of
EpiPen®,
an auto-injector filled with epinephrine for the emergency
treatment of anaphylaxis resulting from severe or allergic
reactions to insect stings or bites, foods, drugs and other
allergens, as well as idiopathic or exercise-induced
anaphylaxis. We have a supply agreement with Dey, L.P., in which
we granted Dey the exclusive right to market, distribute, and
sell
EpiPen®
worldwide. The supply agreement expires December 31, 2015.
On March 1, 2006, we acquired substantially all of the
assets of Allerex Laboratory LTD. The primary asset purchased
from Allerex was the exclusive right to market and sell
EpiPen®
throughout Canada. We also obtained from Dey, L.P., an extension
of those exclusive rights to market and sell
EpiPen®
in Canada through 2015.
Our Meridian segment also includes pharmaceutical products that
are presently sold primarily to the U.S. Department of
Defense (DoD), under an Industrial Base Maintenance
Contract which is terminable by the DoD at its convenience.
These products include the nerve agent
antidotes AtroPen®
and
ComboPen®,
and the Antidote Treatment Nerve Agent Auto-injector, which we
refer to as the ATNAA.
AtroPen®
is an atropine-filled auto-injector and
ComboPen®
consists of an atropine-filled auto-injector and a
pralidoxime-filled auto-injector. The ATNAA utilizes a dual
chambered auto-injector and injection process to administer
atropine and pralidoxime, providing an improved, more efficient
means of delivering these nerve agent
8
antidotes. Other products sold to the DoD include a
diazepam-filled auto-injector for the treatment of seizures and
a morphine-filled auto-injector for pain management.
Factors relating to our Meridian business make our future
operating results uncertain and may cause them to fluctuate from
period to period. With respect to
EpiPen®,
some of the demand for the product is seasonal as a result of
its use in the emergency treatment of allergic reactions to
insect stings or bites. With respect to auto-injector products
sold to government entities, demand for the product is affected
by the cyclical nature of procurements as well as response to
domestic and international events.
Royalties
Segment
We have successfully developed two currently marketed
adenosine-based products,
Adenoscan®
and
Adenocard®,
for which we receive royalty revenues.
Adenoscan®
is a sterile, intravenous solution of adenosine administered
intravenously as an adjunct to imaging agents used in cardiac
stress testing of patients who are unable to exercise
adequately.
Adenocard®
is a sterile solution of adenosine administered intravenously in
emergency situations to convert certain irregular heart rhythms
to normal sinus rhythms. Specifically, we are party to an
agreement under which Astellas Pharma US, Inc. (formerly
Fujisawa Healthcare, Inc.) manufactures and markets
Adenoscan®
and
Adenocard®
in the United States and Canada in exchange for royalties
through the duration of the patents. We own one patent on
Adenoscan®
with an expiration date of May 2009. We also have certain
contractual rights tied to another patent covering
Adenoscan®
which does not expire until 2015. We have licensed exclusive
rights to other third-party pharmaceutical companies to
manufacture and market
Adenoscan®
and
Adenocard®
in certain countries other than the United States and Canada in
exchange for royalties.
Royalties received by us from sales of
Adenoscan®
and
Adenocard®
outside of the United States and Canada are shared equally with
Astellas. Astellas, on its own behalf and ours, obtained a
license to additional intellectual property rights for
intravenous adenosine in cardiac imaging and the right to use
intravenous adenosine as a cardioprotectant in combination with
thrombolytic therapy, balloon angioplasty and coronary bypass
surgery. For additional information on our royalty agreements,
please see the section below entitled Intellectual
Property.
For a discussion regarding the potential risk of generic
competition for
Adenoscan®,
please see Note 18, Commitments and
Contingencies, in Part IV, Item 15(a)(1),
Exhibits and Financial Statement Schedules.
Contract
Manufacturing Segment
We utilize a portion of our excess manufacturing capacity to
provide third-party contract manufacturing for other
pharmaceutical and biotechnology companies. Contract
manufacturing as a percentage of total revenues equaled
approximately 1% for the year ended December 31, 2006. We
believe contract manufacturing provides a means of absorbing
overhead costs and, as such, is an efficient utilization of
excess capacity.
Other
Segment
Our alliance revenue from Depomed for the promotion of
Glumetzatm
is included in our Other segment.
Sales and
Marketing
Our commercial operations organization, which includes sales and
marketing, is based in Bridgewater, New Jersey. We have a sales
force consisting of over 1,100 employees in the United States
and Puerto Rico. We distribute our branded pharmaceutical
products primarily through wholesale pharmaceutical
distributors. These products are ordinarily dispensed to the
public through pharmacies by prescription. Our marketing and
sales promotions for branded pharmaceutical products principally
target general/family practitioners, internal medicine
physicians, cardiologists, endocrinologists, neurologists,
psychiatrists, pain specialists, sleep specialists and hospitals
through detailing and sampling to encourage physicians to
prescribe our products. The sales force is supported by
telemarketing and direct mail, as well as through advertising in
trade publications and representation at regional and national
medical conventions. Our telemarketing and direct mailing
efforts are
9
performed primarily by using a computer sampling system which we
developed to distribute samples to physicians. We identify and
target physicians through data available from IMS America, Ltd.,
a supplier of prescriber prescription data. The marketing and
distribution of these products in foreign countries generally
requires the prior registration of the products in those
countries. We generally seek to enter into distribution
agreements with companies with established foreign marketing and
distribution capabilities since we do not have a distribution
network in place for distribution outside the United States and
Puerto Rico.
Similar to other pharmaceutical companies, our principal
customers are wholesale pharmaceutical distributors. The
wholesale distributor network for pharmaceutical products has in
recent years been subject to increasing consolidation, which has
increased our, and other industry participants, customer
concentration. In addition, the number of independent drug
stores and small chains has decreased as retail consolidation
has occurred. For the year ended December 31, 2006,
approximately 74% of our gross sales were attributable to three
key wholesalers: McKesson Corporation (32%), Cardinal/Bindley
(29%), and Amerisource Bergen Corporation (13%).
Manufacturing
Our manufacturing facilities are located in Bristol, Tennessee;
Rochester, Michigan; Middleton, Wisconsin; St. Petersburg,
Florida; and St. Louis, Missouri. These facilities have
manufacturing, packaging, laboratory, office and warehouse
space. We are licensed by the Drug Enforcement Agency, which we
refer to as the DEA, a division of the Department of
Justice, to procure and produce controlled substances. We
manufacture certain of our own branded pharmaceutical products,
as well as products owned by other pharmaceutical companies
under manufacturing and supply contracts.
We can produce a broad range of dosage forms, including sterile
solutions, lyophylized (freeze-dried) products, injectables,
tablets and capsules, creams and ointments, suppositories and
powders. We believe our manufacturing capabilities allow us to
pursue drug development and product line extensions more
efficiently. We manufacture a portion of the finished dosage
form of
Altace®
at our Bristol facility. However, currently many of our product
lines, including
Skelaxin®,
Sonata®,
Delestrogen®,
Intal®,
Tilade®,
Synercid®
and
Cortisporin®
are manufactured for us by third parties. As of
December 31, 2006, we estimate capacity utilization was
approximately 30% at the Bristol facility, approximately 20% at
the Rochester facility, approximately 100% at the Middleton
facility, approximately 75% at the St. Petersburg facility and
approximately 75% at the St. Louis facility. In 2006, we
initiated an operational excellence program utilizing Six Sigma
and lean manufacturing techniques to identify and execute cost
saving and process improvement initiatives.
During the third quarter of 2006, we began to implement our plan
to streamline manufacturing activities to improve operating
efficiency and reduce costs, including the decision to transfer
the production of
Levoxyl®
from our St. Petersburg, Florida facility to our Bristol,
Tennessee facility by the end of 2008. We expect to close our
St. Petersburg, Florida facility following the transfer.
In addition to manufacturing, we have fully integrated
manufacturing support systems including quality assurance,
quality control, regulatory management and logistics. We believe
that these support systems enable us to maintain high standards
of quality for our products and simultaneously deliver reliable
goods to our customers on a timely basis.
We require a supply of quality raw materials and components to
manufacture and package drug products for us and for third
parties with whom we have contracted. Generally, we have not had
difficulty obtaining raw materials and components from
suppliers. Currently, we rely on more than 500 suppliers to
deliver the needed raw materials and components for our products.
We have experienced, and anticipate that we will continue to
experience, periods of stock-outs in our inventory of
Sonata®.
This product is manufactured for us by Wyeth. Wyeth has been
unable to timely and consistently supply our forecasted need for
Sonata®
since December 2006. It is anticipated that the problems with
production of
Sonata®
experienced by Wyeth will continue for an indeterminable period
of time, leaving us, from time to time, if not continuously,
without sufficient supply of product to meet demand. Our
management is working with Wyeth to address these problems and
transfer the manufacture of
Sonata®
to
10
another manufacturer, but we currently do not have a solution
that will assure us of consistent supply. Given the competitive
market for this product, we have and will likely continue to
experience permanent erosion of our customer base, market share
and sales.
Research
and Development
We are engaged in the development of chemical compounds,
including new chemical entities, which provide us with strategic
pipeline opportunities for the commercialization of new branded
prescription pharmaceutical products. In addition to developing
new chemical compounds, we pursue strategies to enhance the
value of existing products by developing new uses, formulations,
and drug delivery technology that may provide additional
benefits to patients and improvements in the quality and
efficiency of our manufacturing processes.
We invest in research and development because we believe it is
important to our long-term growth. We presently employ
approximately 70 people in research and development, including
pre-clinical and toxicology experts, pharmaceutical formulations
scientists, clinical development experts, medical affairs
personnel, regulatory affairs experts, data
scientists/statisticians and project managers.
In the conduct of our research and development, we utilize a
virtual model led by our project management personnel, providing
us with substantial flexibility and allowing high efficiency
while minimizing internal fixed costs. Utilizing this model, we
supplement our internal efforts by collaborating with
independent research organizations, including educational
institutions and research-based pharmaceutical and biotechnology
companies, and contracting with other parties to perform
research in their facilities. We use the services of physicians,
hospitals, medical schools, universities, and other research
organizations worldwide to conduct clinical trials to establish
the safety and effectiveness of new products. We seek
investments in external research and technologies that hold the
promise to complement and strengthen our own research efforts.
These investments can take many forms, including in-licensing
arrangements, development agreements, joint ventures, and the
acquisition of products in development.
Drug development is time-consuming and expensive. Only a small
percentage of chemical compounds discovered by researchers prove
to be both medically effective and safe enough to become an
approved medicine. The process from discovery to regulatory
approval typically takes 10 to 15 years or longer. Drug
candidates can fail at any stage of the process, and even
late-stage product candidates sometimes fail to receive
regulatory approval.
Clinical trials are conducted in a series of sequential phases,
with each phase designed to address a specific research
question. In Phase I clinical trials, researchers test a
new drug or treatment in a small group of people to evaluate the
drugs safety, determine a safe dosage range, and identify
side effects. In Phase II clinical trials, researchers give
the drug or treatment to a larger population to assess
effectiveness and to further evaluate safety. In Phase III
clinical trials, researchers give the drug or treatment to an
even larger population to confirm its effectiveness, monitor
side effects, compare it to commonly used treatments, and
collect information that will allow the drug or treatment to be
used safely. The results of Phase III clinical trials are
pivotal for purposes of obtaining FDA approval of a new product.
Our development projects, including those for which we have
collaboration agreements with third parties, include the
following:
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Remoxytm,
an investigational drug for the treatment of severe to chronic
pain, which is currently in Phase III clinical trials;
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Binodenoson, our next generation cardiac pharmacologic
stress-imaging agent, which is currently in Phase III
clinical trials;
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Vanquixtm,
a diazepam-filled auto-injector for the treatment of acute,
repetitive epileptic seizures, which is currently in
Phase III clinical trials;
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Bremelanotide, an investigational drug for the treatment of ED
and FSD, which is currently in late Phase II clinical
trials;
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MRE0094, an investigational drug for the topical treatment of
chronic diabetic neuropathic foot ulcers, which is currently in
Phase II clinical trials; and
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T-62, an investigational drug for the treatment of neuropathic
pain, for which we have completed Phase I clinical trials.
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Development projects, including those in which we have
collaboration agreements with third parties, that involve
currently marketed compounds include the following:
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a novel formulation involving ramipril for which an NDA is
pending;
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an
Altace®/diuretic
combination product which is currently in Phase III
clinical trials;
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a program to evaluate the safety and efficacy of
Altace®
in children; and
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a new formulation of metaxalone.
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Our research and development expenses increased to
$143.6 million in 2006 from $74.0 million in 2005 and
$67.9 million in 2004, excluding research and development
in-process at the time of acquisition of a product, primarily as
a result of our development projects discussed above. In-process
research and development expenses were $110.0 million for
the year ended December 31, 2006, $188.7 million for
the year ended December 31, 2005 and $16.3 million for
the year ended December 31, 2004. In-process research and
development represents the actual cost of acquiring rights to
branded pharmaceutical projects in development from third
parties, which costs we expense at the time of acquisition.
Government
Regulation
Our business and our products are subject to extensive and
rigorous regulation at both the federal and state levels. Nearly
all of our products are subject to pre-market approval
requirements. New drugs are approved under, and are subject to,
the Food, Drug and Cosmetics Act (FDC Act), and
related regulations. Biological drugs are subject to both the
FDC Act and the Public Health Service Act, which we refer to as
the PHS Act, and related regulations. Biological
drugs are licensed under the PHS Act.
At the federal level, we are principally regulated by the FDA as
well as by the U.S. Drug Enforcement Agency (DEA),
the Consumer Product Safety Commission, the Federal Trade
Commission, the U.S. Department of Agriculture, the
Occupational Safety and Health Administration, and the
U.S. Environmental Protection Agency (EPA). The
FDC Act, the regulations promulgated thereunder, and other
federal and state statutes and regulations, govern, among other
things, the development, testing, manufacture, safety,
effectiveness, labeling, storage, record keeping, approval,
advertising and promotion of our products and those manufactured
by and for third parties. Product development and approval
within this regulatory framework requires a number of years and
involves the expenditure of substantial resources.
When we acquire the right to market an existing approved
pharmaceutical product, both we and the former application
holder are required to submit certain information to the FDA.
This information, if adequate, results in the transfer to us of
marketing rights to the pharmaceutical product. We are also
required to report to the FDA, and sometimes acquire prior
approval from the FDA for, certain changes in an approved NDA,
as set forth in the FDAs regulations. When advantageous,
we transfer the manufacture of acquired branded pharmaceutical
products to other manufacturing facilities, which may include
manufacturing facilities we own, after regulatory requirements
are satisfied. In order to transfer manufacturing of acquired
products, the new manufacturing facility must demonstrate,
through the filing of information with the FDA and an FDA
inspection, that it can manufacture the product in accordance
with current Good Manufacturing Practices, referred to as
cGMPs, and the specifications and conditions of the
approved marketing application. There can be no assurance that
the FDA will grant necessary approvals in a timely manner, if at
all.
The FDA also mandates that drugs be manufactured, packaged and
labeled in conformity with cGMPs. In complying with cGMPs,
manufacturers must continue to expend time, money and effort in
production, record keeping and quality control to ensure that
the products meet applicable specifications and other
requirements to ensure product safety and efficacy.
12
The FDA and other government agencies periodically inspect drug
manufacturing facilities to ensure compliance with applicable
cGMP and other regulatory requirements. Failure to comply with
these statutory and regulatory requirements subjects the
manufacturer to possible legal or regulatory action, such as
suspension of manufacturing, seizure of product or recall of
product. We must report adverse experiences with the use of our
products to the FDA, and the FDA could impose market
restrictions on us such as labeling changes or product removal.
Product approvals may be withdrawn if we fail to comply with
regulatory requirements or if there are problems with the safety
or efficacy of the product.
The federal government has extensive enforcement powers over the
activities of pharmaceutical manufacturers including the
authority to withdraw product approvals, commence actions to
seize and prohibit the sale of unapproved or non-complying
products, halt manufacturing operations that are not in
compliance with cGMPs, and impose or seek injunctions, voluntary
or involuntary recalls, and civil monetary and criminal
penalties. A restriction or prohibition on sales or withdrawal
of approval of products marketed by us could materially
adversely affect our business, financial condition or results of
operations.
We also manufacture and sell pharmaceutical products which are
controlled substances as defined in the Controlled
Substances Act and related federal and state laws. These laws
establish certain security, licensing, record keeping, reporting
and personnel requirements administered by the DEA and state
authorities. The DEA has dual missions of law enforcement and
regulation. The former deals with the illicit aspects of the
control of abusable substances and the equipment and raw
materials used in making them. The DEA shares enforcement
authority with the Federal Bureau of Investigation, another
division of the Department of Justice. The DEAs regulatory
responsibilities are concerned with the control of licensed
manufacturers, distributors and dispensers of controlled
substances, the substances themselves and the equipment and raw
materials used in their manufacture and packaging in order to
prevent these articles from being diverted into illicit channels
of commerce. We maintain appropriate licenses and certificates
with the DEA and applicable state authorities in order to engage
in the development, manufacturing and distribution of
pharmaceutical products containing controlled substances.
The distribution of pharmaceutical products is subject to the
Prescription Drug Marketing Act (PDMA), a part of
the FDC Act, which regulates distribution activities at both the
federal and state levels. Under the PDMA and its implementing
regulations, states are permitted to require registration of
manufacturers and distributors who provide pharmaceuticals even
if these manufacturers or distributors have no place of business
within the state. States are also permitted to adopt regulations
limiting the distribution of product samples to licensed
practitioners. The PDMA also imposes extensive licensing,
personnel record keeping, packaging, quantity, labeling, product
handling and facility storage and security requirements intended
to prevent the sale of pharmaceutical product samples or other
diversions of samples.
A number of states have passed laws specifically designed to
track and regulate specified activities of pharmaceutical
companies. Other states presently have pending legislation that
will have similar effects. Some of these state laws require the
tracking and reporting of advertising or marketing activities
and spending within the state. Others limit spending on items
provided to healthcare providers or state officials.
Environmental
Matters
Our operations are subject to numerous and increasingly
stringent federal, state and local environmental laws and
regulations concerning, among other things, the generation,
handling, storage, transportation, treatment and disposal of
toxic and hazardous substances and the discharge of pollutants
into the air and water. Environmental permits and controls are
required for some of our operations and these permits are
subject to modification, renewal and revocation by the issuing
authorities. We believe that our facilities are in substantial
compliance with our permits and environmental laws and
regulations and do not believe that future compliance with
current environmental laws will have a material adverse effect
on our business, financial condition or results of operations.
Our environmental capital expenditures and costs for
environmental compliance were immaterial in 2006 and 2005, but
may increase in the future as a result of changes in
environmental laws and regulations or as a result of increased
manufacturing activities at any of our facilities.
13
Competition
General
We compete with numerous other pharmaceutical companies,
including large, global pharmaceutical companies, for the
acquisition of products and technologies in later stages of
development. We also compete with other pharmaceutical companies
for currently marketed products and product line acquisitions.
Additionally, our products are subject to competition from
products with similar qualities. Our branded pharmaceutical
products may be subject to competition from alternate therapies
during the period of patent protection and thereafter from
generic equivalents. The manufacturers of generic products
typically do not bear the related research and development costs
and consequently are able to offer such products at considerably
lower prices than the branded equivalents. There are, however, a
number of factors which enable some products to remain
profitable once patent protection has ceased. These include the
establishment of a strong brand image with the prescriber or the
consumer, supported by the development of a broader range of
alternative formulations than the manufacturers of generic
products typically supply.
Generic
Substitutes
Some of our branded pharmaceutical products currently face
competition from generic substitutes, and others may face
competition from generic substitutes in the future. For a
manufacturer to launch a generic substitute, it must prove to
the FDA that the branded pharmaceutical product and the generic
substitute are therapeutically bioequivalent.
The FDA requires that generic applicants claiming invalidity or
non-infringement of patents listed by a new drug application
(NDA) holder give the NDA holder notice each time an
abbreviated new drug application (ANDA) which claims
invalidity or non-infringement of listed patents is either
submitted or amended. If the NDA holder files a patent
infringement suit against the generic applicant within
45 days of receiving such notice, the FDA is barred (or
stayed) from approving the ANDA for 30 months unless
specific events occurred sooner. To avoid multiple
30-month
stays for the same branded drug, the relevant provisions of the
Hatch-Waxman
Act (21 U.S.C. §§ 355(j)(2) and (5))
indicate that a
30-month
stay will only attach to patents that are listed in the
FDAs Approved Drug Products with Therapeutic
Equivalence Evaluations, which we refer to as the
FDAs Orange Book, at the time an ANDA is
originally filed. Although the ANDA filer is still required to
certify against a newly-listed patent, and the NDA holder can
still bring suit based upon infringement of that patent, such a
suit will not trigger an additional
30-month
stay of FDA approval of the ANDA.
Patents that claim a composition of matter relating to a drug or
certain methods of using a drug are required to be listed in the
FDAs Orange Book. The FDAs regulations prohibit
listing of certain types of patents. Thus, some patents that may
issue are not eligible for listing in the FDAs Orange Book
and thus not eligible for protection by a
30-month
stay of FDA approval of the ANDA.
Intellectual
Property
Patents,
Licenses and Proprietary Rights
The protection of discoveries in connection with our development
activities is critical to our business. The patent positions of
pharmaceutical companies, including ours, are uncertain and
involve legal and factual questions which can be difficult to
resolve. We seek patent protection in the United States and
selected foreign countries where and when appropriate.
In connection with the
Altace®
product line, we acquired a license for the exclusive rights in
the United States and Puerto Rico to various Aventis patents,
including the rights to the active ingredients in
Altace®.
Altace®
patents listed in the FDAs Orange Book expire in October
2008 and April 2012. Our rights include the use of the active
ingredients in
Altace®
alone and in combination as human therapeutic or human
diagnostic products in the United States.
14
Skelaxin®
has two
method-of-use
patents listed in the FDAs Orange Book which expire in
December 2021.
Avinza®
has a formulation patent listed in the FDAs Orange Book
that expires in November 2017.
Sonata®
has a composition of matter patent listed in the FDAs
Orange Book that expires in June 2008.
We own patent rights in the United States related to the HFA
formulation of
Intal®
until September 2017 and a formulation patent in the United
States for
Synercid®
until November 2017.
We have exclusive licenses expiring in June 2036 for the
prescription formulations of
Neosporin®.
These licenses are subject to early termination in the event we
fail to meet specified quality control standards, including cGMP
regulations with respect to the products, or commit a material
breach of other terms and conditions of the licenses which would
have a significant adverse effect on the uses of the licensed
products retained by the licensor.
We own the intellectual property rights associated with
Meridians dual-chambered auto-injector and injection
process, which include a patent in the United States that
expires in April 2010.
We receive royalties on sales of
Adenoscan®,
a product that we successfully developed. We own one patent on
Adenoscan®
with an expiration date of May 2009. We also have certain
rights tied to another patent covering this product which does
not expire until 2015.
In addition to the intellectual property for the currently
marketed products described above, we also have created or
acquired intellectual property related to various products
currently under development. For example, we have acquired
rights to intellectual property relating to T-62 and certain
related backup compounds currently under development for the
treatment for neuropathic pain. In connection with our
collaborative agreement with Pain Therapeutics, Inc., we have
acquired an exclusive license (subject to preexisting license
rights granted by Pain Therapeutics) to certain intellectual
property rights related to opioid formulations, including
Remoxytm,
which is currently in development for the treatment of moderate
to severe chronic pain. In connection with our collaborative
agreement with Palatin Technologies, Inc., we have acquired a
co-exclusive license to intellectual property rights related to
bremelanotide, currently being developed for the treatment of
male and female sexual dysfunction. Furthermore, in connection
with the development of MRE0094, we have acquired exclusive
licenses to composition and method patents related to adenosine
receptor agonists for the topical treatment of chronic diabetic
foot ulcers. Also, we have acquired exclusive rights to patents
related to binodenoson, the pharmacologic stress agent specific
to the adenosine receptor necessary for increased cardiac blood
flow. Also, we have acquired certain intellectual property
rights from Mutual Pharmaceutical Company, Inc. related to
metaxalone, the active pharmaceutical ingredient in
Skelaxin®,
and we have acquired certain intellectual property rights from
Arrow related to ramipril, the active pharmaceutical ingredient
in
Altace,®
as previously discussed.
We also rely upon trade secrets, unpatented proprietary know-how
and continuing technological innovation to develop and sustain
our competitive position. There can be no assurance that others
will not independently develop substantially equivalent
proprietary technology and techniques or otherwise gain access
to our trade secrets or disclose the technology or that we can
adequately protect our trade secrets.
For a discussion of challenges to our patents by generic drug
manufacturers, please see the section entitled Risk
Factors under the heading If we cannot successfully
enforce our rights under the patents relating to three of our
largest products,
Altace®,
Skelaxin®
and
Sonata®,
and the patent relating to
Adenoscan®,
or if we are unable to secure or enforce our rights under other
patents, trademarks, trade secrets or other intellectual
property, additional competitors could enter the market, and
sales of these products may decline materially.
Trademarks
We sell our branded products under a variety of trademarks. We
believe that we have valid proprietary interests in all
currently used trademarks, including those for our principal
branded pharmaceutical products registered in the United States.
15
Backlog
There was no material backlog as of February 27, 2007. For a
discussion regarding
Sonata®
supply, please see Manufacturing in Part I,
Item 1, Business.
There was no material backlog as of February 24, 2006.
Executive
Officers
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Name
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Age
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Position with the Company
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Brian A. Markison
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47
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President and Chief Executive Officer
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Joseph Squicciarino
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Chief Financial Officer
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Stephen J. Andrzejewski
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41
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Chief Commercial Officer
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Frederick
Brouillette, Jr.
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55
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Corporate Compliance Officer
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Eric J. Bruce
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Chief Technical Operations Officer
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Dr. Eric G. Carter
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55
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Chief Science Officer
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James W. Elrod
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46
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General Counsel
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James E. Green
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Executive Vice President, Corporate Affairs
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Brian A. Markison has served as President and Chief
Executive Officer and as a director since July 2004. He had
served as Chief Operating Officer since March 2004. Prior to
joining King, Mr. Markison had served in various positions
with Bristol-Myers Squibb since 1982. From 2001 until he joined
King, he served as President of Bristol-Myers Squibbs
Oncology, Virology and Oncology Therapeutics Network businesses.
Between 1998 and 2001, he served variously as Senior Vice
President, Neuroscience/Infectious Disease; President,
Neuroscience/Infectious Disease/Dermatology; and Vice President,
Operational Excellence and Productivity. Mr. Markison also
serves on the Board of Directors of Immunomedics, Inc., a
publicly-held corporation. He previously served in various
positions with Bristol-Myers Squibb relating to marketing and
sales. He graduated from Iona College in 1982 with a Bachelor of
Science degree.
Joseph Squicciarino has served as Kings Chief
Financial Officer since June 2005. Prior to joining King, he
served as Chief Financial Officer North America for
Revlon, Inc. since March 2005. From February 2003 until March
2005 he served as Chief Financial Officer
International for Revlon International, Inc. He held the
position of Group Controller Pharmaceuticals Europe,
Middle East, Africa with Johnson & Johnson from October
2001 until October 2002. He held a variety of positions with the
Bristol-Myers Squibb Company and its predecessor, the Squibb
Corporation, from 1979 until 2001, including Vice President
Finance, International Medicines; Vice President Finance, Europe
Pharmaceuticals & Worldwide Consumer Medicines; Vice
President Finance, Technical Operations; and Vice President
Finance, U.S. Pharmaceutical Group. Mr. Squicciarino
is a Certified Public Accountant, a member of the New Jersey
Society of Certified Public Accountants and a member of the
American Institute of Certified Public Accountants. He graduated
from Adelphi University in 1978 with a Bachelor of Science
degree in Accounting.
Stephen J. Andrzejewski has served as Chief Commercial
Officer since October 2005. He was previously Corporate Head,
Commercial Operations since May 2004. Prior to joining King,
Mr. Andrzejewski had served as Senior Vice President,
Commercial Business at Endo Pharmaceuticals Inc. since June
2003. He previously served in various positions with
Schering-Plough Corporation since 1987, including Vice President
of New Products and Vice President of Marketing, and had
responsibility for launching the
Claritin®
product. Mr. Andrzejewski graduated from Hamilton College
cum laude in 1987 with a Bachelor of Arts degree and in 1992
graduated from New York Universitys Stern School of
Business with a Master of Business Administration degree.
Frederick Brouillette, Jr. has served as Corporate
Compliance Officer since August 2003. He served as Executive
Vice President, Finance from January 2003 until August 2003 and
as Vice President, Risk Management beginning in February 2001.
Prior to joining King, Mr. Brouillette, a Certified Public
Accountant, was with PricewaterhouseCoopers for 4 years,
serving most recently in that firms Richmond, Virginia
office providing internal audit outsourcing and internal control
consulting services. He was formerly a chief internal
16
audit executive for two major public corporations and served for
12 years in the public accounting audit practice of Peat,
Marwick Mitchell & Co., the predecessor firm to KPMG.
Mr. Brouillette is a member of the Virginia Society of
Certified Public Accountants, the American Institute of
Certified Public Accountants, and the Institute of Internal
Auditors. He graduated with honors from the University of
Virginias McIntire School of Commerce in 1973 with a
Bachelor of Science degree in accounting.
Eric J. Bruce has served as Chief Technical Operations
Officer since June 2005. Prior to joining King, Mr. Bruce
served as Vice President of Operations for Mallinckrodt
Pharmaceuticals, a position he had occupied since 2000. He
previously served as Vice President of Manufacturing for Kendall
Health Care from 1997 until 2000, and from 1996 until 1997 he
held various positions with INBRAND, including that of Senior
Vice President of Manufacturing. Mr. Bruce graduated from
the Georgia Institute of Technology in 1978 with a Bachelor of
Science degree in Industrial Management.
Eric G. Carter, M.D., Ph.D., was appointed as
Kings Chief Science Officer in January 2007. Prior to
joining King, he had served in several positions with
GlaxoSmithKline since 1999, most recently as Vice President and
Global Head, Clinical Development and Medical Affairs,
Gastroenterology, R&D. Dr. Carter has served as a
Clinical Associate Professor at the University of North Carolina
for the Division of Digestive Diseases and Nutrition, School of
Medicine. He previously held academic positions with the
University of California, where he was responsible for
establishing and directing many research programs. After earning
a bachelors degree in Biochemistry from the University of
London, Dr. Carter received his medical degree from the
University of Miami and a doctor of philosophy degree from the
University of Cambridge. He obtained board certification from
the American Board of Internal Medicine, Gastroenterology and
Clinical Nutrition and has authored or co-authored more than 50
scientific publications.
James W. Elrod has served as General Counsel since
February 2006 and Corporate Secretary since May 2005. He served
as Acting General Counsel from February 2005 to February 2006.
He previously served in various positions with King since
September 2003, including Vice President, Legal Affairs. Prior
to joining King he served in various capacities at Service
Merchandise Company, Inc. including Vice President, Legal
Department. He previously practiced law in Nashville, Tennessee.
Mr. Elrod has a Juris Doctor degree (Order of the Coif)
from the University of Tennessee and a Bachelor of Arts degree
from Berea College.
James E. Green has served as Executive Vice President,
Corporate Affairs since April 2003. He served as Vice President,
Corporate Affairs since June 2002 and as Senior Director,
Corporate Affairs since September 2000. Prior to joining King,
he was engaged in the private practice of law for 15 years
as a commercial transactions and commercial litigation attorney,
having most recently served as the senior member of
Green & Hale, a Professional Corporation, in Bristol,
Tennessee. Mr. Green graduated from Southern Methodist
University School of Law with a Juris Doctor degree in 1985 and
Milligan College with a Bachelor of Science degree, cum laude,
in 1982. He is licensed to practice law in Tennessee, Texas, and
Virginia.
Employees
As of February 23, 2007, we employed approximately 2,800
full-time and 6 part-time persons. Approximately
180 employees of the Rochester facility are covered by a
collective bargaining agreement with United Steelworkers, Local
6-176, which expires on February 28, 2008. Approximately
280 employees of the St. Louis facility are covered by a
collective bargaining agreement with the International
Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers
of America Union, Local No. 688, which expires
February 28, 2008. We believe our employee relations are
good.
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You should carefully consider the risks described below and
the other information contained in this report, including our
audited consolidated financial statements and related notes. The
risks described below are not the only ones facing our company.
Additional risks not presently known to us or that we currently
deem immaterial may also impair our business operations. If any
of the adverse events described in this Risk Factors
section or other sections of this report actually occurs, our
business, results of operations and financial condition could be
materially adversely affected, the trading price, if any, of our
securities could decline and you might lose all or part of your
investment.
Risks
Related to our Business
If we
cannot successfully enforce our rights under the patents
relating to three of our largest products,
Altace®,
Skelaxin®
and
Sonata®,
and the patent relating to
Adenoscan®,
or if we are unable to secure or enforce our rights under other
patents, trademarks, trade secrets or other intellectual
property, additional competitors could enter the market, and
sales of these products may decline materially.
Under the Hatch-Waxman Act, any generic pharmaceutical
manufacturer may file an ANDA with a certification, known as a
Paragraph IV certification, challenging the
validity or infringement of a patent listed in the FDAs
Approved Drug Products with Therapeutic Equivalence
Evaluations, which is known as the FDAs Orange
Book, four years after the pioneer company obtains
approval of its NDA. Other companies have filed
Paragraph IV certifications challenging the patents
associated with several of our largest products, as described
below.
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Cobalt Pharmaceuticals, Inc. (Cobalt), a
generic drug manufacturer, filed an ANDA with the FDA seeking
permission to market a generic version of
Altace®
and filed a Paragraph IV certification alleging invalidity
of a patent held by us related to
Altace®.
Aventis Pharma Deutschland GmbH (Aventis) and we
filed suit in March 2003, in the District Court for the District
of Massachusetts to enforce our rights under that patent. The
parties submitted a joint stipulation of dismissal in April
2006, and the court granted dismissal. We have received a
request for information from the U.S. Federal Trade
Commission (FTC) in connection with the dismissal
without prejudice of our patent infringement litigation against
Cobalt under the Hatch-Waxman Act of 1984. We are cooperating
with the FTC in this investigation.
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Lupin Ltd. (Lupin) filed an ANDA with the FDA
seeking permission to market a generic version of
Altace®
and filed a Paragraph IV certification challenging the validity
and infringement of a patent related to
Altace®,
and seeking to market its generic version of
Altace®
before expiration of that patent. In July 2005, we filed civil
actions for infringement of the patent against Lupin. In July
2006, the validity of the patent was upheld. Lupin filed a
notice of appeal in July 2006. Pursuant to the current schedule,
appellate briefing will be completed in March 2007.
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Eon Labs, Inc. (Eon Labs), CorePharma, LLC
(CorePharma) and Mutual Pharmaceutical Co.
(Mutual), Inc. have each filed an ANDA with the FDA
seeking permission to market a generic version of
Skelaxin®
400 mg tablets. Additionally, Eon Labs ANDA seeks
permission to market a generic version of
Skelaxin®
800 mg tablets. Each has also filed Paragraph IV
certifications against patents related to
Skelaxin®
and are alleging noninfringement, invalidity and
unenforceability of those patents. A patent infringement suit
was filed against Eon Labs in January 2003; against CorePharma
in March 2003; and against Mutual in March 2004 concerning their
proposed 400 mg products. Additionally, we filed a separate
suit against Eon Labs in December 2004 concerning its proposed
800 mg product. In May 2006 the Mutual case was suspended
pending the outcome of the FDA activity described below. In June
2006, the Eon Labs cases were consolidated with the CorePharma
case.
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In March 2004, we received a copy of a letter from the FDA to
all ANDA applicants for
Skelaxin®
stating that the use listed in the FDAs Orange Book for a
patent related to Skelaxin may be deleted from the ANDA
applicants product labeling. We believe that this decision
is arbitrary, capricious, and inconsistent with the FDAs
previous position on this issue. We filed a Citizen Petition in
March 2004,
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supplemented in April and July 2004, requesting that the FDA
rescind that letter, require generic applicants to submit
Paragraph IV certifications for the patent in question, and
prohibit the removal of information corresponding to the use
listed in the Orange Book. We concurrently filed a Petition for
Stay of Action requesting the FDA to stay approval of any
generic metaxalone products until the FDA has fully evaluated
our Citizen Petition. In March 2004, the FDA sent a letter to us
explaining that our proposed labeling revision, which includes
references to additional clinical studies relating to food, age,
and gender effects, was approvable and only required certain
formatting changes. In April 2004, we submitted amended labeling
text that incorporated those changes. On the same day, Mutual
filed a Petition for Stay of Action requesting the FDA to stay
approval of our proposed labeling revision until the FDA has
fully evaluated and ruled upon our Citizen Petition, as well as
all comments submitted in response to that petition. CorePharma,
Mutual and we have filed responses and supplements to their
pending Citizen Petitions and responses. In December 2005,
Mutual filed another supplement with the FDA in which it
withdrew its prior Petition for Stay of Action, its supplement,
and its opposition to Kings Citizen Petition. In November
2006, the FDA approved the revision to the
Skelaxin®
labeling. In February 2007, we filed another supplement to
our pending Citizen Petition to reflect FDA approval of the
revision to the
Skelaxin®
labeling
If our Citizen Petition is rejected, there is a substantial
likelihood that a generic version of
Skelaxin®
will enter the market, and our business, financial condition,
results of operations and cash flows could be materially
adversely affected. In an attempt to mitigate this risk, we have
entered into an agreement with a generic pharmaceutical company
to launch an authorized generic of
Skelaxin®
in the event of generic competition. However, we cannot provide
any assurance regarding the degree to which this strategy will
be successful, if at all.
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Sicor Pharmaceuticals, Inc. (Sicor), a
generic drug manufacturer, filed an ANDA with the FDA seeking
permission to market a generic version of
Adenoscan®.
It also filed a Paragraph IV certification alleging
invalidity of a patent related to
Adenoscan®
and non-infringement of certain claims of that patent. We and
Astellas Pharma US, Inc., the exclusive licensee of certain
rights under the patent, filed suit in May 2005 against Sicor
and its parents/affiliates Sicor, Inc.,
Teva Pharmaceuticals USA, Inc. (Teva) and Teva
Pharmaceutical Industries, Ltd., to enforce our rights under the
patent. In May 2006, Sicor stipulated to infringement of the
asserted claims of the patent. Trial in this action began on
February 12, 2007.
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Teva filed an ANDA with the FDA seeking permission to
market a generic version of
Sonata®,
as well as a Paragraph IV certification challenging the
validity and enforceability of a patent related to Sonata which
expires in June 2008. We filed suit against Teva to enforce our
rights under that patent. In September 2006, the parties filed a
stipulation with the Court in which Teva admitted infringement
of the patent. In October 2006, Teva filed a summary judgment
motion which the Court denied in January 2007.
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If any of these Paragraph IV challenges succeeds, our
affected product would face generic competition and its sales
would likely decline materially. Should sales decline, we may
have to write off a portion or all of the intangible assets
associated with the affected product.
For additional information about these Paragraph IV
challenges, please see Note 18 Commitments and
Contingencies in Part IV Item 15(a)(1) Exhibits
and Financial Statement Schedules.
We may not be successful in securing or maintaining proprietary
patent protection for other of our products or for products and
technologies we develop or license. In addition, our competitors
may develop products similar to ours, including generic
products, using methods and technologies that are beyond the
scope of our intellectual property protection, which could
materially reduce our sales.
Although most of our revenue is generated by products not
currently subject to competition from generic products, there is
no proprietary protection for many of our branded pharmaceutical
products, and generic substitutes for many of these products are
sold by other pharmaceutical companies. Further, we also rely
upon trade secrets, unpatented proprietary know-how and
continuing technological innovation in order to maintain
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our competitive position with respect to some products. We
cannot assure you that others will not independently develop
substantially equivalent proprietary technology and techniques
or otherwise gain access to our trade secrets and technology, or
that we can adequately protect our trade secrets and technology.
If we are unable to secure or enforce patent rights, trademarks,
trade secrets or other intellectual property, there could be a
material adverse effect on our results of operations.
Some of our supply agreements or purchase orders, including
those related to
Altace®
and
Skelaxin®,
require us to purchase certain minimum levels of active
ingredients or finished goods. If we are unable to maintain
market exclusivity for our products, if our product life-cycle
management is not successful, or if we fail to sell our products
in accordance with the forecasts we develop as required by our
supply agreements, we may incur losses in connection with the
purchase commitments under the supply agreements or purchase
orders. In the event we incur losses in connection with the
purchase commitments under our supply agreements or purchase
orders, there may be a material adverse effect upon our results
of operations and cash flows.
Six of
our products plus royalty payments presently account for 84.0%
of our revenues from continuing operations and a decrease in
sales or royalty income in the future would have a material
adverse effect on our results of operations.
In
General. Altace®,
Skelaxin®,
Thrombin-JMI®,
Levoxyl®,
Sonata®,
EpiPen®
and royalty revenues for the last twelve months ended
December 31, 2006 accounted for 32.8%, 20.9%, 12.4%, 5.6%,
4.3%, 4.0% and 4.0% of our total revenues from continuing
operations, respectively, or 84.0% in total. We believe that
these sources of revenue may constitute a significant portion of
our revenues for the foreseeable future. Accordingly, any factor
adversely affecting sales of any of these products or products
for which we receive royalty payments could have a material
adverse effect on our results of operations and cash flows. For
example, with the amendment of our Co-Promotion Agreement with
Wyeth, we have assumed full responsibility for the selling and
marketing of
Altace®.
If we do not sell and market
Altace®
effectively, there may be a material adverse effect on our
results of operations. Further, the agreements associated with
some sources of royalty income may be terminated upon short
notice and without cause.
Product Competition. Additionally, since our
currently marketed products are generally established and
commonly sold, they are subject to competition from products
with similar qualities.
Our largest selling product
Altace®
competes in a very competitive and highly genericized market
with other cardiovascular therapies.
Our product
Skelaxin®
competes in a highly genericized market with other muscle
relaxants.
Our product
Sonata®
competes with other insomnia treatments in a highly competitive
market.
Our product
Levoxyl®
competes in a competitive and highly genericized market with
other levothyroxine sodium products.
We anticipate competition from bovine, recombinant human and
human thrombin for our product
Thrombin-JMI®
in the near future. Omrix Biopharmaceuticals, Inc. filed a
Biologics Licensing Application (BLA) in early
November 2006 for its human thrombin product. Zymogenetics, Inc.
filed a BLA for its recombinant human thrombin product in
December 2006.
Many of our branded pharmaceutical products have either a strong
market niche or competitive position. Some of our branded
pharmaceutical products face competition from generic
substitutes.
The manufacturers of generic products typically do not bear the
related research and development costs and, consequently, are
able to offer such products at considerably lower prices than
the branded equivalents. We cannot assure you that any of our
products will remain exclusive without generic competition, or
maintain their market share, gross margins and cash flows, the
failure of which could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
EpiPen. Dey, L.P. markets our
EpiPen®
auto-injector through a supply agreement with us that expires on
December 31, 2015. Under the terms of the agreement, we
grant Dey the exclusive right and license to market,
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distribute and sell
EpiPen®,
either directly or through subdistributors. A failure by Dey to
successfully market and distribute
EpiPen®
or an increase in competition could have a material adverse
effect on our business, financial condition, results of
operations and cash flows.
If we
cannot implement our strategy to grow our business through
increased sales, acquisitions, development and in-licensing, our
business or competitive position in the pharmaceutical industry
may suffer.
Drug development is time-consuming and expensive. Only a small
percentage of chemical compounds discovered by researchers prove
to be both medically effective and safe enough to become an
approved medicine. The process from discovery to regulatory
approval typically takes 10 to 15 years or longer. Drug
candidates can fail at any stage of the process, and even
late-stage product candidates sometimes fail to receive
regulatory approval.
Clinical trials are conducted in a series of sequential phases,
with each phase designed to address a specific research
question. In Phase I clinical trials, researchers test a
new drug or treatment in a small group of people to evaluate the
drugs safety, determine a safe dosage range, and identify
side effects. In Phase II clinical trials, researchers give
the drug or treatment to a larger population to assess
effectiveness and to further evaluate safety. In Phase III
clinical trials, researchers give the drug or treatment to an
even larger population to confirm its effectiveness, monitor
side effects, compare it to commonly used treatments, and
collect information that will allow the drug or treatment to be
used safely. The results of Phase III clinical trials are
pivotal for purposes of obtaining FDA approval of a new product.
Our current strategy is to increase sales of our existing
products and to enhance our competitive standing through
acquisitions or in-licensing of products, either in development
or previously approved by the FDA, that complement our business
and enable us to promote and sell new products through existing
marketing and distribution channels. Moreover, since we engage
in limited proprietary research activity with respect to the
development of new chemical entities, we rely heavily on
purchasing or licensing products in development and FDA-approved
products from other companies.
Development projects, including those for which we have
collaboration agreements with third parties, include the
following:
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Remoxytm,
an investigational drug for the treatment of moderate to severe
chronic pain;
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binodenoson, a myocardial pharmacologic stress imaging agent;
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Vanquixtm,
a diazepam-filled auto-injector;
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bremelanotide (which we previously referred to as PT-141), an
investigational drug for the treatment of erectile dysfunction
and female sexual dysfunction;
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MRE0094, an investigational drug for the topical treatment of
chronic diabetic foot ulcers;
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T-62, an investigational drug for the treatment of neuropathic
pain;
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a new inhaler for
Intal®
using the alternative propellant hydrofluoroalkane
(HFA) for which the FDA has issued an approvable
letter;
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a potential new formulation of metaxalone;
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a novel formulation of ramipril for which an NDA is pending;
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an
Altace®/diuretic
combination product; and
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a program to evaluate the safety and efficacy of
Altace®
in children.
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We compete with other pharmaceutical companies, including large
pharmaceutical companies with financial, human and other
resources substantially greater than ours, in the development
and licensing of new products. We cannot assure you that we will
be able to
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engage in product life-cycle management to develop new
indications and line extensions for existing and acquired
products,
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successfully develop, license or commercialize new products on a
timely basis or at all,
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continue to develop products already in development in a cost
effective manner, or
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obtain any FDA approvals necessary to successfully implement the
strategies described above.
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If we are not successful in the development or licensing of new
products already in development, including obtaining any
necessary FDA approvals, our business, financial condition, and
results of operations could be materially adversely affected.
Further, other companies may license or develop products or may
acquire technologies for the development of products that are
the same as or similar to the products we have in development or
that we license. Because there is rapid technological change in
the industry and because many other companies may have more
financial resources than we do, other companies may
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develop or license their products more rapidly than we can,
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complete any applicable regulatory approval process sooner than
we can,
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market or license their products before we can market or license
our products, or
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offer their newly developed or licensed products at prices lower
than our prices.
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Any of these events would thereby have a negative effect on the
sales of our existing, newly developed or licensed products. The
inability to effect acquisitions or licenses of additional
branded products in development and FDA-approved products could
limit the overall growth of our business. Furthermore, even if
we obtain rights to a pharmaceutical product or acquire a
company, we may not be able to generate sales sufficient to
create a profit or otherwise avoid a loss. Technological
developments or the FDAs approval of new products or of
new therapeutic indications for existing products may make our
existing products or those products we are licensing or
developing obsolete or may make them more difficult to market
successfully, which could have a material adverse effect on
results of operations and cash flows.
If we
cannot integrate the business of companies or products we
acquire, or appropriately and successfully manage and coordinate
third-party collaborative development activities, our business
may suffer.
The integration into our business of in-licensed or acquired
assets or businesses, as well as the coordination and
collaboration of research and development, sales and marketing
efforts with third parties, requires significant management
attention, maintenance of adequate operational, financial and
management information systems, integration of systems that we
acquire into our existing systems, and verification that the
acquired systems meet our standards for internal control over
financial reporting. Our future results will also depend in part
on our ability to hire, retain and motivate qualified employees
to manage expanded operations efficiently and in accordance with
applicable regulatory standards. If we cannot manage our
third-party collaborations and integrate in-licensed and
acquired assets successfully, or, if we do not establish and
maintain an appropriate administrative, support and control
infrastructure to support these activities, this could have a
material adverse effect on our business, financial condition,
results of operations and cash flows and on our ability to make
the necessary certifications with respect to our internal
controls.
We are
required annually, or on an interim basis as needed, to review
the carrying value of our intangible assets and goodwill for
impairment. If sales of our products decline because of, for
example, generic competition or an inability to manufacture or
obtain sufficient supply of product, the intangible asset value
of any declining product could become impaired.
As of December 31, 2006, we had approximately
$972.5 million of net intangible assets and goodwill.
Intangible assets primarily include the net book value of
various product rights, trademarks, patents and other intangible
rights. If a change in circumstances causes us to lower our
future sales forecast for a product, we may be required to write
off a portion of the net book value of the intangible assets
associated with that product. In evaluating goodwill for
impairment, we estimate the fair value of our individual
business reporting
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units on a discounted cash flow basis. In the event the value of
an individual business reporting unit declines significantly, it
could result in a non-cash impairment charge. Any impairment of
the net book value of any intangible asset or goodwill,
depending on the size, could result in a material adverse effect
on our business, financial condition and results of operations.
We
have entered into agreements with manufacturers
and/or
distributors of generic pharmaceutical products with whom we are
presently engaged, or have previously been engaged in
litigation, and these agreements could subject us to claims that
we have violated federal
and/or state
anti-trust laws.
We have negotiated and entered into a number of agreements with
manufacturers
and/or
distributors of generic pharmaceutical products, some of whom
are presently engaged or have previously been engaged in
litigation with us. Governmental
and/or
private parties may allege that these arrangements and
activities in furtherance of the success of these arrangements
violate applicable state or federal anti-trust laws.
Alternatively, courts could interpret these laws in a manner
contrary to current understandings of such laws. If a court or
other governmental body were to conclude that a violation of
these laws had occurred, any liability based on such a finding
could be material and adverse and could be preceded or followed
by private litigation such as class action litigation.
We have received a request for information from the FTC in
connection with the dismissal without prejudice of our patent
infringement litigation against Cobalt under the Hatch-Waxman
Act of 1984. We are cooperating with the FTC in this
investigation.
We
could be required to pay significant sums in connection with the
derivative litigation or the continuing SEC investigation, or
the SEC could impose other sanctions on us.
Subsequent to the announcement of the SEC investigation
described in SEC Investigation included in
Note 18, Commitments and Contingencies, in Part
IV, Item 15(a)(l), Exhibits and Financial Statement
Schedules, beginning in March 2003, four purported
shareholder derivative complaints were filed in Tennessee state
court alleging a breach of fiduciary duty, among other things,
by some of our current and former officers and directors in
connection with our underpayment of rebates owed to Medicaid and
other governmental pricing programs, and certain transactions
between us and the Benevolent Fund, a non-profit organization
affiliated with certain former members of our senior management.
These cases have been consolidated, and on October 11,
2006, plaintiffs voluntarily dismissed Brian Markison and
Elizabeth Greetham. Discovery with respect to the remaining
claims in the case has commenced. No trial date has been set.
Beginning in March 2003, three purported shareholder derivative
complaints were likewise filed in Tennessee federal court,
asserting claims similar to those alleged in the state
derivative litigation. These cases have been consolidated, and
on December 2, 2003 plaintiffs filed a consolidated amended
complaint. On March 9, 2004, the court entered an order
indefinitely staying these cases in favor of the state
derivative action.
The SEC investigation of our previously disclosed errors
relating to reserves for product returns is continuing, and it
is possible that this investigation could result in the
SECs imposing fines or other sanctions on us.
We are currently unable to predict the outcome or reasonably
estimate the range of potential loss, if any, in the pending
litigation. If we were not to prevail in the pending litigation,
or if the SEC imposes any sanctions on us, neither of which we
can predict or reasonably estimate at this time, we could be
required to expend funds otherwise available for operation of
the business.
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Compliance
with the terms and conditions of our corporate integrity
agreement with the Office of Inspector General of the United
States Department of Health and Human Services requires
significant resources and management time and, if we fail to
comply, we could be subject to penalties or, under certain
circumstances, excluded from government health care programs,
which could materially reduce our sales.
In October 2005, as part of our settlement of the government
pricing investigation of our company we entered into a five-year
corporate integrity agreement (CIA) with the Office
of Inspector General of the United States Department of Health
and Human Services (HHS/OIG). For additional
information, please see Note 18, Commitments and
Contingencies, in Part IV, Item 15(a)(1),
Exhibits and Financial Statement Schedules. The
purpose of the CIA, which applies to all of our
U.S. subsidiaries and employees, is to promote compliance
with the federal health care and procurement programs in which
we participate, including the Medicaid Drug Rebate Program, the
Medicare Program, the 340B Drug Pricing Program, and the
Veterans Administration Pricing Program.
In addition to the challenges associated with complying with the
regulations applicable to each of these programs (as discussed
below), we are required, among other things, to keep in place
our current compliance program, provide specified training to
employees, retain an independent review organization to conduct
periodic audits of our Medicaid Rebate calculations and our
automated systems, processes, policies and practices related to
government pricing calculations, and to provide periodic reports
to HHS/OIG.
Implementing and maintaining the broad array of processes,
policies, and procedures necessary to comply with the CIA has
required, and is expected to continue to require, a significant
portion of managements attention as well as the
application of significant resources.
Failing to meet the CIA obligations could have serious
consequences for us including stipulated monetary penalties for
each instance of non-compliance. In addition, flagrant or
repeated violations of the CIA could result in our being
excluded from participating in government health care programs,
which could materially reduce our sales.
Unfavorable
results in pending and future claims and litigation matters
could have an adverse impact on us.
We are named as a party in various lawsuits, as are certain of
our current and former directors and certain of our former
officers. For information about our pending material litigation
matters, please see Note 18, Commitments and
Contingencies, in Part IV, Item 15(a)(1),
Exhibits and Financial Statement Schedules. While we
intend to vigorously defend ourselves in these actions, we could
be required to pay material sums in connection with judgments or
settlements related to these matters, or they could otherwise
have a material adverse effect on our business, results of
operations and financial condition.
Any
significant delays or difficulties in the manufacture of, or
supply of materials for, our products may reduce our profit
margins and revenues, limit the sales of our products, or harm
our products reputations.
Many of our product lines, including
Altace®,
Skelaxin®,
Sonata®,
Intal®,
Tilade®,
Synercid®
and
Cortisporin®,
are currently manufactured in part or entirely by third parties.
Our dependence upon third parties for the manufacture of our
products may adversely affect our profit margins or may result
in unforeseen delays or other problems beyond our control. For
example, if any of these third parties are not in compliance
with applicable regulations, the manufacture of our products
could be delayed, halted or otherwise adversely affected. If for
any reason we are unable to obtain or retain third-party
manufacturers on commercially acceptable terms, we may not be
able to distribute our products as planned. If we encounter
delays or difficulties with contract manufacturers in producing
or packaging our products, the distribution, marketing and
subsequent sales of these products could be adversely affected,
and we may have to seek alternative sources of supply or abandon
or sell product lines on unsatisfactory terms. We might not be
able to enter into alternative supply arrangements at
commercially acceptable rates, if at all. We also cannot assure
you that the manufacturers we use will be able to provide us
with sufficient quantities of our products or that the products
supplied to us will meet our specifications.
24
We have experienced, and anticipate that we will continue to
experience, periods of stock-outs in our inventory of
Sonata®.
This product is manufactured for us by Wyeth. Wyeth has been
unable to timely and consistently supply our forecasted need for
Sonata®
since December 2006. It is anticipated that the problems
with production of
Sonata®
experienced by Wyeth will continue for an indeterminable period
of time, leaving us, from time to time, if not continuously,
without sufficient supply of product to meet demand. Our
management is working with Wyeth to address these problems and
transfer the manufacture of
Sonata®
to another manufacturer, but we currently do not have a solution
that will assure us of consistent supply. Given the competitive
market for this product, we have and will likely continue to
experience permanent erosion of our customer base, market share
and sales.
We have completed construction of facilities to produce
Bicillin®
at our Rochester, Michigan location. We began commercial
production of
BicillinLA®
and began shipping this product to our customers during the
fourth quarter of 2006. We expect to begin commercial production
of
BicillinCR®
during the third quarter of 2007. The third-party manufacturer
that produced
Bicillin®
for us closed its plant. If our inventory of
BicillinCR®
is not sufficient to sustain demand while we are obtaining
regulatory authorizations or experience production difficulties
at our
Bicillin®
manufacturing facility, sales of this product may be reduced or
the market for the product may be permanently diminished, either
of which could have a material adverse effect on our business,
financial condition, results of operations and cash flows. For
the last twelve months ended December 31, 2006, net sales
of
Bicillin®
were $42.8 million, representing 2.2% of our total revenues.
We are currently working to expand our production capacity for
Thrombin-JMI®.
We cannot assure you that our plans to expand our production
capacity for
Thrombin-JMI®
will be successful
and/or
timely. If we cannot successfully and timely expand our
production capacity for
Thrombin-JMI®,
our ability to increase production of
Thrombin-JMI®
will be limited, which could in turn limit our unit sales growth
for this product.
Sales
of
Thrombin-JMI®
may be affected by the perception of risks associated with some
of the raw materials used in its manufacture; if we are unable
to successfully maintain purification procedures at our
facilities that are in accordance with the FDAs
expectations for biological products generally, the FDA could
limit our ability to manufacture biological products at those
facilities.
For the twelve months ended December 31, 2006, our product
Thrombin-JMI®
accounted for 12.4% of our total revenues from continuing
operations. The source material for
Thrombin-JMI®
comes from bovine plasma and lung tissue which has been
certified by the United States Department of Agriculture for use
in the manufacture of pharmaceutical products. Bovine-sourced
materials, particularly those from outside the United States,
may be of some concern because of potential transmission of
bovine spongiform encephalopathy, or BSE. However,
we have taken precautions to minimize the risks of contamination
from BSE in our source materials. Our principal precaution is
the use of bovine materials only from FDA-approved sources in
the United States. Accordingly, all source animals used in our
production of
Thrombin-JMI®
are of United States origin. Additionally, source animals used
in production of
Thrombin-JMI®
are generally less than 18 months of age (BSE has not been
identified in animals less than 30 months of age).
We have two approved vendors as sources of supply of the bovine
raw materials. Any interruption or delay in the supply of these
materials could adversely affect the sales of
Thrombin-JMI®.
We will continue surveillance of the source and believe that the
risk of BSE contamination in the source materials for
Thrombin-JMI®
is very low. While we believe that our procedures and those of
our vendor for the supply, testing and handling of the bovine
material comply with all federal, state, and local regulations,
we cannot eliminate the risk of contamination or injury from
these materials. There are high levels of global public concern
about BSE. Physicians could determine not to administer
Thrombin-JMI®
because of the perceived risk, which could adversely affect our
sales of the product. Any injuries resulting from BSE
contamination could expose us to extensive liability. Also,
there is currently no alternative to the bovine-sourced
materials for
Thrombin-JMI®.
If public concern for the risk of BSE infection in the United
States should increase, the manufacture and sale of
Thrombin-JMI®
and our business, financial condition, results of operations and
cash flows could be materially and adversely affected.
25
The FDA expects manufacturers of biological products to have
validated processes capable of removing extraneous viral
contaminants to a high level of assurance. As a result, many
manufacturers of biologics are currently engaged in developing
procedures to remove potential extraneous viral contaminants
from their products. We have developed and implemented
appropriate processing steps to achieve maximum assurance for
the removal of potential extraneous viral contaminants from
Thrombin-JMI®,
which does not include BSE because it is not a viral contaminant
and we gained FDA approval for these processes. If we are unable
to successfully maintain these processing steps in accordance
with the FDAs expectations, the manufacture and sale of
Thrombin-JMI®
and our business, financial condition, results of operations and
cash flows could be materially and adversely affected.
Wholesaler
and distributor buying patterns and other factors may cause our
quarterly results to fluctuate, and these fluctuations may
adversely affect our short-term results. Further, our access to
wholesaler and distributor inventory levels and sales data
affects our ability to estimate certain reserves included in our
financial statements.
Our results of operations, including, in particular, product
sales revenue, may vary from quarter to quarter due to many
factors. Sales to wholesalers and distributors represent a
substantial portion of our total sales. Buying patterns of our
wholesalers and distributors may vary from time to time. In the
event wholesalers and distributors with whom we do business
determine to limit their purchases of our products, sales of our
products could be adversely affected. For example, in advance of
an anticipated price increase, customers may order
pharmaceutical products in larger than normal quantities. The
ordering of excess quantities in any quarter could cause sales
of some of our branded pharmaceutical products to be lower in
subsequent quarters than they would have been otherwise. As part
of our ongoing efforts to facilitate improved management of
wholesale inventory levels of our branded pharmaceutical
products, we have entered into inventory management and data
services agreements with each of our three key wholesale
customers and other wholesale customers. These agreements
provide wholesalers incentives to manage inventory levels and
provide timely and accurate data with respect to inventory
levels held, and valuable data regarding sales and marketplace
activity. We rely on the timeliness and accuracy of the data
that each customer provides to us on a regular basis pursuant to
these agreements. If our wholesalers fail to provide us with
timely and accurate data in accordance with the agreements, our
estimates for certain reserves included in our financial
statements could be materially and adversely affected.
Other factors that may affect quarterly results include, but are
not limited to, expenditures related to the acquisition, sale
and promotion of pharmaceutical products, a changing customer
base, the availability and cost of raw materials, interruptions
in supply by third-party manufacturers, new products introduced
by us or our competitors, the mix of products we sell, sales and
marketing expenditures, product recalls, competitive pricing
pressures and general economic and industry conditions that may
affect customer demand. We cannot assure you that we will be
successful in maintaining or improving our profitability or
avoiding losses in any future period.
If we
are unable to obtain approval of an HFA propellant for
Intal®,
our sales of this product could be adversely
affected.
Under government regulations, chlorofluorocarbon compounds are
being phased out because of environmental concerns. Our
Intal®
product currently uses these compounds as propellants. The FDA
has issued an approvable letter with respect to the new drug
application, or NDA, covering a new inhaler for
Intal®
using the alternative propellant HFA. The approvable letter
provides that final approval of the NDA for
Intal®
HFA is subject to addressing certain FDA comments solely
pertaining to the chemistry, manufacturing, and controls section
of the NDA covering the product. In the event we cannot also
obtain final approval for alternative propellants for
Intal®
before the final phase-out date for use of chlorofluorocarbon
compounds or if we are unable to maintain an adequate supply of
chlorofluorocarbon compounds for the production of these
products prior to this date, our ability to market and sell this
product could be materially adversely affected.
26
Our
relationships with the U.S. Department of Defense and other
government entities subject us to risks associated with doing
business with the government.
All U.S. government contracts provide that they may be
terminated for the convenience of the government as well as for
default. Our Meridian Medical Technologies segment has
pharmaceutical products that are presently sold primarily to the
U.S. Department of Defense (DoD) under an
Industrial Base Maintenance Contract (IBMC). The
current IBMC expires in July 2007. Although we have reason to
believe the DoD will renew the IBMC based on our relationship of
many years, we cannot assure you that they will. In the event
the DoD does not renew the IBMC, our business, financial
condition, results of operations and cash flows could be
materially adversely affected. Additionally, the unexpected
termination of one or more of our significant government
contracts could result in a material adverse effect on our
business, financial condition, results of operations and cash
flows. A surge capability provision allows for the coverage of
defense mobilization requirements in the event of rapid military
deployment. If this surge capability provision becomes
operative, we may be required to devote more of our Meridian
Medical Technologies segment manufacturing capacity to the
production of products for the government, which could result in
less manufacturing capacity being devoted to products in this
segment with higher profit margins.
Our supply contracts with the DoD are subject to post-award
audit and potential price determination. These audits may
include a review of our performance on the contract, our pricing
practices, our cost structure and our compliance with applicable
laws, regulations and standards. Any costs found to be
improperly allocated to a specific contract will not be
reimbursed, while costs already reimbursed must be refunded.
Therefore, a post-award audit or price redetermination could
result in an adjustment to our revenues. From time to time the
DoD makes claims for pricing adjustments with respect to
completed contracts. If a government audit uncovers improper or
illegal activities, we may be subject to civil and criminal
penalties and administrative sanctions, including termination of
contracts, forfeitures of profits, suspension of payments, fines
and suspension or disqualification from doing business with the
government.
Other risks involved in government sales include the
unpredictability in funding for various government programs and
the risks associated with changes in procurement policies and
priorities. Reductions in defense budgets may result in
reductions in our revenues. We also provide our nerve agent
antidote auto-injectors to a number of state agencies and local
communities for homeland defense against chemical agent
terrorist attacks. Changes in governmental and agency
procurement policies and priorities may also result in a
reduction in government funding for programs involving our
auto-injectors. A loss in government funding of these programs
could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
Our
shareholder rights plan, charter and bylaws discourage
unsolicited takeover proposals and could prevent shareholders
from realizing a premium on their common stock.
We have a shareholder rights plan that may have the effect of
discouraging unsolicited takeover proposals. The rights issued
under the shareholder rights plan would cause substantial
dilution to a person or group which attempts to acquire us on
terms not approved in advance by our Board of Directors. In
addition, our charter and bylaws contain provisions that may
discourage unsolicited takeover proposals that shareholders may
consider to be in their best interests. These provisions include
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a classified Board of Directors;
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the ability of our Board of Directors to designate the terms of
and issue new series of preferred stock;
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advance notice requirements for nominations for election to our
Board of Directors; and
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special voting requirements for the amendment of our charter and
bylaws.
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We are also subject to anti-takeover provisions under Tennessee
laws, each of which could delay or prevent a change of control.
Together these provisions and the rights plan may discourage
transactions that otherwise could involve payment of a premium
over prevailing market prices for our common stock.
27
At
times, our stock price has been volatile, and such volatility in
the future could result in substantial losses for our
investors.
The trading price of our common stock has at times been
volatile. The stock market in general and the market for the
securities of emerging pharmaceutical companies such as King, in
particular, have experienced extreme volatility. Many factors
contribute to this volatility, including
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variations in our results of operations;
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perceived risks and uncertainties concerning our business;
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announcements of earnings;
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developments in the governmental investigations or derivative
litigation;
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the commencement of, or adverse developments in, any material
litigation;
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failure to meet timelines for product development or other
projections or forward-looking statements we may make to the
public;
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failure to meet or exceed security analysts financial
projections for our company;
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comments or recommendations made by securities analysts;
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general market conditions;
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perceptions about market conditions in the pharmaceutical
industry;
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announcements of technological innovations or the results of
clinical trials or studies;
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changes in marketing, product pricing and sales strategies or
development of new products by us or our competitors;
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changes in domestic or foreign governmental regulations or
regulatory approval processes; and
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announcements concerning regulatory compliance and government
agency reviews.
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The volatility of our common stock imposes a greater risk of
capital losses on our shareholders than would a less volatile
stock. In addition, such volatility makes it difficult to
ascribe a stable valuation to a shareholders holdings of
our common stock.
Risks
Related to Our Industry
Failure
to comply with laws and government regulations could adversely
affect our ability to operate our business.
Virtually all of our activities are regulated by federal and
state statutes and government agencies. The manufacturing,
processing, formulation, packaging, labeling, distribution and
advertising of our products, and disposal of waste products
arising from these activities, are subject to regulation by one
or more federal agencies, including the FDA, the Drug
Enforcement Agency, or DEA, the Federal Trade
Commission, the Consumer Product Safety Commission, the
Department of Agriculture, the Occupational Safety and Health
Administration, and the Environmental Protection Agency
(EPA), as well as by foreign governments in
countries where we distribute some of our products.
Failure to comply with the policies or requirements established
by these agencies could subject us to enforcement actions or
other consequences. For example, noncompliance with applicable
FDA policies or requirements could subject us to suspensions of
manufacturing or distribution, seizure of products, product
recalls, fines, criminal penalties, injunctions, failure to
approve pending drug product applications or withdrawal of
product marketing approvals. Similar civil or criminal penalties
could be imposed by other government agencies, such as the DEA,
the EPA or various agencies of the states and localities in
which our products are manufactured, sold or distributed, and
could have ramifications for our contracts with government
agencies such as the Department of Veterans Affairs or the
Department of Defense.
28
All manufacturers of human pharmaceutical products are subject
to regulation by the FDA under the authority of the Food, Drug
and Cosmetics Act (the FDC Act), or the Public
Health Service Act (the PHS Act), or both. New
drugs, as defined in the FDC Act, and new human biological
drugs, as defined in the PHS Act, must be the subject of an
FDA-approved new drug or biologic license application before
they may be marketed in the United States. Some prescription and
other drugs are not the subject of an approved marketing
application but, rather, are marketed subject to the FDAs
regulatory discretion
and/or
enforcement policies.
We manufacture some pharmaceutical products containing
controlled substances and, therefore, are also subject to
statutes and regulations enforced by the DEA and similar state
agencies which impose security, record keeping, reporting and
personnel requirements on us. Additionally, we manufacture
biological drug products for human use and are subject to
regulatory obligations as a result of these aspects of our
business. There are additional FDA and other regulatory policies
and requirements covering issues, such as advertising,
commercially distributing, selling, sampling and reporting
adverse events associated with our products, with which we must
continuously comply.
The FDA has the authority and discretion to withdraw existing
marketing approvals and to review the regulatory status of
marketed products at any time. For example, the FDA may require
withdrawal of an approved marketing application for any drug
product marketed if new information reveals questions about a
drugs safety or efficacy. All drugs must be manufactured
in conformity with current Good Manufacturing Practices and drug
products subject to an approved application must be
manufactured, processed, packaged, held and labeled in
accordance with information contained in the approved
application.
While we believe that all of our currently marketed
pharmaceutical products comply with FDA enforcement policies,
have approval pending or have received the requisite agency
approvals, our marketing is subject to challenge by the FDA at
any time. Through various enforcement mechanisms, the FDA can
ensure that noncomplying drugs are no longer marketed and that
advertising and marketing materials and campaigns are in
compliance with FDA regulations. In addition, modifications,
enhancements, or changes in manufacturing sites of approved
products are in many circumstances subject to additional FDA
approvals which may or may not be received and which may be
subject to a lengthy FDA review process. Our manufacturing
facilities and those of our third-party manufacturers are
continually subject to inspection by governmental agencies.
Manufacturing operations could be interrupted or halted in any
of those facilities if a government or regulatory authority is
unsatisfied with the results of an inspection. Any interruptions
of this type could result in materially reduced sales of our
products or increased manufacturing costs.
Under the Comprehensive Environmental Response, Compensation,
and Liability Act, CERCLA, the EPA can impose
liability for the entire cost of cleanup of contaminated
properties upon each or any of the current and former site
owners, site operators or parties who sent waste to the site,
regardless of fault or the legality of the original disposal
activity. In addition, many states, including Tennessee,
Michigan, Wisconsin, Florida and Missouri, have statutes and
regulatory authorities similar to CERCLA and to the EPA. We have
entered into hazardous waste hauling agreements with licensed
third parties to properly dispose of hazardous wastes. We cannot
assure you that we will not be found liable under CERCLA or
other applicable state statutes or regulations for the costs of
undertaking a cleanup at a site to which our wastes were
transported.
We cannot determine what effect changes in regulations,
enforcement positions, statutes or legal interpretations, when
and if promulgated, adopted or enacted, may have on our business
in the future. These changes could, among other things, require
modifications to our manufacturing methods or facilities,
expanded or different labeling, new approvals, the recall,
replacement or discontinuance of certain products, additional
record keeping and expanded documentation of the properties of
certain products and scientific substantiation. These changes,
new legislation, or failure to comply with existing laws and
regulations could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
An
increase in product liability claims or product recalls could
harm our business.
We face an inherent business risk of exposure to product
liability claims in the event that the use of our technologies
or products is alleged to have resulted in adverse effects.
These risks exist for products in clinical development and with
respect to products that have received regulatory approval for
commercial sale. While
29
we have taken, and will continue to take, what we believe are
appropriate precautions, we may not be able to avoid significant
product liability exposure. We currently have product liability
insurance, however, we cannot assure you that the level or
breadth of any insurance coverage will be sufficient to cover
fully all potential claims. Also, adequate insurance coverage
might not be available in the future at acceptable costs, if at
all. For example, we are now not able to obtain product
liability insurance with respect to certain of our womens
healthcare products. With respect to any product liability
claims relating to these products, we could be responsible for
any monetary damages awarded by any court or any voluntary
monetary settlements. Significant judgments against us for
product liability for which we have no insurance could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
Product recalls or product field alerts may be issued at our
discretion or at the discretion of the FDA, other government
agencies or other companies having regulatory authority for
pharmaceutical product sales. From time to time, we may recall
products for various reasons, including failure of our products
to maintain their stability through their expiration dates. Any
recall or product field alert has the potential of damaging the
reputation of the product or our reputation. To date, these
recalls have not been significant and have not had a material
adverse effect on our business, financial condition, results of
operations or cash flows. However, we cannot assure you that the
number and significance of recalls will not increase in the
future. Any significant recalls could materially affect our
sales and the prescription trends for the products and damage
the reputation of the products or our reputation. In these
cases, our business, financial condition, results of operations
and cash flows could be materially adversely affected.
If we
fail to comply with our reporting and payment obligations under
the Medicaid rebate program or other governmental pricing
programs, we could be required to reimburse government programs
for underpayments and could be required to pay penalties,
sanctions and fines which could have a material adverse effect
on our business.
Medicaid reporting and payment obligations are highly complex
and in certain respects ambiguous. If we fail to comply with
these obligations, we could be subject to additional
reimbursements, penalties, sanctions and fines which could have
a material adverse effect on our business. Our processes for
estimating amounts due under Medicaid and other governmental
pricing programs involve subjective decisions, and, as a result,
these calculations will remain subject to the risk of errors.
The
insolvency of any of our principal customers, who are wholesale
pharmaceutical distributors, could have a material adverse
effect on our business, financial condition, results of
operations and cash flows.
As with most other pharmaceutical companies, our principal
customers are primarily wholesale pharmaceutical distributors.
The wholesale distributor network for pharmaceutical products
has in recent years been subject to increasing consolidation,
which has increased our, and other industry participants,
customer concentration. Accordingly, three key customers
accounted for approximately 74% of our gross sales and a
significant portion of our accounts receivable for the fiscal
year ended December 31, 2006. The insolvency of any of our
principal customers could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
Any
reduction in reimbursement levels by managed care organizations
or other third-party payors may have an adverse effect on our
revenues.
Commercial success in producing, marketing and selling branded
prescription pharmaceutical products depends, in part, on the
availability of adequate reimbursement from third-party health
care payors, such as the government, private health insurers and
managed care organizations. Third-party payors are increasingly
challenging whether to reimburse certain pharmaceutical products
and medical services. For example, many managed health care
organizations limit reimbursement of pharmaceutical products.
These limits may take the form of formularies with differential
co-pay tiers. The resulting competition among pharmaceutical
companies to maximize their product reimbursement has generally
reduced growth in average selling prices across the industry. We
cannot assure you that our products will be appropriately
reimbursed or included on the
30
formulary lists of managed care organizations or any or all
Medicare Part D plans, or that downward pricing pressures
in the industry generally will not negatively impact our
operations.
We have addressed our contract relationship with managed care
organizations in an effort to increase the attractiveness of
reimbursements for our products. We take reserves for the
estimated amounts of rebates we will pay to managed care and
government organizations each quarter. Any increased usage of
our products through Medicaid, Medicare, or managed care
programs will increase the amount of rebates that we owe. We
cannot assure you that our products will be included on the
formulary lists of managed care or Medicare organizations or
that adverse reimbursement issues will not result in materially
lower revenues.
If we
fail to comply with the safe harbors provided under various
federal and state laws, our business could be adversely
affected.
We are subject to various federal and state laws pertaining to
health care fraud and abuse, including anti-kickback
laws and false claims laws. Anti-kickback laws make it illegal
for a prescription drug manufacturer to solicit, offer, receive,
or pay any remuneration in exchange for, or to include, the
referral of business, including the purchase or prescription of
a particular drug. The federal government has published
regulations that identify safe harbors or exemptions
for certain payment arrangements that do not violate the
anti-kickback statutes. We seek to comply with these safe
harbors. Due to the breadth of the statutory provisions and the
absence of guidance in the form of regulations or court
decisions addressing some of our practices, it is possible that
our practices might be challenged under anti-kickback or similar
laws. False claims laws prohibit anyone from knowingly (in the
civil context), or knowingly and willfully (in the criminal
context), presenting, or causing to be presented for payment to
third-party payors (including Medicaid and Medicare) claims for
reimbursed drugs or services that are false or fraudulent,
claims for items or services not provided as claimed, or claims
for medically unnecessary items or services.
Violations of fraud and abuse laws may be punishable by civil
and/or
criminal sanctions, including fines and civil monetary
penalties, as well as the possibility of exclusion from federal
health care programs, including Medicaid and Medicare. Any such
violations could have a material adverse effect on our financial
results.
In the
future, the publication of negative results of studies or
clinical trials may adversely affect the sales of our products
or the values of the intangible assets associated with
them.
From time to time studies or clinical trials on various aspects
of pharmaceutical products are conducted by academics or others,
including government agencies, the results of which, when
published, may have dramatic effects on the markets for the
pharmaceutical products that are the subject of the study, or
those of related or similar products. The publication of
negative results of studies or clinical trials related to our
products or the therapeutic areas in which our products compete
could adversely affect our sales, the prescription trends for
our products and the reputation of our products. In the event of
the publication of negative results of studies or clinical
trials related to our branded pharmaceutical products or the
therapeutic areas in which our products compete, sales of these
products may be materially adversely affected. Additionally,
potential write-offs of the intangible assets associated with
the affected products could materially adversely affect our
results of operations.
New
legislation or regulatory proposals may adversely affect our
revenues.
A number of legislative and regulatory proposals aimed at
changing the health care system, including the cost of
prescription products, importation and reimportation of
prescription products from countries outside the United States
and changes in the levels at which pharmaceutical companies are
reimbursed for sales of their products, have been proposed.
While we cannot predict when or whether any of these proposals
will be adopted or the effect these proposals may have on our
business, these proposals, as well as the adoption of any other
proposals, may exacerbate industry-wide pricing pressures and
could have a material adverse effect on our business, financial
condition, results of operations and cash flows. The
reimportation bills have not yet resulted in any new laws or
regulations; however, these and other initiatives could decrease
the price we
31
receive for our products. Additionally, sales of our products in
the United States could be adversely affected by the importation
of products that some may deem to be equivalent to ours that are
manufactured by others and are available outside the United
States. Many states have implemented or are in the process of
implementing regulations requiring pharmaceutical companies to
provide them with certain marketing and pricing information.
While we intend to comply with these regulations, we are unable
at this time to predict or estimate the effect of these
regulations, if any.
A WARNING
ABOUT FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
These statements relate to analyses and other information which
are based on forecasts of future results and estimates of
amounts that are not yet determinable. These statements also
relate to our future prospects, developments and business
strategies.
These forward-looking statements are identified by their use of
terms and phrases, such as anticipate,
believe, could, estimate,
expect, intend, may,
plan, predict, project,
will and other similar terms and phrases, including
references to assumptions. These statements are contained in the
Business, Risk Factors, and
Managements Discussion and Analysis of Financial
Condition and Results of Operations sections, as well as
other sections of this report.
Forward-looking statements in this report include, but are not
limited to:
|
|
|
|
|
the future potential of, including anticipated net sales and
prescription trends for our branded pharmaceutical products,
particularly
Altace®,
Skelaxin®,
Thrombin-JMI®,
Sonata®
and
Levoxyl®;
|
|
|
|
expectations regarding the enforceability and effectiveness of
product-related patents, including in particular patents related
to
Altace®,
Skelaxin®,
Sonata®
and
Adenoscan®;
|
|
|
|
expected trends and projections with respect to particular
products, reportable segment and income and expense line items;
|
|
|
|
the timeliness and accuracy of wholesale inventory data provided
by our customers;
|
|
|
|
the adequacy of our liquidity and capital resources;
|
|
|
|
anticipated capital expenditures;
|
|
|
|
the development, approval and successful commercialization of
Remoxytm,
an investigational drug for the treatment of
moderate-to-severe
chronic pain; binodenoson, our next generation cardiac
pharmacologic stress-imaging agent; bremelanotide, an
investigational new drug for the treatment of erectile
dysfunction and female sexual dysfunction; T-62, an
investigational drug for the treatment of neuropathic pain;
MRE0094, an investigational drug for the topical treatment of
chronic diabetic foot ulcers; the development of a new
formulation of
Skelaxin®;
pre-clinical programs; and product life-cycle development
projects;
|
|
|
|
the development, approval and successful commercialization of a
diazepam-filled auto-injector, new inhaler for
Intal®
using the alternative propellant HFA, and an
Altace®/diuretic
combination product;
|
|
|
|
our expectation that we will be in a position to launch an
Altace®
tablet formulation during the fourth quarter of 2007 or the
first quarter of 2008;
|
|
|
|
the ability to obtain a supply of
Sonata®
sufficient to meet market demand;
|
|
|
|
our successful execution of our growth strategies;
|
|
|
|
anticipated developments and expansions of our business;
|
|
|
|
our plans for the manufacture of some of our products, including
but not limited to, the anticipated expansion of our
manufacturing capacity for
Thrombin-JMI®;
|
|
|
|
anticipated increases in sales of acquired products or royalty
revenues;
|
32
|
|
|
|
|
the success of our Amended and Restated Co-Promotion Agreement
with Wyeth;
|
|
|
|
the high cost and uncertainty of research, clinical trials and
other development activities involving pharmaceutical products;
|
|
|
|
the development of product line extensions;
|
|
|
|
the unpredictability of the duration or future findings and
determinations of the FDA, including the pending applications
related to our diazepam-filled auto-injector and a new
Intal®
inhaler formulation utilizing HFA, and other regulatory agencies
worldwide;
|
|
|
|
products developed, acquired or in-licensed that may be
commercialized;
|
|
|
|
the intent, belief or current expectations, primarily with
respect to our future operating performance;
|
|
|
|
expectations regarding sales growth, gross margins,
manufacturing productivity, capital expenditures and effective
tax rates;
|
|
|
|
expectations regarding the outcome of various pending legal
proceedings including the
Altace®
and
Skelaxin®
patent challenges, the SEC investigation, other possible
governmental investigations, securities litigation, and other
legal proceedings described in this report; and
|
|
|
|
expectations regarding our financial condition and liquidity as
well as future cash flows and earnings.
|
These forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause actual
results to be materially different from those contemplated by
our forward-looking statements. These known and unknown risks,
uncertainties and other factors are described in detail in the
Risk Factors section and in other sections of this
report.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
The location and business segments served by our primary
facilities are as follows:
|
|
|
|
|
Location
|
|
Principal Purposes
|
|
Business Segment(s)
|
|
Bristol, Tennessee
|
|
Manufacturing and Administration
|
|
Branded Pharmaceuticals
|
Rochester, Michigan
|
|
Manufacturing
|
|
Branded Pharmaceuticals and
Contract Manufacturing
|
St. Louis, Missouri
|
|
Manufacturing
|
|
Meridian Medical Technologies
|
St. Petersburg, Florida
|
|
Manufacturing
|
|
Branded Pharmaceuticals
|
Middleton, Wisconsin
|
|
Manufacturing
|
|
Branded Pharmaceuticals
|
We own each of these primary facilities, with the exception of a
portion of the facilities in St. Louis, Missouri, which is
leased. For information regarding production capacity and extent
of utilization, please see Item 1,
Manufacturing.
The Bristol, Rochester, and St. Louis owned facilities are
pledged as collateral for our senior secured revolving credit
facility dated April 23, 2002.
Our corporate headquarters and centralized distribution center
are located in Bristol, Tennessee. We consider our properties to
be generally in good condition, well maintained, and generally
suitable and adequate to carry on our business.
We currently lease office space for our commercial operations
organization located in Bridgewater, New Jersey and our
research and development organization located in Cary, North
Carolina.
33
|
|
Item 3.
|
Legal
Proceedings
|
Please see Note 18 Commitments and Contingencies in
Part IV, Item 15(a)(1), Exhibits and Financial
Statement Schedules for information regarding material
legal proceedings in which we are involved.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
PART II
|
|
Item 5.
|
Market
for Common Equity and Related Stockholder Matters
|
The following table sets forth the range of high and low sales
prices per share of our common stock for the periods indicated.
Our common stock is listed on the New York Stock Exchange, where
it trades under the symbol KG. There were
approximately 960 shareholders of record on February 23,
2007.
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
High
|
|
|
Low
|
|
|
First quarter
|
|
$
|
19.87
|
|
|
$
|
16.25
|
|
Second quarter
|
|
|
18.48
|
|
|
|
15.83
|
|
Third quarter
|
|
|
17.31
|
|
|
|
15.93
|
|
Fourth quarter
|
|
|
17.46
|
|
|
|
15.74
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
High
|
|
|
Low
|
|
|
First quarter
|
|
$
|
12.58
|
|
|
$
|
8.28
|
|
Second quarter
|
|
|
10.60
|
|
|
|
7.50
|
|
Third quarter
|
|
|
16.39
|
|
|
|
10.11
|
|
Fourth quarter
|
|
|
17.45
|
|
|
|
14.22
|
|
On February 27, 2007, the closing price of our common stock
as reported on the New York Stock Exchange was $17.91.
34
PERFORMANCE
GRAPH
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
The graph below compares the cumulative total return of
Kings common stock in comparison with the
Standard & Poors 500 Index, the
NYSE Composite Index and a peer group index since
December 31, 2001. It shows an investment of $100 on
December 31, 2001. The peer group index includes United
States pharmaceutical companies which trade on the NYSE.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/01
|
|
|
12/02
|
|
|
12/03
|
|
|
12/04
|
|
|
12/05
|
|
|
12/06
|
|
|
King Pharmaceuticals, Inc.
|
|
|
100.00
|
|
|
|
40.80
|
|
|
|
36.22
|
|
|
|
29.43
|
|
|
|
40.16
|
|
|
|
37.79
|
|
Standard & Poors 500
Stocks
|
|
|
100.00
|
|
|
|
77.90
|
|
|
|
100.24
|
|
|
|
111.15
|
|
|
|
116.61
|
|
|
|
135.03
|
|
NYSE Composite
|
|
|
100.00
|
|
|
|
81.83
|
|
|
|
108.16
|
|
|
|
124.38
|
|
|
|
136.03
|
|
|
|
164.60
|
|
NYSE Stocks (SIC
2830-2839
U.S. Companies) Drugs
|
|
|
100.00
|
|
|
|
78.48
|
|
|
|
85.44
|
|
|
|
79.09
|
|
|
|
76.74
|
|
|
|
88.39
|
|
35
We have never paid cash dividends on our common stock. The
payment of cash dividends is subject to the discretion of the
Board of Directors and is limited by the terms of our credit
facility and will be dependent upon many factors, including our
earnings, our capital needs, and our general financial
condition. We currently anticipate that for the foreseeable
future, we will retain our earnings.
|
|
Item 6.
|
Selected
Financial Data
|
The table below should be read in conjunction with the section
entitled Managements Discussion and Analysis of
Financial Condition and Results of Operations and our
audited consolidated financial statements and related notes
included elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except per share data)
|
|
|
Statement of Income
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,988,500
|
|
|
$
|
1,772,881
|
|
|
$
|
1,304,364
|
|
|
$
|
1,492,789
|
|
|
$
|
1,088,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)(1)(2)
|
|
|
402,546
|
|
|
|
180,079
|
|
|
|
(41,264
|
)
|
|
|
151,952
|
|
|
|
275,043
|
|
Income (loss) from continuing
operations before income taxes, discontinued operations
|
|
|
424,312
|
|
|
|
178,115
|
|
|
|
(58,034
|
)
|
|
|
163,327
|
|
|
|
248,506
|
|
Income tax expense (benefit)
|
|
|
135,730
|
|
|
|
61,485
|
|
|
|
(7,412
|
)
|
|
|
65,884
|
|
|
|
78,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
288,582
|
|
|
|
116,630
|
|
|
|
(50,622
|
)
|
|
|
97,443
|
|
|
|
170,473
|
|
Income (loss) from discontinued
operations(3)
|
|
|
367
|
|
|
|
1,203
|
|
|
|
(109,666
|
)
|
|
|
(5,489
|
)
|
|
|
11,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
288,949
|
|
|
$
|
117,833
|
|
|
$
|
(160,288
|
)
|
|
$
|
91,954
|
|
|
$
|
182,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
1.19
|
|
|
$
|
0.48
|
|
|
$
|
(0.21
|
)
|
|
$
|
0.40
|
|
|
$
|
0.70
|
|
Income (loss) from discontinued
operations
|
|
|
|
|
|
|
0.01
|
|
|
|
(0.45
|
)
|
|
|
(0.02
|
)
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1.19
|
|
|
$
|
0.49
|
|
|
$
|
(0.66
|
)
|
|
$
|
0.38
|
|
|
$
|
0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
1.19
|
|
|
$
|
0.48
|
|
|
$
|
(0.21
|
)
|
|
$
|
0.40
|
|
|
$
|
0.69
|
|
Income (loss) from discontinued
operations
|
|
|
|
|
|
|
0.01
|
|
|
|
(0.45
|
)
|
|
|
(0.02
|
)
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1.19
|
|
|
$
|
0.49
|
|
|
$
|
(0.66
|
)
|
|
$
|
0.38
|
|
|
$
|
0.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share of
common stock
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
1,055,677
|
|
|
$
|
276,329
|
|
Total assets
|
|
|
3,329,531
|
|
|
|
2,965,242
|
|
Total debt
|
|
|
400,000
|
|
|
|
345,000
|
|
Shareholders equity
|
|
|
2,288,606
|
|
|
|
1,973,422
|
|
|
|
|
(1) |
|
Results for 2003 reflect a $15,212 reduction in the co-promotion
fees paid to our
Altace®
co-promotion partner as a result of charges for amounts due
under Medicaid and other governmental pricing programs for the
years 1998 to 2002. Specifically (a) we recovered on a
pre-tax basis $9,514 in fees we previously accrued during the
fourth quarter of 2002 and have reduced the accrual for these
fees by this amount in the fourth quarter of 2003 and
(b) fees under our Co-Promotion Agreement for
Altace®
in the fourth quarter of 2003 were reduced on a pre-tax basis by
an additional $5,698 as a result of the Medicaid accrual
adjustment recorded in that quarter. |
|
(2) |
|
Effective January 1, 2006, we adopted Statement of
Financial Accounting Standards No. 123(R), Share
Based Payment, which requires the recognition of the fair
value of
stock-based
compensation in earnings. This statement was adopted using the
modified prospective application method and therefore our prior
periods have not been restated and do not reflect the
recognition of
stock-based
compensation costs. During 2006, we incurred on a
pre-tax
basis $24,718 of compensation costs related to our
stock-based
compensation arrangements. |
|
(3) |
|
Reflects the classification of
Nordette®
and
Prefest®
product lines as discontinued operations. See Note 26,
Discontinued Operations, in Part 15(a)(1),
Exhibits and Financial Statement Schedules. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion should be read in conjunction with the
other parts of this report, including the audited consolidated
financial statements and related notes. Historical results and
percentage relationships set forth in the statement of income,
including trends that might appear, are not necessarily
indicative of future operations. Please see the Risk
Factors and Forward-Looking Statements
sections for a discussion of the uncertainties, risks and
assumptions associated with these statements.
OVERVIEW
Our
Business
We are a vertically integrated pharmaceutical company that
develops, manufactures, markets and sells branded prescription
pharmaceutical products. To capitalize on opportunities in the
pharmaceutical industry, we seek to develop, in-license, acquire
or obtain commercialization rights to novel branded prescription
pharmaceutical products in attractive markets.
Our corporate strategy is focused on three key therapeutic
areas: cardiovascular/metabolic, neuroscience, and
hospital/acute care products. We believe each of our key
therapeutic areas has significant market potential and our
organization is aligned accordingly. We work to achieve organic
growth by maximizing the potential of our currently marketed
products through sales and marketing and product life-cycle
management. We also work to achieve organic growth through the
successful development of new branded pharmaceutical products.
Additionally, we seek to achieve growth through the acquisition
or in-licensing of novel branded pharmaceutical products in
various stages of development and technologies that have
significant market potential that complement our three key
therapeutic areas. We may also seek company acquisitions which
add products or products in development, technologies or sales
and marketing capabilities to our key therapeutic areas or that
otherwise complement our operations.
37
Utilizing our internal resources and a disciplined business
development process, we strive to be a leader and partner of
choice in bringing innovative, clinically-differentiated
therapies and technologies to market in our key therapeutic
areas.
Our business consists of five segments which include branded
pharmaceuticals, Meridian Medical Technologies, royalties,
contract manufacturing, and other. In accordance with our
strategy, our branded pharmaceutical products can be divided
into the following therapeutic areas:
|
|
|
|
|
Cardiovascular/metabolics (including
Altace®
and
Levoxyl®),
|
|
|
|
Neuroscience (including
Skelaxin®,
Avinza®
and
Sonata®),
|
|
|
|
Hospital/acute care (including
Thrombin-JMI®), and
|
|
|
|
Other.
|
Our Meridian Medical Technologies segment consists of our
auto-injector business, which includes
EpiPen®
and nerve gas antidotes which we provide to the
U.S. Military. Our royalties segment relates to revenues we
derive from successfully developed products that we have
licensed to third parties. Our contract manufacturing segment
manufactures pharmaceutical products for third parties under
contracts with a number of pharmaceutical and biotechnology
companies.
2006
Highlights
Introduction
During 2006, we achieved many important accomplishments that we
believe better position us for long-term growth. Among our many
accomplishments, we:
|
|
|
|
|
expanded our portfolio of products;
|
|
|
|
took steps to create opportunities to extend the life cycle of
our
Altace®
franchise; and
|
|
|
|
advanced projects in our research and development pipeline.
|
We believe these accomplishments better position us to continue
executing our strategy for long-term growth in 2007.
Expanded
Product Portfolio
On January 9, 2007, we obtained an exclusive license to the
hemostatic products designed for use outside catheterization and
electrophysiology laboratories by Vascular Solutions, Inc.
(Vascular Solutions), which include products which
we expect to market as
Thrombi-Padtm
and
Thrombi-Gel®
hemostats. The license also includes a product we expect to
market as
Thrombi-Pastetm,
which is currently in development. Each of these products
includes
Thrombin-JMI®
as a component. Vascular Solutions will manufacture and supply
these products for us.
On September 6, 2006, we entered into an agreement to
acquire all the rights to
Avinza®
in the United States, its territories and Canada from Ligand
Pharmaceuticals Incorporated (Ligand).
Avinza®
is an extended release formulation of morphine and is indicated
as a once-daily treatment for moderate to severe pain in
patients who require continuous opioid therapy for an extended
period of time. We completed our acquisition of
Avinza®
on February 26, 2007. Under the terms of the asset purchase
agreement, we paid Ligand $246.3 million and, in addition,
paid certain liabilities, including a product-related liability
totaling $49.1 million. As part of the transaction, we
agreed to pay Ligand an ongoing royalty on net sales of
Avinza®
and to assume payment of Ligands
Avinza®
royalty obligations to third parties.
On June 27, 2006, we entered into a co-exclusive agreement
with Depomed, Inc. (Depomed) to commercialize
Depomeds
Glumetzatm
product.
Glumetzatm
is a once-daily, extended-release formulation of metformin for
the treatment of patients with Type II diabetes that Depomed
developed utilizing its proprietary
Acuformtm
drug delivery technology. Under the terms of the agreement, we
assumed responsibility for
38
promoting
Glumetzatm
in the United States and Puerto Rico, while Depomed has the
right to co-promote the product using its own sales force at
some point in the future. Depomed will pay us a fee from gross
profit, as defined in the agreement, generally net sales less
cost of goods sold less a royalty Depomed must pay a third
party. Depomed is responsible for the manufacture and
distribution of
Glumetzatm,
while we bear all costs related to the use of our sales force
for the product. We launched the promotion of
Glumetzatm
in the third quarter of 2006.
Altace
Franchise
On June 22, 2000, we entered into a Co-Promotion Agreement
with Wyeth to
promote Altace®
in the United States and Puerto Rico through October 29,
2008, with possible extensions as outlined in the Co-Promotion
Agreement. Under the agreement, Wyeth paid an upfront fee to us
of $75.0 million. In connection with the Co-Promotion
Agreement, we agreed to pay Wyeth a promotional fee based on
annual net sales of
Altace®.
On July 5, 2006, we entered into an amended and restated
co-promotion agreement (Amended Co-Promotion
Agreement) with Wyeth regarding
Altace®.
Effective January 1, 2007, we assumed full responsibility
for selling and marketing
Altace®.
During 2006, the Wyeth sales force continued to
co-promote
the product with us and continued to share marketing expenses.
We paid or will pay Wyeth a reduced annual fee as follows:
|
|
|
|
|
For 2006, 15% of
Altace®
net sales up to $165.0 million, 42.5% of
Altace®
net sales in excess of $165.0 million and less than or
equal to $465.0 million, and 52.5% of
Altace®
net sales that are in excess of $465.0 million and less
than or equal to $585.0 million, with the fee not to exceed
$215.3 million.
|
|
|
|
For 2007, 30% of
Altace®
net sales, with the fee not to exceed $178.5 million.
|
|
|
|
For 2008, 22.5% of
Altace®
net sales, with the fee not to exceed $134.0 million.
|
|
|
|
For 2009, 14.2% of
Altace®
net sales, with the fee not to exceed $84.5 million.
|
|
|
|
For 2010, 25% of
Altace®
net sales, with the fee not to exceed $5.0 million.
|
Wyeth will pay us a $20.0 million milestone fee if a
specified
Altace®
net sales threshold is achieved in 2008.
In February 2006, we entered into a collaboration with Arrow
International Limited and certain of its affiliates, excluding
Cobalt Pharmaceuticals, Inc. (collectively, Arrow),
to commercialize one or more novel formulations of ramipril, the
active ingredient in our
Altace®
product. Under a series of agreements, Arrow has granted us
rights to certain current and future New Drug Applications
(NDAs) regarding novel formulations of ramipril and
intellectual property, including patent rights and technology
licenses relating to these novel formulations. On
February 27, 2007, the FDA approved an NDA arising from
this collaboration for an
Altace®
tablet formulation. Under certain conditions, Arrow will be
responsible for the manufacture and supply of new formulations
of ramipril for us. Additionally, we have granted Cobalt
Pharmaceuticals, Inc. a non-exclusive right to enter into the
U.S. ramipril market with a generic form of the currently
marketed
Altace®
product, which would be supplied by us. Cobalt is an affiliate
of Arrow, but is not a party to the collaboration.
Pursuant to the agreements, we made an upfront payment to Arrow
of $35.0 million. During the fourth quarter of 2006, we
made an additional payment of $25.0 million to Arrow. Arrow
will also receive payments from us of $50.0 million during
2007. We classified these payments as
in-process
research and development expense in 2006. Additionally, Arrow
will earn fees for the manufacture and supply of new
formulations of ramipril.
In addition, we have in development an
Altace®/diuretic
combination product which is currently in Phase III
clinical trials.
39
Research
and Development Pipeline
Our current research and development pipeline includes four
products in Phase III clinical trials and two products in
late Phase II clinical trials. Our Phase III products
are led by
Remoxytm,
an abuse-deterrent formulation of long-acting oxycodone for the
treatment of moderate to severe chronic pain. In February 2006,
Remoxytm
successfully completed a Special Protocol Assessment with the
FDA. As a result, we, along with Pain Therapeutics, commenced a
pivotal Phase III clinical trial with
Remoxytm
in patients with severe chronic pain.
The
Remoxytm
formulation consists of a sticky, high-viscosity mass that is
not prone to injection or inhalation. It is intended to meet the
needs of physicians who appropriately prescribe opioid
painkillers and who seek to minimize risks of drug diversion,
abuse or accidental patient misuse. Published data show that
freezing, crushing, or submerging
Remoxytm
in high-proof alcohol for hours at a time releases just a
fraction of oxycodone compared to currently available
formulations of oxycodone at time points when abusers presumably
expect to be able to abuse its active ingredient.
Our Phase III products also include: binodenoson, a
pharmacologic cardiac stress imaging agent intended to provide a
reduced side effects profile compared to the currently approved
product
Adenoscan®;
Vanquixtm,
our diazepam-filled auto-injector that is currently under
development as the only therapy of its kind for the treatment of
acute, repetitive epileptic seizures; and an
Altace®/diuretic
combination product for the treatment of hypertension. We expect
to file an NDA with the FDA for our Altace/diuretic combination
product in the second half of 2007.
Our Phase II compounds are led by bremelanotide, under our
collaborative agreement with Palatin Technologies. Bremelanotide
is the first compound in a new drug class called melanocortin
receptor agonists under development to treat sexual dysfunction
in both men and women. In November 2006, we announced results
from Phase II clinical trials evaluating bremelanotide in
men experiencing erectile dysfunction (ED). We are
continuing to evaluate data from these completed Phase II
trials in men experiencing ED as we prepare for an end of
Phase II meeting with the FDA in 2007. Also in 2006, we
announced results from a Phase IIa clinical trial and
initiated a Phase IIb clinical trial evaluating the effects
of bremelanotide in women experiencing female sexual dysfunction
(FSD).
In January 2006, we initiated the Phase II clinical program
for MRE-0094, an adenosine A2a receptor agonist for the topical
treatment of chronic, neuropathic, diabetic foot ulcers. During
2006 we also completed the Phase I clinical program for
T-62, an adenosine A1 allosteric enhancer that we are developing
for the treatment of neuropathic pain. We expect to begin the
Phase II clinical program for T-62 in the first half of
2007.
40
OPERATING
RESULTS
The following table summarizes total revenues and cost of
revenues by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$
|
1,724,701
|
|
|
$
|
1,542,124
|
|
|
$
|
1,076,517
|
|
Meridian Medical Technologies
|
|
|
164,760
|
|
|
|
129,261
|
|
|
|
123,329
|
|
Royalties
|
|
|
80,357
|
|
|
|
78,128
|
|
|
|
78,474
|
|
Contract manufacturing
|
|
|
16,501
|
|
|
|
22,167
|
|
|
|
26,045
|
|
Other
|
|
|
2,181
|
|
|
|
1,201
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,988,500
|
|
|
$
|
1,772,881
|
|
|
$
|
1,304,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues, exclusive of
depreciation, amortization and impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$
|
317,677
|
|
|
$
|
222,924
|
|
|
$
|
251,568
|
|
Meridian Medical Technologies
|
|
|
74,576
|
|
|
|
62,958
|
|
|
|
59,296
|
|
Royalties
|
|
|
9,748
|
|
|
|
9,003
|
|
|
|
10,878
|
|
Contract manufacturing
|
|
|
17,636
|
|
|
|
27,055
|
|
|
|
31,207
|
|
Other cost of revenues
|
|
|
171
|
|
|
|
1,045
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
419,808
|
|
|
$
|
322,985
|
|
|
$
|
352,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes our gross to net sales deductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Gross Sales
|
|
$
|
2,461,588
|
|
|
$
|
2,240,852
|
|
|
$
|
2,017,296
|
|
Commercial Rebates
|
|
|
188,652
|
|
|
|
192,203
|
|
|
|
203,405
|
|
Medicare Part D Rebates
|
|
|
54,221
|
|
|
|
|
|
|
|
|
|
Medicaid Rebates
|
|
|
27,219
|
|
|
|
78,753
|
|
|
|
135,545
|
|
Chargebacks
|
|
|
102,876
|
|
|
|
99,057
|
|
|
|
114,995
|
|
Returns
|
|
|
14,832
|
|
|
|
5,012
|
|
|
|
183,066
|
|
Trade Discounts/Other
|
|
|
84,720
|
|
|
|
91,090
|
|
|
|
62,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,989,068
|
|
|
$
|
1,774,737
|
|
|
$
|
1,317,546
|
|
Discontinued Operations
|
|
|
568
|
|
|
|
1,856
|
|
|
|
13,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
1,988,500
|
|
|
$
|
1,772,881
|
|
|
$
|
1,304,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross sales were higher in 2006 compared to 2005 primarily due
to price increases, higher unit sales as a result of the effect
of wholesale inventory reductions of some of our branded
pharmaceutical products during 2005, particularly
Altace®,
and an increase in gross sales of Meridian Medical Technologies.
These increases in gross sales were partially offset by a
decline in prescriptions of certain of our branded
pharmaceutical products during 2006.
Gross sales were higher in 2005 compared to 2004 primarily due
to the effect of higher unit sales as a result of the effect of
a higher level of wholesale inventory reductions of some of our
branded pharmaceutical products during 2004, and price
increases, particularly with respect to
Thrombin-JMI®.
In April 2004 we entered into inventory management agreements
(IMAs) with each of our three key wholesale
customers covering all of our branded products for the purpose
of obtaining data regarding and
41
reducing the level of wholesale inventories of our products. As
we anticipated, entering into the IMAs adversely affected net
sales of some of our branded pharmaceutical products,
particularly during 2004, as wholesale inventory levels of these
products were aggressively reduced.
During the fourth quarter of 2004, we amended our IMAs with our
key wholesale customers with the objective of further reducing
their inventories of our products. As a result, the average
wholesale inventory level of our key products was further
reduced during the fourth quarter of 2004 and the first quarter
of 2005.
Based on inventory data provided by our key customers under the
IMAs, we believe that wholesale inventory levels of our key
products,
Altace®,
Skelaxin®,
Thrombin-JMI®,
Sonata®
and
Levoxyl®,
as of December 31, 2006, are at or below normalized levels.
We estimate that the wholesale and retail inventories of our
products as of December 31, 2006 represent gross sales of
approximately $180.0 million to $190.0 million.
The following tables provide the activity and ending balances
for our significant gross to net categories:
Accrual
for Rebates, including Administrative Fees:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Balance at January 1, net of
prepaid amounts
|
|
$
|
126,240
|
|
|
$
|
179,062
|
|
Current provision related to sales
made in current period
|
|
|
282,603
|
|
|
|
294,964
|
|
Current provision related to sales
made in prior periods
|
|
|
(12,511
|
)
|
|
|
(24,008
|
)
|
Rebates paid
|
|
|
(342,567
|
)
|
|
|
(323,778
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31, net
of prepaid amounts
|
|
$
|
53,765
|
|
|
$
|
126,240
|
|
|
|
|
|
|
|
|
|
|
Rebates include commercial rebates and Medicaid and Medicare
rebates.
Medicaid rebate expense was lower in 2006 than in 2005 primarily
due to the Federal government shifting persons who were covered
by the Medicaid Program to the Medicare Part D Program.
During January 2006, the Medicare Prescription Drug Improvement
and Modernization Act became effective. This law provides
outpatient prescription drug coverage to senior citizens and
certain disabled citizens in the United States. We have
contracts with organizations that administer the Medicare
Part D Program, which require us to pay rebates based on
contractual pricing and actual utilization under the plans.
During the third quarter of 2005, we began reporting to the
Centers for Medicare and Medicaid Services using a refined
calculation to compute our Average Manufacturers Price
(AMP) and Best Price. In addition, during the third
quarter of 2005, we recalculated rebates due with respect to
prior quarters utilizing the refined AMP and Best Price
Calculations. As a result of this updated information, during
the third quarter of 2005, we decreased our reserve for
estimated Medicaid and other government pricing program
obligations and increased net sales from branded pharmaceutical
products by approximately $21.0 million, approximately
$8.0 million of which related to years prior to 2005. This
does not include the adjustment to sales classified as
discontinued operations. As a result of the increase in net
sales, the co-promotion expense related to net sales of
Altace®
increased by approximately $6.0 million, approximately
$4.0 million of which related to years prior to 2005. The
effect of this change in estimate on operating income was,
therefore, approximately $15.0 million, approximately
$4.0 million of which related to years prior to 2005.
During the third quarter of 2006, we reduced our Medicaid rebate
expense and increased net sales from branded pharmaceutical
products by approximately $9.3 million due to the
determination that a liability established in 2005 for a
government pricing program for military dependents and retirees
was no longer probable.
During the first quarter of 2006, we paid approximately
$129.3 million related to (i) the settlement
agreements with the Office of Inspector General of the United
States Department of Health and Human Services
(HHS/OIG) and the Department of Veterans Affairs, to
resolve the governmental investigations related to our
underpayment of rebates owed to Medicaid and other governmental
pricing programs during the period from 1994 to 2002 and
(ii) similar state settlement agreements. For a discussion
regarding this
42
settlement, please see Settlement of Governmental Pricing
Investigation included in Note 18, Commitments
and Contingencies, in Part IV Item 15(a)(1),
Exhibits and Financial Statement Schedules. Of the
$129.3 million paid in the first quarter of 2006,
approximately $64.0 million reduced the rebate accrual and
is reflected in Rebates paid in the table above.
In addition, during the first quarter of 2006, we reduced our
regular periodic Medicaid rebate payments as a result of prior
overpayments. During the second quarter of 2006, we began
reducing our payments for Medicaid rebates to utilize
overpayments made to the government related to Medicaid during
the government pricing investigation in 2003, 2004 and 2005.
During the period of the investigation, we made actual Medicaid
payments in excess of estimated expense to avoid any
underpayments to the government. As a result of refining the AMP
and Best Price calculations in the third quarter of 2005, we
discontinued the practice of making payments in excess of the
amounts expensed. We expect to recover the remaining
overpayments to the government and will continue to reduce cash
payments in the future until this overpayment is fully
recovered. For a discussion regarding this investigation, please
see Note 18, Commitments and Contingencies, in
Part IV, Item 15(a)(1), Exhibits and Financial
Statement Schedules. In 2006, the utilization of
overpayments reduced our rebate payments by approximately
$25.0 million and has therefore reduced Rebates
Paid in the table above.
Accrual
for Returns:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Balance at January 1
|
|
$
|
50,902
|
|
|
$
|
122,863
|
|
Current provision
|
|
|
14,832
|
|
|
|
5,012
|
|
Actual returns
|
|
|
(23,733
|
)
|
|
|
(76,973
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance at December 31
|
|
$
|
42,001
|
|
|
$
|
50,902
|
|
|
|
|
|
|
|
|
|
|
Our calculation for returns reserves is based on historical
sales and return rates over the period during which customers
have a right of return. We also consider current wholesale and
retail inventory levels of our products. Based on data received
from our inventory management agreements with our three key
wholesale customers, there was a significant reduction of
wholesale inventory levels of our products during the first
quarter of 2005. This reduction resulted in a change in estimate
during the first quarter of 2005 that decreased the reserve for
returns by approximately $20.0 million and increased net
sales from branded pharmaceuticals, excluding the adjustment to
sales classified as discontinued operations, by the same amount.
During the second quarter of 2005, we decreased our reserve for
returns by approximately $5.0 million and increased our net
sales from branded pharmaceuticals, excluding the adjustment for
sales classified as discontinued operations, by the same amount
as a result of an additional reduction in wholesale inventory
levels of our branded products. These adjustments are reflected
in the table above as a reduction in the current provision.
During the third quarter of 2005, our actual returns of branded
pharmaceutical products continued to decrease significantly
compared to actual returns during the quarterly periods in 2004
and the first quarter of 2005. Additionally, based on data
received pursuant to our inventory management agreements with
key wholesale customers, we continued to experience normalized
wholesale inventory levels of our branded pharmaceutical
products during the third quarter of 2005. Accordingly, we
believed that the rate of returns experienced during the second
and third quarters of 2005 was more indicative of what we
expected in future quarters and adjusted our returns reserve
accordingly. This change in estimate resulted in a decrease of
approximately $15.0 million in the returns reserve in the
third quarter of 2005 and a corresponding increase in net sales
from branded pharmaceutical products. As a result of this
increase in net sales, the co-promotion expense related to net
sales of
Altace®
increased by approximately $5.0 million. The effect of the
change in estimate on operating income was, therefore,
approximately $10.0 million.
As a result of the actual returns during the first quarter of
2006, the estimated rate of returns used in the calculation of
our returns reserve for some of our products continued to
decrease. During the first quarter of
43
2006, we decreased our reserve for returns by approximately
$8.0 million and increased our net sales from branded
pharmaceuticals, excluding the adjustment to sales classified as
discontinued operations, by the same amount. The Accrual
for Returns table above reflects this adjustment as a
reduction in the current provision. As a result of this increase
in net sales, the co-promotion expense related to net sales of
Altace®
in the first quarter of 2006 increased by approximately
$1.0 million and royalty expense related to net sales of
Skelaxin®
increased by approximately $1.0 million. The effect of the
change in estimate on first quarter 2006 operating income was,
therefore, approximately $6.0 million.
Accrual
for Chargebacks:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Balance at January 1
|
|
$
|
13,153
|
|
|
$
|
27,953
|
|
Current provision
|
|
|
102,876
|
|
|
|
99,057
|
|
Actual chargebacks
|
|
|
(102,090
|
)
|
|
|
(113,857
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance at December 31
|
|
$
|
13,939
|
|
|
$
|
13,153
|
|
|
|
|
|
|
|
|
|
|
Branded
Pharmaceuticals Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
For the Years Ended December 31,
|
|
|
2006 vs. 2005
|
|
|
2005 vs. 2004
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded
pharmaceutical
revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Altace®
|
|
$
|
652,962
|
|
|
$
|
554,353
|
|
|
$
|
347,292
|
|
|
$
|
98,609
|
|
|
|
17.8
|
%
|
|
$
|
207,061
|
|
|
|
59.6
|
%
|
Skelaxin®
|
|
|
415,173
|
|
|
|
344,605
|
|
|
|
238,563
|
|
|
|
70,568
|
|
|
|
20.5
|
|
|
|
106,042
|
|
|
|
44.5
|
|
Thrombin-JMI®
|
|
|
246,520
|
|
|
|
220,617
|
|
|
|
174,570
|
|
|
|
25,903
|
|
|
|
11.7
|
|
|
|
46,047
|
|
|
|
26.4
|
|
Levoxyl®
|
|
|
111,771
|
|
|
|
139,513
|
|
|
|
104,749
|
|
|
|
(27,742
|
)
|
|
|
(19.9
|
)
|
|
|
34,764
|
|
|
|
33.2
|
|
Sonata®
|
|
|
85,809
|
|
|
|
83,162
|
|
|
|
60,365
|
|
|
|
2,647
|
|
|
|
3.2
|
|
|
|
22,797
|
|
|
|
37.8
|
|
Other
|
|
|
212,466
|
|
|
|
199,874
|
|
|
|
150,978
|
|
|
|
12,592
|
|
|
|
6.3
|
|
|
|
48,896
|
|
|
|
32.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,724,701
|
|
|
$
|
1,542,124
|
|
|
$
|
1,076,517
|
|
|
$
|
182,577
|
|
|
|
11.8
|
%
|
|
$
|
465,607
|
|
|
|
43.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues,
exclusive of depreciation, amortization and impairments
|
|
$
|
317,677
|
|
|
$
|
222,924
|
|
|
$
|
251,568
|
|
|
$
|
94,753
|
|
|
|
42.5
|
%
|
|
$
|
(28,644
|
)
|
|
|
(11.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales from branded pharmaceutical products were higher in
2006 compared to 2005 primarily due to higher unit sales in 2006
as a result of the effects of wholesale inventory reductions in
2005 and price increases taken in the fourth quarter of 2005
partially offset by a decrease in prescriptions in 2006 from
2005. In addition, net sales during 2005 reflect a reduction in
reserves for returns and rebates as discussed above.
Net sales from branded pharmaceutical products were higher in
2005 than in 2004 primarily due to the effect of higher unit
sales and a lower rate of reserve for returns of some of these
products in 2005 as a result of the effect of a higher level of
wholesale inventory reductions of some of our branded
pharmaceutical products during 2004, the effect of a reduction
in reserves for returns and rebates during 2005 and price
increases, particularly with respect to
Thrombin-JMI®.
For a discussion regarding the potential risk of generic
competition for
Altace®,
Skelaxin®,
and
Sonata®,
please see Note 18 Commitments and
Contingencies in Part IV, Item 15(a)(1),
Exhibits and Financial Statement Schedules.
44
Sales
of Key Products
Altace®
Net sales of
Altace®
were higher in 2006 than in 2005 primarily due to higher unit
sales in 2006 as a result of the effects of wholesale inventory
reductions of
Altace®
in 2005 and a price increase taken in the fourth quarter of 2005
partially offset by a decrease in prescriptions in 2006 compared
to 2005. In addition, net sales during 2005 reflect a reduction
in reserves for returns and rebates as discussed above. Total
prescriptions for
Altace®
decreased approximately 2.2% in 2006 from 2005 according to IMS
America, Ltd. (IMS) monthly prescription data. We
believe
Altace®
net sales in 2007 may not achieve the level experienced in 2006
due to an expected increase in rebates and a continued decline
in prescriptions.
Net sales of
Altace®
were higher in 2005 than in 2004 primarily due to higher unit
sales and a lower rate of reserve for returns of the product in
2005 as a result of the effects of a higher level of wholesale
inventory reductions of
Altace®
in 2004, a reduction in the reserves for returns and rebates of
Altace®
in 2005, and price increases. Total prescriptions for
Altace®
increased approximately 1% in 2005 from 2004 according to IMS
monthly prescription data.
For a discussion regarding the risk of potential generic
competition for
Altace®,
please see Note 18, Commitments and
Contingencies in Part IV, Item 15(a)(1),
Exhibits and Financial Statement Schedules.
Skelaxin®
Net sales of
Skelaxin®
increased in 2006 from 2005 primarily due to a price increase
taken in the fourth quarter of 2005, higher unit sales in 2006
as a result of the effect of wholesale inventory reductions of
Skelaxin®
in 2005 and a reduction in government rebates partially offset
by a decline in prescriptions in 2006 compared to 2005. In
addition, net sales during 2005 reflect a reduction in reserves
for returns and rebates as discussed above. Total prescriptions
for
Skelaxin®
decreased approximately 2.1% in 2006 from 2005 according to IMS
monthly prescription data. We believe
Skelaxin®
net sales in 2007 may not continue to increase at the rate
experienced in 2006.
Net sales of
Skelaxin®
increased in 2005 from 2004 primarily due to higher unit sales
as a result of the effects of a higher level of wholesale
inventory reductions of
Skelaxin®
in 2004. Net sales of
Skelaxin®
in 2005 also benefited from a reduction in reserves for returns
and rebates of
Skelaxin®
and modest price increases. Total prescriptions for Skelaxin
declined approximately 10% in 2005 from 2004 according to IMS
monthly prescription data.
For a discussion regarding the risk of potential generic
competition for
Skelaxin®,
please see Note 18 Commitments and
Contingencies in Part IV, Item 15(a)(1),
Exhibits and Financial Statement Schedules.
Thrombin-JMI®
Net sales of
Thrombin-JMI®
increased in 2006 compared to 2005 primarily due to increases in
wholesale inventory levels, a price increase taken in the second
half of 2005 and an increase in demand by end users, partially
offset by an increase in chargebacks during 2006 compared to
2005. We believe
Thrombin-JMI®
net sales in 2007 may not continue to increase at the rate
experienced in 2006 due to the potential introduction of new
competitors in the market in the second half of 2007.
Net sales of
Thrombin-JMI®
increased in 2005 compared to 2004 due to the effect of price
increases and increased unit sales.
Levoxyl®
Net sales of
Levoxyl®
decreased in 2006 compared to 2005 primarily due to a decrease
in prescriptions in 2006, partially offset by price increases
taken in the fourth quarter of 2005 and changes in wholesale
inventory levels. During 2005, net sales of
Levoxyl®
benefited from the reduction in the reserve for returns
described above and a reduction in the reserve for rebates.
During 2006, net sales of
Levoxyl®
benefited from a favorable change in estimate of approximately
$7.0 million in the products reserve for Medicaid
rebates as a result of the government pricing investigation
settlement. This benefit was substantially offset by increases
in
45
Medicaid rebate reserves for other products as a result of the
settlement. Total prescriptions for
Levoxyl®
were approximately 16.0% lower in 2006 than in 2005 according to
IMS monthly prescription data. While prescriptions for this
product may continue to decline in 2007, we believe the rate of
any decline may be lower than that experienced in 2006.
Net sales of
Levoxyl®
were higher in 2005 than in 2004, notwithstanding lower unit
sales due to generic competition, primarily due to a lower rate
of actual returns of the products and a reduction in the amount
of commercial rebates. Total prescriptions for
Levoxyl®
decreased approximately 33% in 2005 from 2004 according to IMS
monthly prescription data.
Sonata®
Net sales of
Sonata®
were higher in 2006 than in 2005 primarily due to higher unit
sales as a result of wholesale inventory reductions of
Sonata®
in 2005 and price increases taken in the fourth quarter of 2005
and the third quarter of 2006, partially offset by a decrease in
prescriptions during 2006 compared to 2005. Total prescriptions
for
Sonata®
decreased approximately 19.6% in 2006 from 2005 according to IMS
monthly prescription data. The decrease in prescriptions during
2006 was primarily due to new competitors that entered the
market in 2005. While prescriptions for this product may
continue to decline, we believe the rate of any decline may be
lower than that recently experienced. We are currently
experiencing periodic stock-outs in our inventory of
Sonata®
and have been unable to fill the current demand for
Sonata®
due to problems with production experienced by Wyeth who
manufactures
Sonata®.
We believe the current lack of supply will negatively impact net
sales of
Sonata®
in the first quarter of 2007 and perhaps subsequent quarters. If
we are unable to consistently meet demand, net sales of
Sonata®
will decrease. For a discussion regarding
Sonata®
supply, please see Manufacturing in Part I,
Item 1, Business.
Net sales of
Sonata®
were higher in 2005 than in 2004 primarily due to higher unit
sales as a result of the effects of a higher level of wholesale
inventory reductions of
Sonata®
in 2004. Net sales of
Sonata®
in 2005 also benefited from modest price increases. Total
prescriptions for
Sonata®
decreased approximately 12% in 2005 from 2004 according to IMS
monthly prescription data. The decrease in prescriptions during
2005 was primarily due to increased competition during 2005.
For a discussion regarding the risk of potential generic
competition for
Sonata®,
please see Note 18, Commitments and
Contingencies in Part IV, Item 15(a)(1),
Exhibits and Financial Statement Schedules.
Other
Net sales of other branded pharmaceutical products were higher
in 2006 compared to 2005 primarily due to the effects of
wholesale inventory reductions in 2005 and price increases which
were partially offset by decreases in prescriptions. Most of
these products are not promoted through our sales force and
prescriptions for many of these products are declining. We do
not believe net sales of other branded pharmaceutical products
will grow from the level of net sales achieved in 2006.
Net sales of other branded pharmaceutical products were higher
in 2005 than in 2004 primarily due to the effects of a higher
level of wholesale inventory reductions of other branded
pharmaceutical products in 2004. Net sales of other branded
pharmaceutical products in 2005 benefited from a reduction in
reserves for returns and rebates for these products and modest
price increases.
Cost
of Revenues
Cost of revenues from branded pharmaceutical products increased
in 2006 from 2005 primarily due to an increase in royalties
associated with
Skelaxin®,
the cost of revenues associated with higher unit sales of
branded pharmaceutical products in 2006 compared to 2005, and
differences in special items which benefited 2005 compared to
2006 as discussed below.
46
Cost of revenues from branded pharmaceutical products was lower
in 2005 compared to 2004 primarily due to the following:
|
|
|
|
|
a charge during 2004 of approximately $46.0 million for the
write-off of excess inventory which was partially attributable
to reduced unit sales of products during 2004 as a result of
wholesale inventory reductions;
|
|
|
|
differences in special items which benefited 2005 compared to
2004 as discussed below.
|
These two items were partially offset by the cost of revenues
associated with higher unit sales of branded prescription
products in 2005.
Special items are those particular material income or expense
items that our management believes are not related to our
ongoing, underlying business, are not recurring, or are not
generally predictable. These items include, but are not limited
to, merger and restructuring expenses; non-capitalized expenses
associated with acquisitions, such as in-process research and
development charges and one-time inventory valuation adjustment
charges; charges resulting from the early extinguishments of
debt; asset impairment charges; expenses of drug recalls; and
gains and losses resulting from the divestiture of assets. We
believe the identification of special items enhances an analysis
of our ongoing, underlying business and an analysis of our
financial results when comparing those results to that of a
previous or subsequent like period. However, it should be noted
that the determination of whether to classify an item as a
special item involves judgments by us.
Special items affecting cost of revenues from branded
pharmaceuticals during 2006, 2005 and 2004 included the
following:
|
|
|
|
|
We recorded a charge in 2004 in the amount of $8.9 million
for our purchase commitments for some of our smaller products
for which commitments exceeded expected demand. With the
termination of some of these purchase commitment contracts in
2005, we had a benefit of approximately $6.1 million which
reduced our cost of revenues from branded pharmaceutical product.
|
|
|
|
We incurred a charge of $4.6 million in 2004 primarily
related to the voluntary recall of certain lots of
Levoxyl®.
Product returned as a result of this voluntary recall was less
than originally estimated. Accordingly, cost of revenues from
branded pharmaceutical products in 2005 was reduced by
approximately $2.5 million.
|
We anticipate cost of revenues will increase in 2007 compared to
2006 due to an increase in royalties we will pay on
Skelaxin®.
Meridian
Medical Technologies Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
For the Years Ended December 31,
|
|
|
2006-2005
|
|
|
2005-2004
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Meridian Medical Technologies
revenue
|
|
$
|
164,760
|
|
|
$
|
129,261
|
|
|
$
|
123,329
|
|
|
$
|
35,499
|
|
|
|
27.5
|
%
|
|
$
|
5,932
|
|
|
|
4.8
|
%
|
Cost of Revenues, exclusive of
depreciation, amortization and impairments
|
|
|
74,576
|
|
|
|
62,958
|
|
|
|
59,296
|
|
|
|
11,618
|
|
|
|
18.5
|
|
|
|
3,662
|
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
90,184
|
|
|
$
|
66,303
|
|
|
$
|
64,033
|
|
|
$
|
23,881
|
|
|
|
36.0
|
%
|
|
$
|
2,270
|
|
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from Meridian Medical Technologies increased in 2006
compared to 2005 primarily due to increases in unit sales of
Epipen®
to Dey, L.P., as well as revenues derived from our acquisition
of the rights to market and sell
Epipen®
in Canada that we purchased from Allerex Laboratory LTD on
March 1, 2006. Most of our
Epipen®
sales are based on our supply agreement with Dey, L.P., which
markets, distributes and sells the product. Revenues from
Meridian Medical Technologies fluctuate based on buying patterns
of Dey, L.P. and the government. Total prescriptions for
Epipen®
in the United States increased approximately 3.6% in 2006
compared to 2005 according to IMS monthly prescription data. We
do not believe revenues from
47
Meridian Medical Technologies will increase at the rate
experienced in 2006, as a significant portion of the increase in
2006 is associated with our acquisition of Allerex.
Cost of revenues from Meridian Medical Technologies increased in
2006 compared to 2005 primarily due to higher unit sales.
Royalties
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
For the Years Ended December 31,
|
|
|
2006-2005
|
|
|
2005-2004
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty revenue
|
|
$
|
80,357
|
|
|
$
|
78,128
|
|
|
$
|
78,474
|
|
|
$
|
2,229
|
|
|
|
2.9
|
%
|
|
$
|
(346
|
)
|
|
|
(0.4
|
)%
|
Cost of Revenues, exclusive of
depreciation, amortization and impairments
|
|
|
9,748
|
|
|
|
9,003
|
|
|
|
10,878
|
|
|
|
745
|
|
|
|
8.3
|
|
|
|
(1,875
|
)
|
|
|
(17.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
70,609
|
|
|
$
|
69,125
|
|
|
$
|
67,596
|
|
|
$
|
1,484
|
|
|
|
2.1
|
%
|
|
$
|
1,529
|
|
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from royalties are derived primarily from payments we
receive based on sales of
Adenoscan®.
We are not responsible for the marketing of this product and,
thus, are not able to predict whether revenue from royalties
will increase or decrease in 2007. For a discussion regarding
the potential risk of generic competition for
Adenoscan®,
please see Note 18, Commitments and
Contingencies, in Part IV, Item 15(a)(1),
Exhibits and Financial Statement Schedules.
Contract
Manufacturing Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
For the Years Ended December 31,
|
|
|
2006-2005
|
|
|
2005-2004
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract manufacturing revenue
|
|
$
|
16,501
|
|
|
$
|
22,167
|
|
|
$
|
26,045
|
|
|
$
|
(5,666
|
)
|
|
|
(25.6
|
)%
|
|
$
|
(3,878
|
)
|
|
|
(14.9
|
)%
|
Cost of Revenues, exclusive of
depreciation, amortization and impairments
|
|
|
17,636
|
|
|
|
27,055
|
|
|
|
31,207
|
|
|
|
(9,419
|
)
|
|
|
(34.8
|
)
|
|
|
(4,152
|
)
|
|
|
(13.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,135
|
)
|
|
$
|
(4,888
|
)
|
|
$
|
(5,162
|
)
|
|
$
|
3,753
|
|
|
|
76.8
|
%
|
|
$
|
274
|
|
|
|
5.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from contract manufacturing decreased in 2006 compared
to 2005 and in 2005 compared to 2004 due to a lower volume of
units manufactured for third parties. We expect this decline to
continue in future periods.
Cost of revenues associated with contract manufacturing
decreased in 2006 compared to 2005 and in 2005 compared to 2004
primarily due to decreased unit production of products we
manufacture for third parties.
48
Operating
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
For the Years Ended December 31,
|
|
|
2006-2005
|
|
|
2005-2004
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues, exclusive of
depreciation, amortization and impairments
|
|
$
|
419,808
|
|
|
$
|
322,985
|
|
|
$
|
352,938
|
|
|
$
|
96,823
|
|
|
|
30.0
|
%
|
|
$
|
(29,953
|
)
|
|
|
(8.5
|
)%
|
Selling, general and administrative
|
|
|
713,965
|
|
|
|
636,483
|
|
|
|
595,441
|
|
|
|
77,482
|
|
|
|
12.2
|
|
|
|
41,042
|
|
|
|
6.9
|
|
Research and development
|
|
|
253,596
|
|
|
|
262,726
|
|
|
|
84,239
|
|
|
|
(9,130
|
)
|
|
|
(3.5
|
)
|
|
|
178,487
|
|
|
|
>100.0
|
%
|
Depreciation and amortization
|
|
|
147,549
|
|
|
|
147,049
|
|
|
|
162,115
|
|
|
|
500
|
|
|
|
<1.0
|
|
|
|
(15,066
|
)
|
|
|
(9.3
|
)
|
Intangible asset impairment
|
|
|
47,842
|
|
|
|
221,054
|
|
|
|
149,592
|
|
|
|
(173,212
|
)
|
|
|
(78.4
|
)
|
|
|
71,462
|
|
|
|
47.8
|
|
Restructuring charges
|
|
|
3,194
|
|
|
|
4,180
|
|
|
|
10,827
|
|
|
|
(986
|
)
|
|
|
(23.6
|
)
|
|
|
(6,647
|
)
|
|
|
(61.4
|
)
|
Gain on sale of products
|
|
|
|
|
|
|
(1,675
|
)
|
|
|
(9,524
|
)
|
|
|
1,675
|
|
|
|
100.0
|
|
|
|
7,849
|
|
|
|
82.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
$
|
1,585,954
|
|
|
$
|
1,592,802
|
|
|
$
|
1,345,628
|
|
|
$
|
(6,848
|
)
|
|
|
(0.4
|
)%
|
|
$
|
247,174
|
|
|
|
18.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
For the Years Ended December 31,
|
|
|
2006-2005
|
|
|
2005-2004
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative, exclusive of co-promotion fees
|
|
$
|
496,215
|
|
|
$
|
409,451
|
|
|
$
|
409,775
|
|
|
$
|
86,764
|
|
|
|
21.2
|
%
|
|
$
|
(324
|
)
|
|
|
(0.1
|
)%
|
Medicaid related charge
|
|
|
|
|
|
|
|
|
|
|
65,000
|
|
|
|
|
|
|
|
|
|
|
|
(65,000
|
)
|
|
|
(100.0
|
)
|
Mylan transaction costs
|
|
|
|
|
|
|
3,898
|
|
|
|
9,062
|
|
|
|
(3,898
|
)
|
|
|
(100.0
|
)
|
|
|
(5,164
|
)
|
|
|
(57.0
|
)
|
Co-promotion fees
|
|
|
217,750
|
|
|
|
223,134
|
|
|
|
111,604
|
|
|
|
(5,384
|
)
|
|
|
(2.4
|
)
|
|
|
111,530
|
|
|
|
99.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and
administrative
|
|
$
|
713,965
|
|
|
$
|
636,483
|
|
|
$
|
595,441
|
|
|
$
|
77,482
|
|
|
|
12.2
|
%
|
|
$
|
41,042
|
|
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total revenues, total selling, general, and
administrative expenses were 35.9% in 2006 and 2005.
Total selling, general and administrative expenses increased in
2006 compared to 2005 primarily due to an increase in special
items, stock-based compensation costs and an increase in
operating expenses associated with sales and marketing. While
Altace®
net sales were higher in 2006 compared to 2005, the co-promotion
fee remained consistent due to a lower co-promotion fee average
rate during 2006 as a result of the Amended Co-Promotion
Agreement discussed above. For additional discussion regarding
the Amended Co-Promotion Agreement, please see
General within the Liquidity and Capital
Resources section below. For a discussion regarding the
increase in net sales of
Altace®,
please see
Altace®
within the Sales of Key Products section above.
Effective January 1, 2006, we adopted Statement of
Financial Accounting Standards (SFAS)
No. 123(R), Share-Based Payment, using the
modified prospective application transition method. Our prior
period
49
condensed consolidated financial statements have not been
restated and therefore do not reflect the recognition of
stock-based compensation costs. During 2006, we incurred
stock-based compensation costs of $21.1 million,
$15.4 million of which is included in selling, general and
administrative expenses.
In addition to the stock-based compensation costs discussed
above, we have recorded a charge of $3.6 million in the
third quarter of 2006 to correct immaterial understatements of
compensation expense identified in our voluntary review of our
practices with respect to granting equity-based compensation.
For additional information, please see Note 20,
Stock-Based Compensation, in Part IV,
Item 15(a)(1), Exhibits and Financial Statement
Schedules.
As a percentage of total revenues, total selling, general, and
administrative expenses decreased to 35.9% in 2005 compared to
45.6% in 2004. Selling, general and administrative expense, as a
percentage of total revenues, was higher in 2004 than in 2005
primarily due to lower total revenues in 2004 as a result of a
higher level of wholesale channel inventory reductions of some
of our branded pharmaceutical products and a higher level of
expense associated with special items affecting this category of
expense in 2004 compared to 2005 as discussed below.
Total selling, general and administrative expenses increased in
2005 compared to 2004 primarily due to an increase in
co-promotion fees we paid to Wyeth under our Co-Promotion
Agreement as a result of higher net sales of
Altace®
during 2005 as compared to 2004, which were partially offset by
a lower net charge for special items affecting this category of
expense in 2005 compared to 2004. For a discussion regarding the
increase in net sales of
Altace®,
please see
Altace®
within the Sales of Key Products section above.
Selling, general and administrative expense includes the
following special items:
|
|
|
|
|
A charge of $45.1 million during 2006 related to the
results of a binding arbitration proceeding with Elan
Corporation, plc regarding an agreement concerning the
development of a modified release formulation of
Sonata®.
During 2004, we incurred a charge of $5.0 million as
estimated settlement costs related to the termination of this
agreement. For additional information please see Note 18,
Commitments and Contingencies, in Part IV,
Item 15(a)(1), Exhibits and Financial Statement
Schedules.
|
|
|
|
Charges of $0.1 million, $19.8 million, and
$19.8 million during 2006, 2005 and 2004, respectively,
primarily due to professional fees related to the now-completed
investigation of our company by the HHS/OIG, the partially
completed investigation by the SEC, and private plaintiff
securities litigation. During 2006, we received payment from our
insurance carriers for the recovery of legal fees in the amount
of $6.8 million related to the securities litigation. This
recovery has been reflected as a reduction of professional fees
in 2006. For additional information, please see Note 18,
Commitments and Contingencies, in Part IV,
Item 15(a)(1), Exhibits and Financial Statement
Schedules.
|
|
|
|
Charges in the amount of $3.9 million and $9.1 million
in 2005 and 2004, respectively, for professional fees and
expenses related to the terminated merger agreement with Mylan
Laboratories, Inc.
|
|
|
|
A charge of $65.0 million related to Medicaid in the first
half of 2004 to cover estimated interest, costs, fines,
penalties and all other settlement costs in addition to the
$65.4 million charge that we accrued in 2003 for estimated
underpayments to Medicaid and other government pricing programs.
For additional information, please see Settlement of
Governmental Pricing Investigation in Note 18,
Commitments and Contingencies, in Part IV,
Item 15(a)(1), Exhibits and Financial Statement
Schedules.
|
50
Research
and Development Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
Change
|
|
|
|
December 31,
|
|
|
2006-2005
|
|
|
2005-2004
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
$
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
143,596
|
|
|
$
|
74,015
|
|
|
$
|
67,939
|
|
|
$
|
69,581
|
|
|
$
|
6,076
|
|
Research and
development in- process upon acquisition
|
|
|
110,000
|
|
|
|
188,711
|
|
|
|
16,300
|
|
|
|
(78,711
|
)
|
|
|
172,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development
|
|
$
|
253,596
|
|
|
$
|
262,726
|
|
|
$
|
84,239
|
|
|
$
|
(9,130
|
)
|
|
$
|
178,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development represents expenses associated with the
ongoing development of investigational drugs and product
life-cycle management projects in our research and development
pipeline. These expenses have continued to increase over time as
our development programs have progressed to later stages of
clinical development, which later stages are much more expensive
than earlier stages, and as we have continued to add late-stage
products in development to our portfolio. Our business model
continues to focus on adding to our research and development
pipeline through the acquisition of novel branded pharmaceutical
products and technologies in later stages of development.
Accordingly, we anticipate this category of expense to increase
in 2007 but not at the rate experienced in 2006.
Research and developmentin-process upon acquisition
represents the actual cost of acquiring rights to novel branded
pharmaceutical projects in development from third parties, which
costs we expense at the time of acquisition. We classify these
costs as special items and in 2006, 2005, and 2004 included the
following:
|
|
|
|
|
A charge equaling $110.0 million during 2006 for our
acquisition of in-process research and development associated
with our collaboration with Arrow to commercialize one or more
novel formulations of ramipril, the active ingredient in our
Altace®
product. Under a series of agreements, Arrow has granted us
rights to certain current and future NDAs regarding novel
formulations of ramipril and intellectual property, including
patent rights and technology licenses relating to these novel
formulations. Arrow will have responsibility for the manufacture
and supply of new formulations of ramipril for us. However,
under certain conditions, we may manufacture and supply the
formulations of ramipril instead of Arrow. Arrow will earn fees
for the manufacture and supply of the new formulations of
ramipril. Arrow filed an NDA for a novel formulation of ramipril
in January 2006. At the time of our acquisition of this project,
its success was dependent on additional development activities
and FDA approval. The estimated cost to complete the project at
the execution of these agreements was approximately
$3.5 million. The FDA approved the NDA on February 27,
2007. We expect to be in a position to launch the new
formulation during the fourth quarter of 2007 or the first
quarter of 2008.
|
|
|
|
A charge equaling $153.7 million during 2005 for our
acquisition of in-process research and development associated
with our strategic alliance with Pain Therapeutics to develop
and commercialize
Remoxytm
and other abuse-deterrent opiod painkillers.
Remoxytm
is an investigational drug in late-stage clinical development by
Pain Therapeutics for the treatment of
moderate-to-severe
chronic pain. We are responsible for all research and
development expenses related to this alliance, which could total
$100.0 million. The value of the in-process research and
development project was expensed on the date of acquisition as
it had not received regulatory approval and had no alternative
future use.
Remoxytm
is in Phase III of clinical development. If Phase III
clinical development is successful, we currently anticipate
obtaining FDA approval in 2009. We believe there is a reasonable
probability of completing the project successfully. However, the
success of the project depends on the outcome of our
Phase III clinical trial and the ability to successfully
manufacture the product. If the project is not successfully
completed, it could have a material effect on our cash flows and
results of operations.
|
|
|
|
A charge of $35.0 million during 2005 for our acquisition
of in-process research and development due to our co-exclusive
license agreement with Mutual Pharmaceutical Company whereby we
obtained a license to certain intellectual property relating to
metaxalone. The intellectual property licensed to us relates to
the potential for improved dosing and administration of
metaxalone. The value of the in-process research and development
project was expensed on the date of acquisition as it had not
received
|
51
|
|
|
|
|
regulatory approval and had no alternative future use. We are in
the process of evaluating a potential new formulation of
Skelaxin®.
The success of the project will depend on additional
in vitro and in vivo work in a clinical setting. The costs
and the time-line of the potential project are being evaluated.
The in-process research and development is part of the branded
pharmaceutical segment.
|
|
|
|
|
|
A charge of $16.3 million during 2004 for our acquisition
of in-process research and development associated with our entry
into a strategic alliance with Palatin to develop and
commercialize bremelanotide.
|
Depreciation
and Amortization Expense
Depreciation and amortization expense in 2006 was consistent
with 2005. Depreciation and amortization expense in 2006
includes a special item consisting of a $3.0 million charge
associated with accelerated depreciation on certain assets
including those associated with our decision to transfer the
production of
Levoxyl®
from our St. Petersburg, Florida facility to our Bristol,
Tennessee facility by the end of 2008.
Depreciation and amortization expense decreased in 2005 from
2004 primarily due to completing our amortization of the
purchase price associated with our
Skelaxin®
patent in the second quarter of 2005. For additional information
regarding amortization, including estimated future amortization
expense, please see Note 10, Intangible Assets and
Goodwill, in Part 15(a)(1), Exhibits and
Financial Statement Schedules.
Other
Operating Expenses
In addition to the special items described above, we incurred
other special items affecting operating costs and expenses
resulting in a net charge totaling $51.0 million in 2006
compared to a net charge totaling $223.6 million during
2005 and $150.9 million during 2004. These other special
items included the following:
|
|
|
|
|
An intangible asset impairment charge in 2006 of
$47.8 million, which is primarily related to lower than
expected prescription growth for
Intal®
and
Tilade®.
An intangible asset impairment charge in 2005 of
$221.1 million, which primarily related to a greater than
expected decline in prescriptions for
Sonata®
and an anticipated decline in prescriptions for
Corzide®.
An intangible asset impairment charge in 2004 of
$149.6 million, which primarily related to our decision to
discontinue the
Sonata®
MR development program and a greater than expected decline in
prescriptions for
Florinef®
and
Tapazole®
due to the availability of generics for these products. These
charges were recorded in order to adjust the carrying value of
the intangible assets on our balance sheet associated with these
products so as to reflect the estimated fair value of these
assets at the time the charges were incurred.
|
|
|
|
A restructuring charge of $3.2 million during 2006 for
separation payments that primarily arose in connection with our
decision to transfer the production of
Levoxyl®
from our St. Petersburg, Florida facility to the Bristol,
Tennessee facility by the end of 2008. Restructuring charges of
$2.3 million in 2005 due to a decision to reduce our
workforce in order to improve efficiencies in our operations.
Restructuring charges of $1.9 million and
$10.8 million in 2005 and 2004, respectively, primarily as
a result of separation agreements with several of our
executives, the relocation of our sales and marketing operations
from Bristol, Tennessee to New Jersey and our decision to
discontinue some relatively insignificant products associated
with Meridian Medical Technologies business.
|
|
|
|
Income of $1.7 million and $9.5 million in 2005 and
2004, respectively, primarily due to a gain on our divestiture
of our
Anusol-HC®
and
Proctocort®
product lines and a gain on the termination of our co-promotion
and license agreements with Novavax, Inc. regarding
Estrasorbtm
and the repurchase by Novavax of all of its convertible notes
which we held.
|
As of December 31, 2006, the net intangible assets
associated with
Synercid®
totaled approximately $85.9 million. We believe that these
intangible assets are not currently impaired based on estimated
undiscounted cash flows associated with these assets. However,
if our estimates regarding future cash flows prove to be
incorrect or adversely change,we may have to reduce the
estimated remaining useful life
and/or write
off a portion or all of these intangible assets.
52
In addition, certain generic companies have challenged patents
on
Altace®
and
Skelaxin®.
For additional information, please see Note 18,
Commitments and Contingencies in Part IV,
Item 15(a)(1), Exhibits and Financial Statement
Schedules. If a generic version of
Altace®
or
Skelaxin®
enters the market, we may have to write-off a portion or all of
the intangible assets associated with these products.
Our Rochester, Michigan facility manufactures products for us
and various third parties. As of December 31, 2006, the net
carrying value of the property, plant and equipment at the
Rochester facility, excluding that associated with the
Bicillin®
production facility, was $63.5 million. Overall production
volume at this facility declined in recent years. We are
currently transferring to this facility the manufacture of
certain products that are currently manufactured by us at other
facilities or for us by third parties. These transfers should
increase production and cash flow at the Rochester facility. We
currently believe that the long-term assets associated with the
Rochester facility are not impaired based on estimated
undiscounted future cash flows. However, if production volumes
decline further or if we are not successful in transferring
additional production to the Rochester facility, we may have to
write-off a portion of the property, plant, equipment associated
with this facility.
The net book value of some of our manufacturing facilities
currently exceeds fair market value. Management currently
believes that the long-term assets associated with these
facilities are not impaired based on estimated undiscounted
future cash flows. However, if we were to approve a plan to sell
or close any of the facilities for which the carrying value
exceeds fair market value, we would have to write off a portion
of the assets or reduce the estimated useful life of the assets
which would accelerate depreciation.
NON-OPERATING
ITEMS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Interest income
|
|
$
|
32,152
|
|
|
$
|
18,175
|
|
|
$
|
5,974
|
|
Interest expense
|
|
|
(9,857
|
)
|
|
|
(11,931
|
)
|
|
|
(12,588
|
)
|
Valuation charge
convertible notes receivable
|
|
|
|
|
|
|
|
|
|
|
(2,887
|
)
|
Loss on investment
|
|
|
|
|
|
|
(6,182
|
)
|
|
|
(6,520
|
)
|
Gain on early extinguishment of
debt
|
|
|
628
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(1,157
|
)
|
|
|
(2,026
|
)
|
|
|
(749
|
)
|
Income tax expense (benefit)
|
|
|
135,730
|
|
|
|
61,485
|
|
|
|
(7,412
|
)
|
Discontinued operations
|
|
|
367
|
|
|
|
1,203
|
|
|
|
(109,666
|
)
|
Other
Income (Expense)
Interest income increased in 2006 compared to 2005, and in 2005
compared to 2004, primarily due to increases in interest rates
and higher average balances of cash, cash equivalents and
investments in debt securities in 2006 compared to 2005, and in
2005 compared to 2004.
Special items affecting other income (expense) included the
following:
|
|
|
|
|
Income of $0.6 million during 2006 resulting from the early
retirement of our
23/4% Convertible
Debentures due November 15, 2021.
|
|
|
|
Charges of $6.2 million and $6.5 million in 2005 and
2004, respectively, in order to write-down our investment in
Novavax common stock to fair value during each of those years.
During the third quarter of 2005, we sold our investment in
Novavax.
|
|
|
|
A charge of $2.9 million during 2004 to reflect a change in
the valuation allowance for the convertible notes receivable
from Novavax. Novavax repurchased the convertible notes from us
in July 2004.
|
Income
Tax Expense (Benefit)
During 2006, our effective tax rate for continuing operations
was 32.0%. This rate differs from the federal statutory rate of
35% primarily due to benefits related to charitable
contributions of inventory, tax-exempt
53
interest income and domestic manufacturing deductions, which
benefits were partially offset by state taxes. We believe our
effective tax rate in 2007 will be higher than the 2006
effective tax rate.
During 2005, our effective income tax rate for continuing
operations was 34.5%. This rate differs from the federal
statutory rate of 35% primarily due to tax benefits related to
charitable contributions of inventory, tax-exempt interest
income and domestic manufacturing deductions, which benefits
were partially offset by state taxes.
During 2004, we had an effective income tax benefit rate of
12.8%, which is lower than the federal statutory rate due to the
nondeductible Medicaid related charges, state taxes, and the
establishment of a valuation allowance against state deferred
tax assets related to asset impairments.
Discontinued
Operations
During the first quarter of 2004, our Board of Directors
approved managements decision to market for divestiture
some of our womens health products, including
Prefest®
and
Nordette®,
which we sold in the fourth quarter of 2004. These product
rights had identifiable cash flows that were largely independent
of the cash flows of other groups of assets and liabilities and
are classified as discontinued operations. Accordingly, all net
sales, cost of revenues, selling, general and administrative
costs, amortization and other operating costs associated with
Prefest®
and
Nordette®
are included in discontinued operations in 2006, 2005 and 2004.
Results of discontinued operations during 2006 and 2005 are
primarily due to changes in estimated reserves for returns and
rebates.
Off
Balance Sheet Arrangements, Contractual Obligations and
Commercial Commitments
We do not have any off balance sheet arrangements, except for
operating leases in the normal course of business as described
in Note 11 Lease Obligations in Part IV,
Item 15(a)(1), Exhibits and Financial Statement
Schedules. to our audited consolidated financial
statements included in this report and as reflected in the table
below.
The following table summarizes contractual obligations and
commitments as of December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
One to
|
|
|
Four to
|
|
|
More Than
|
|
|
|
Total
|
|
|
One Year
|
|
|
Three Years
|
|
|
Five Years
|
|
|
Five Years
|
|
|
|
(In thousands)
|
|
Contractual
Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
400,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
400,000
|
|
Operating leases
|
|
|
103,390
|
|
|
|
17,786
|
|
|
|
32,953
|
|
|
|
32,900
|
|
|
|
19,751
|
|
Unconditional purchase obligations
|
|
|
445,984
|
|
|
|
238,796
|
|
|
|
133,477
|
|
|
|
28,279
|
|
|
|
45,432
|
|
Interest on long-term debt
|
|
|
31,306
|
|
|
|
5,000
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
6,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
980,680
|
|
|
$
|
261,582
|
|
|
$
|
176,430
|
|
|
$
|
71,179
|
|
|
$
|
471,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our unconditional purchase obligations are primarily related to
minimum purchase requirements under contracts with suppliers to
purchase raw materials and finished goods related to our branded
pharmaceutical products and commitments associated with research
and development projects. The above table does not reflect any
potential milestone payments in connection with research and
development projects or acquisitions.
We have a supply agreement with a third party to produce
ramipril, the active ingredient in
Altace®.
This supply agreement is reflected in the unconditional purchase
obligations above. This supply agreement requires us to purchase
certain minimum levels of ramipril as long as we maintain market
exclusivity on
Altace®
in the United States, and thereafter the parties must negotiate
in good faith the annual minimum purchase quantities. If we are
unable to maintain market exclusivity for
Altace®
in accordance with our current expectations and/or, if our
product life cycle management is not successful, we may incur
losses in connection with the purchase commitments under the
supply agreement. In the event we incur losses in connection
with the purchase commitments under the supply agreement, there
may be a material adverse effect upon our results of operations
and cash flows.
54
We have commitments to purchase metaxalone, the active
ingredient in
Skelaxin®,
from two suppliers in the form of purchase orders. These
outstanding purchase orders are reflected in the unconditional
purchase obligations above. If sales of
Skelaxin®
do not continue as currently anticipated, we may incur losses in
connection with the purchase commitments. In the event we incur
losses in connection with the purchase commitments under these
purchase orders, there may be a material adverse effect upon our
results of operations and cash flows.
Liquidity
and Capital Resources
General
We believe that existing balances of cash, cash equivalents,
investments in debt securities and marketable securities, cash
generated from operations, our existing revolving credit
facility and funds potentially available to us under our
universal shelf registration are sufficient to finance our
current operations and working capital requirements on both a
short-term and long-term basis. However, we cannot predict the
amount or timing of our need for additional funds under various
circumstances, which could include a significant acquisition of
a business or assets, new product development projects,
expansion opportunities, or other factors that may require us to
raise additional funds in the future. Our current revolving
credit facility expires in April 2007. We cannot assure you that
funds will be available to us when needed on favorable terms, or
at all.
On September 6, 2006, we entered into a definitive asset
purchase agreement and related agreements with Ligand
Pharmaceuticals Incorporated (Ligand) to acquire
rights to Ligands
Avinza®
(morphine sulfate extended release).
Avinza®
is an extended release formulation of morphine and is indicated
as a once-daily treatment for moderate to severe pain in
patients who require continuous opioid therapy for an extended
period of time. We completed our acquisition of
Avinza®
on February 26, 2007. Under the terms of the asset
purchase agreement we made a $246.3 million payment to
Ligand to acquire all the rights to
Avinza®
in the United States, its territories and Canada. In addition,
we paid Ligand for certain product-related liabilities and other
expenses totaling $49.1 million and we have assumed all
existing product royalty obligations. Of the total cash payment,
$15.0 million is set aside in an escrow account to fund
potential liabilities under the asset purchase agreement between
the companies.
As part of the transaction, we have agreed to pay Ligand an
ongoing royalty, to assume payment of Ligands royalty
obligations to Organon and to assume payment of royalty
obligations to other third parties. The royalty we will pay to
Ligand consists of a 15% royalty during the first 20 months
after the closing date. Subsequent royalty payments to Ligand
will be based upon calendar year net sales of
Avinza®
as follows:
|
|
|
|
|
If calendar year net sales are less than $200.0 million the
royalty payment will be 5% of all net sales.
|
|
|
|
If calendar year net sales are greater than $200.0 million
then the royalty payment will be 10% of all net sales up to
$250 million, plus 15% of net sales greater than
$250.0 million.
|
In connection with the transaction, we entered into a loan
agreement with Ligand for the amount of $37.8 million on
October 12, 2006. The principal amount of the loan was to
be used solely for the purpose of paying a specific liability
related to
Avinza®.
The loan was subject to certain market terms, including a 9.5%
interest rate and security interest in the assets that comprise
Avinza®
and certain of the proceeds of Ligands sale of certain
assets. On January 8, 2007, Ligand repaid the principal
amount of the loan of $37.8 million and accrued interest of
$0.9 million. We forgave the interest on the loan and
repaid Ligand the interest of $0.9 million at the time of
closing. Accordingly, at December 31, 2006, we have not
recognized interest income on the note receivable.
On June 22, 2000, we entered into a Co-Promotion Agreement
with Wyeth to
promote Altace®
in the United States and Puerto Rico through October 29,
2008, with possible extensions as outlined in the
Co-Promotion
Agreement. Under the agreement, Wyeth paid an upfront fee to us
of $75.0 million. In connection with the Co-Promotion
Agreement, we agreed to pay Wyeth a promotional fee based on
annual net sales of
Altace®.
On July 5, 2006, we entered into an amended and restated
co-promotion agreement (Amended Co-Promotion
Agreement) with Wyeth regarding
Altace®.
Effective January 1, 2007, we assumed full responsibility
for selling and marketing
Altace®.
For the full 2006 year, the Wyeth sales force promoted
55
the product with us and Wyeth shared marketing expenses. We have
paid or will pay Wyeth a reduced annual fee as follows:
|
|
|
|
|
For 2006, 15% of
Altace®
net sales up to $165.0 million, 42.5% of
Altace®
net sales in excess of $165.0 million and less than or
equal to $465.0 million, and 52.5% of
Altace®
net sales that are in excess of $465.0 million and less
than or equal to $585.0 million.
|
|
|
|
For 2007, 30% of
Altace®
net sales, with the fee not to exceed $178.5 million.
|
|
|
|
For 2008, 22.5% of
Altace®
net sales, with the fee not to exceed $134.0 million.
|
|
|
|
For 2009, 14.2% of
Altace®
net sales, with the fee not to exceed $84.5 million.
|
|
|
|
For 2010, 25% of
Altace®
net sales, with the fee not to exceed $5.0 million.
|
The annual fee is accrued quarterly based on a percentage of
Altace®
net sales at a rate equal to the expected relationship of the
expected fee for the quarter to applicable expected
Altace®
net sales for the year.
Wyeth will pay us a $20.0 million milestone fee if a
specified
Altace®
net sales threshold is achieved in 2008.
On June 27, 2006, we entered into a co-exclusive agreement
with Depomed, Inc. (Depomed) to commercialize
Depomeds
Glumetzatm
product.
Glumetzatm
is a once-daily, extended-release formulation of metformin for
the treatment of patients with Type II diabetes that
Depomed developed utilizing its proprietary
Acuformtm
drug delivery technology. Under the terms of the agreement, we
assumed responsibility for promoting
Glumetzatm
in the United States and Puerto Rico, while Depomed has the
right to co-promote the product using its own sales force at
some point in the future. Depomed will pay us a fee from gross
profit, as defined in the agreement, generally net sales less
cost of goods sold less a royalty Depomed must pay a third
party. Depomed is responsible for the manufacture and
distribution of
Glumetzatm,
while we bear all costs related to the utilization of our sales
force for the product. We launched the promotion of
Glumetzatm
in the third quarter of 2006.
On March 1, 2006, we acquired the exclusive right to
market, distribute, and sell
EpiPen®
throughout Canada and other specific assets from Allerex
Laboratory LTD. Under the terms of the agreements, the initial
purchase price was approximately $23.9 million, plus
acquisition costs of approximately $0.7 million. As an
additional component of the purchase price, we pay Allerex an
earn-out equal to a percentage of future sales of
EpiPen®
in Canada over a fixed period of time. As these additional
payments accrue, we will increase intangible assets by the
amount of the accrual. The aggregate of these payments will not
exceed $13.2 million.
On February 12, 2006, we entered into a collaboration with
Arrow to commercialize one or more novel formulations of
ramipril, the active ingredient in our
Altace®
product. Under a series of agreements, Arrow granted us rights
to certain current and future New Drug Applications
(NDAs) regarding novel formulations of ramipril and
intellectual property, including patent rights and technology
licenses relating to these novel formulations. On
February 27, 2007, the FDA approved an NDA arising from
this collaboration for an
Altace®
tablet formulation. Arrow will have responsibility for the
manufacture and supply of the new formulations of ramipril for
us. However, under certain conditions we may manufacture and
supply new formulations of ramipril.
Upon execution of the agreements, we made an initial payment to
Arrow of $35.0 million. During the fourth quarter of 2006,
we made an additional payment of $25.0 million to Arrow.
Arrow will also receive future payments from us of
$50.0 million during 2007. We classified these payments as
in-process
research and development expense in 2006. Additionally, Arrow
will earn fees for the manufacture and supply of the new
formulations of ramipril.
We entered into an agreement with Cobalt Pharmaceuticals, Inc.
(Cobalt), an affiliate of Arrow International
Limited, whereby Cobalt will have the non-exclusive right to
distribute a generic version of our currently marketed
Altace®
product in the U.S. market, which would be supplied by us.
In December 2005, we entered into a cross-license agreement with
Mutual. Under the terms of the agreement, each of the parties
has granted the other a worldwide license to certain
intellectual property,
56
including patent rights and know-how, relating to metaxalone. As
of January 1, 2006, we began paying royalties on net sales
of products containing metaxalone to Mutual. This royalty
increased in the fourth quarter of 2006 due to the achievement
of a certain milestone and may continue to increase depending on
the achievement of certain regulatory and commercial milestones
in the future. The royalty we pay to Mutual is in addition to
the royalty we pay to Elan Corporation, plc (Elan)
on our current formulation of metaxalone, which we refer to as
Skelaxin®.
During the fourth quarter of 2005, we entered into a strategic
alliance with Pain Therapeutics, Inc. to develop and
commercialize
Remoxytm
and other abuse-deterrent opioid painkillers.
Remoxytm
is an investigational drug in late-stage clinical development by
Pain Therapeutics for the treatment of
moderate-to-severe
chronic pain. Under the strategic alliance, we made an upfront
cash payment of $150.0 million in December 2005 and made a
milestone payment of $5.0 million in July 2006 to Pain
Therapeutics. In addition, we may pay additional milestone
payments of up to $145.0 million in cash based on the
successful clinical and regulatory development of
Remoxytm
and other abuse-deterrent opioid products. This amount includes
a $15.0 million cash payment upon acceptance of a
regulatory filing for
Remoxytm
and an additional $15.0 million upon its approval. We are
responsible for all research and development expenses related to
this alliance, which could total $100.0 million over four
years. After regulatory approval and commercialization of
Remoxytm
or other products developed through this alliance, we will pay a
royalty of 15% of the cumulative net sales up to
$1.0 billion and 20% of the cumulative net sales over
$1.0 billion.
In August 2004, we entered into a collaborative agreement with
Palatin Technologies, Inc. to jointly develop and, on obtaining
necessary regulatory approvals, commercialize Palatins
bremelanotide, which we formerly referred to as PT-141, for the
treatment of male and female sexual dysfunction. In connection
with this agreement, we agreed to pay potential milestone
payments to Palatin of up to $100.0 million upon achieving
certain development and regulatory approval targets,
$10.0 million of which was paid in September 2005. In the
event of regulatory approval and commercialization of
bremelanotide, we may also pay potential net sales milestone
payments to Palatin of up to $130.0 million.
Elan Corporation, plc (Elan) was working to develop
a modified release formulation of
Sonata®,
which we refer to as
Sonata®
MR, pursuant to an agreement we had with them which we refer to
as the
Sonata®
MR Development Agreement. In early 2005, we advised Elan that we
considered the
Sonata®
MR Development Agreement terminated for failure to satisfy the
target product profile required by us. Elan disputed the
termination and initiated an arbitration proceeding. During
December of 2006, the arbitration panel reached a decision in
favor of Elan and ordered us to pay Elan certain milestone
payments and other research and development-related expenses of
approximately $49.8 million, plus interest from the date of
the decision. In January 2007, we paid Elan $50.1 million,
which included interest of $0.4 million.
Settlement
of Governmental Pricing Investigation
On October 31, 2005, we entered into (i) a definitive
settlement agreement with the United States of America, acting
through the United States Department of Justice and the United
States Attorneys Office for the Eastern District of
Pennsylvania and on behalf of the Office of Inspector General of
the United States Department of Health and Human Services
(HHS/OIG) and the Department of Veterans Affairs, to
resolve the governmental investigations related to our
underpayment of rebates owed to Medicaid and other governmental
pricing programs during the period from 1994 to 2002 (the
Federal Settlement Agreement), and (ii) similar
settlement agreements with 48 states and the District of
Columbia (collectively, the 2005 State Settlement
Agreements).
On March 6, 2006, we entered into a definitive settlement
agreement with the remaining state on substantially the same
terms as the other state settlements (this most recent state
settlement, the Federal Settlement Agreement and the 2005 State
Settlement Agreements are collectively referred to as the
Settlement Agreements). Consummation of the Federal
Settlement Agreement and some state Settlement Agreements was
subject to court approval, which was granted by the United
States District Court for the Eastern District of Pennsylvania
(District Court) during the first quarter of 2006.
57
During the first quarter of 2006, we paid approximately
$129.3 million, comprising (i) all amounts due under
each of the Settlement Agreements and (ii) all our
obligations to reimburse other parties for expenses related to
the settlement, including the previously disclosed legal fees of
approximately $0.8 million and the previously disclosed
settlement costs of approximately $1.0 million.
The individual purportedly acting as a relator under
the False Claims Act has appealed certain decisions of the
District Court denying the relators request to be
compensated out of the approximately $31 million that was
paid by us to those states that do not have legislation
providing for a relators share. The purported
relator has asserted for the first time on appeal that we should
be responsible for making such a payment to this individual. We
believe that this claim against us is without merit and do not
expect the result of the appeal to have a material effect on us.
In addition to the Settlement Agreements, we have entered into a
five-year corporate integrity agreement with HHS/OIG (the
Corporate Integrity Agreement) pursuant to which we
are required, among other things, to keep in place our current
compliance program, to provide periodic reports to HHS/OIG and
to submit to audits relating to our Medicaid rebate calculations.
The previously disclosed claim seeking damages from us because
of alleged retaliatory actions against the relator was dismissed
with prejudice on January 31, 2006.
The Settlement Agreements do not resolve any of the previously
disclosed civil suits that are pending against us and related
individuals and entities discussed in the section
Securities Litigation below.
The foregoing description of the settlement, the Settlement
Agreements and the Corporate Integrity Agreement is qualified in
its entirety by our Current Report on
Form 8-K
filed November 4, 2005, which is incorporated herein by
reference.
SEC
Investigation
As previously reported, the Securities and Exchange Commission
(SEC) has also been conducting an investigation
relating to our underpayments to governmental programs, as well
as into our previously disclosed errors relating to reserves for
product returns. While the SECs investigation is
continuing with respect to the product returns issue, the Staff
of the SEC has advised us that it has determined not to
recommend enforcement action against us with respect to the
aforementioned governmental pricing matter. The Staff of the SEC
notified us of this determination pursuant to the final
paragraph of Securities Act Release 5310. Although the SEC could
still consider charges against individuals in connection with
the governmental pricing matter, we do not believe that any
governmental unit with authority to assert criminal charges is
considering any charges of that kind.
We continue to cooperate with the SECs ongoing
investigation. Based on all information currently available to
us, we do not anticipate that the results of the SECs
ongoing investigation will have a material adverse effect on us,
including by virtue of any obligations to indemnify current or
former officers and directors.
Securities
Litigation
Subsequent to the announcement of the SEC investigation
described above, beginning in March 2003, 22 purported class
action complaints were filed by holders of our securities
against King, our directors, former directors, executive
officers, former executive officers, our subsidiary, and a
former director of the subsidiary in the United States District
Court for the Eastern District of Tennessee, alleging violations
of the Securities Act of 1933
and/or the
Securities Exchange Act of 1934, in connection with our
underpayment of rebates owed to Medicaid and other governmental
pricing programs, and certain transactions between us and the
Benevolent Fund. These 22 complaints have been consolidated in
the United States District Court for the Eastern District of
Tennessee. In addition, holders of our securities filed two
class action complaints alleging violations of the Securities
Act of 1933 in Tennessee state court. We removed these two cases
to the United States District Court for the Eastern District of
Tennessee, where these two cases were consolidated with the
other class actions. Plaintiffs in these actions unsuccessfully
moved to remand these two cases back to
58
Tennessee state court. These two actions therefore remain part
of the consolidated action. The district court has appointed
lead plaintiffs in the consolidated action, and those lead
plaintiffs filed a consolidated amended complaint on
October 21, 2003 alleging that King, through some of our
executive officers, former executive officers, directors, and
former directors, made false or misleading statements concerning
our business, financial condition, and results of operations
during periods beginning February 16, 1999 and continuing
until March 10, 2003. Plaintiffs in the consolidated action
also named the underwriters of our November 2001 public offering
as defendants. We and other defendants filed motions to dismiss
the consolidated amended complaint.
On August 12, 2004, the United States District Court for
the Eastern District of Tennessee ruled on defendants
motions to dismiss. The Court dismissed all claims as to Jones
Pharma, Inc. and as to defendants Dennis Jones and Henry
Richards. The Court also dismissed certain claims as to five
other individual defendants. The Court denied the motions to
dismiss in all other respects. Following the Courts
ruling, on September 20, 2004, the Company and the other
remaining defendants filed answers to plaintiffs
consolidated amended complaint.
In November 2005, the parties agreed to submit the matter to
non-binding mediation. After an extensive mediation process, an
agreement in principle to settle the litigation was reached on
April 26, 2006. On July 31, 2006, the parties entered
into a stipulation of settlement and a supplemental agreement
(together, the Settlement Agreement) to resolve the
litigation. On January 9, 2007, the court granted final
approval of the Settlement Agreement. The Settlement Agreement
provides for a settlement amount of $38.3 million.
We previously estimated a probable loss contingency of
$38.3 million for the class action lawsuit described above.
We believe all but an immaterial portion of this loss
contingency will be paid on behalf of us by our insurance
carriers. Accordingly, we previously recorded a liability and a
receivable for this amount, which are classified in accrued
expenses and prepaid and other current assets, respectively, in
our consolidated financial statements.
Beginning in March 2003, four purported shareholder derivative
complaints were also filed in Tennessee state court alleging a
breach of fiduciary duty, among other things, by some of our
current and former officers and directors, with respect to the
same events at issue in the federal securities litigation
described above. These cases have been consolidated, and on
October 11, 2006, plaintiffs voluntarily dismissed Brian
Markison and Elizabeth Greetham. Discovery with respect to the
remaining claims in the case has commenced. No trial date has
been set.
Beginning in March 2003, three purported shareholder derivative
complaints were likewise filed in Tennessee federal court,
asserting claims similar to those alleged in the state
derivative litigation. These cases have been consolidated, and
on December 2, 2003 plaintiffs filed a consolidated amended
complaint. On March 9, 2004, the court entered an order
indefinitely staying these cases in favor of the state
derivative action.
During the third quarter of 2006, we recorded an anticipated
insurance recovery of legal fees in the amount of
$6.8 million for the class action and derivative suits
described above. In November of 2006, we received payment for
the recovery of these legal fees.
We are currently unable to predict the outcome or to reasonably
estimate the range of potential loss, if any, except as noted
above, in the pending litigation. If we were not to prevail in
the pending litigation, the outcome of which we cannot predict
or reasonably estimate at this time, our business, financial
condition, results of operations and cash flows could be
materially adversely affected.
Patent
Challenges
Certain generic companies have challenged patents on
Altace®,
Skelaxin®,
Sonata®
and
Adenoscan®.
For additional information, please see Note 18
Commitments and Contingencies in Part IV,
Item 15(a)(1), Exhibits and Financial Statement
Schedules. If a generic version of
Altace®,
Skelaxin®,
Sonata®
or
Adenoscan®
enters the market, our business, financial condition, results of
operations and cash flows could be materially adversely affected.
59
Cash
Flows
Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net cash provided by operating
activities
|
|
$
|
465,627
|
|
|
$
|
519,508
|
|
|
$
|
260,907
|
|
Our net cash from operations was lower in 2006 than in 2005
primarily due to our payment in 2006 of $129.3 million
pursuant to the Settlement Agreements described in
the section entitled Settlement of Government Pricing
Investigation above and an increase in our investment in
research and development partially offset by an increase in net
sales and a lower co-promotion fee rate in 2006. Please see the
section entitled Results of Operations for a
discussion of net sales.
Our net cash provided by operations was higher in 2005 than in
2004 primarily due to an increase in the gross profit margin,
driven by an increase in net sales of branded pharmaceutical
products. This was partially offset by an increase in the
co-promotion fees and working capital changes outlined below.
Please see the section entitled Operating Results
for a discussion of net sales, selling, general and
administrative expenses and co-promotion fees.
The allowance for doubtful accounts was $5.4 million and
$12.3 million as of December 31, 2006 and
December 31, 2005, respectively. The decline in the
allowance for doubtful accounts is primarily driven by the
settlement of a past due account in 2006 which was previously
fully reserved and improvements in the aging of receivables at
December 31, 2006 in comparison to December 31, 2005.
As of December 31, 2006 and December 31, 2005,
approximately 94% and 89% of aged accounts receivable,
respectively, were current. Additionally, after adjusting for
the specific identification of certain accounts, the accounts
greater than 120 days past due improved from
$13.6 million at December 31, 2005 to
$7.4 million at December 31, 2006.
The following table summarizes the changes in operating assets
and liabilities and deferred taxes for the periods ending 2006,
2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Accounts receivable, net of
allowance
|
|
$
|
(41,746
|
)
|
|
$
|
(43,407
|
)
|
|
$
|
57,978
|
|
Inventories
|
|
|
48,275
|
|
|
|
46,349
|
|
|
|
(15,205
|
)
|
Prepaid expenses and other current
assets
|
|
|
(45,796
|
)
|
|
|
(47,544
|
)
|
|
|
(16,161
|
)
|
Accounts payable
|
|
|
(8,568
|
)
|
|
|
(7,713
|
)
|
|
|
9,197
|
|
Accrued expenses and other
liabilities
|
|
|
(50,458
|
)
|
|
|
(52,544
|
)
|
|
|
43,566
|
|
Income taxes payable
|
|
|
8,479
|
|
|
|
22,161
|
|
|
|
(78,708
|
)
|
Deferred revenue
|
|
|
(6,886
|
)
|
|
|
(9,092
|
)
|
|
|
(9,091
|
)
|
Other assets
|
|
|
(20,173
|
)
|
|
|
(4,471
|
)
|
|
|
(3,483
|
)
|
Deferred taxes
|
|
|
(39,010
|
)
|
|
|
(68,047
|
)
|
|
|
(17,083
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total changes from operating
assets and liabilities and deferred taxes
|
|
$
|
(155,883
|
)
|
|
$
|
(164,308
|
)
|
|
$
|
(28,990
|
)
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net cash used in investing
activities
|
|
$
|
(436,315
|
)
|
|
$
|
(683,007
|
)
|
|
$
|
(154,071
|
)
|
Changes in investing activities in 2006 primarily relate to our
net investments in debt securities of $395.5 million. We
transferred $129.3 million from restricted cash for
payments associated with the Settlement Agreements
noted above in cash flows from operating activities.
Additionally we made payments totaling $85.8 million for
our collaboration agreement with Arrow and our acquisition from
Allerex Laboratory LTD of the exclusive right to market
Epipen®
in Canada. Capital expenditures during 2006 totaled
$45.8 million which included property, plant and equipment
purchases, building improvements for facility upgrades and
60
costs associated with improving our production capabilities, as
well as costs associated with moving production of some of our
pharmaceutical products to our facilities in St. Louis,
Bristol and Rochester. Additionally, in the fourth quarter of
2006, in connection with our pending acquisition from Ligand of
all of Ligands assets related to
Avinza®,
we entered into a Loan Agreement with Ligand pursuant to which
we loaned Ligand $37.8 million. The principal amount of the
Loan may be used solely for the purpose of paying certain
obligations of Ligand to Organon USA Inc., which obligations we
assumed as part of the acquisition.
Investing activities in 2005 were driven by payments totaling
$198.7 million for our collaboration agreements with Pain
Therapeutics and Palatin and our cross-license agreement with
Mutual. Capital expenditures during 2005 totaled
$53.3 million which included property, plant and equipment
purchases, building improvements for facility upgrades and costs
associated with improving our production capabilities, and costs
associated with moving production of some of our pharmaceutical
products to our facilities in St. Louis, Bristol and
Rochester. Additionally in 2005, we transferred
$73.6 million to restricted cash primarily related to the
now completed investigation of our Company by the HHS/OIG. We
increased our investments in debt securities by
$345.2 million.
Investing activities in 2004 were driven by payments totaling
$78.2 million for our collaboration agreement with Palatin
and, milestone payments associated with the acquisitions of
primary care business of Elan and
Synercid®.
Capital expenditures during 2004 totaled $55.1 million
which included property, plant and equipment purchases, building
improvements for facility upgrades and costs associated with
improving our production capabilities, and costs associated with
moving production of some of our pharmaceutical products to our
facilities in St. Louis, Bristol and Rochester.
Additionally in 2004, we increased our investments in debt
securities by $46.5 million which was partially offset by
proceeds of $27.5 million principally from the sale of
product rights.
We anticipate capital expenditures, including capital lease
obligations, for the year ending December 31, 2007 of
approximately $66.0 million, which will be funded with cash
from operations. The principal capital expenditures are
anticipated to include property and equipment purchases,
information technology systems and hardware, building
improvements for facility upgrades, costs associated with
improving our production capabilities, and costs associated with
moving production of some of our pharmaceutical products to our
facilities in St. Louis, Bristol and Rochester.
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Net cash provided by financing
activities
|
|
$
|
54,451
|
|
|
$
|
857
|
|
|
$
|
4,580
|
|
During 2006, we issued $400.0 million of
11/4% Convertible
Senior Notes due April 1, 2026 and repurchased all of our
outstanding
23/4% Convertible
Debentures due November 15, 2021 for $342.7 million.
Certain
Indebtedness and Other Matters
During 2006, we issued $400.0 million of
11/4% Convertible
Senior Notes due April 1, 2026 (Notes). The
Notes are unsecured obligations and are guaranteed by each of
our domestic subsidiaries on a joint and several basis. The
Notes accrue interest at an initial rate of
11/4%.
Beginning with the six-month interest period that commences on
April 1, 2013, we will pay additional interest during any
six-month interest period if the average trading price of the
Notes during the five consecutive trading days ending on the
second trading day immediately preceding the first day of such
six-month period equals 120% or more of the principal amount of
the Notes. Interest is payable on April 1 and
October 1 of each year, beginning October 1, 2006.
On or after April 5, 2013, we may redeem for cash some or
all of the Notes at any time at a price equal to 100% of the
principal amount of the Notes to be redeemed, plus any accrued
and unpaid interest, and liquidated damages, if any, to but
excluding the date fixed for redemption. Holders may require us
to purchase for cash some or all of their Notes on April 1,
2013, April 1, 2016 and April 1, 2021, or upon the
occurrence of a fundamental change, at 100% of the principal
amount of the Notes to be purchased, plus any accrued and unpaid
interest and liquidated damages, if any, to but excluding the
purchase date.
61
During the fourth quarter of 2001, we issued $345.0 million
of
23/4%
Convertible Debentures due November 15, 2021
(Debentures). On March 29, 2006, we repurchased
$165.0 million of the Debentures prior to maturity. On
June 2, 2006, we completed a tender offer, repurchasing
$175.7 million of the Debentures. On November 20,
2006, we redeemed the remaining Debentures of $4.3 million.
On May 16, 2006, the interest rate on the Debentures reset
to 3.5%.
We also had available as of December 31, 2006 up to
$399.0 million under a five-year senior secured revolving
credit facility that we established in April 2002. Our senior
secured revolving credit facility matures in April 2007. The
facility is collateralized in general by all of our real estate
with a value of $5.0 million or more and all of our
personal property and that of our significant subsidiaries. Our
obligations under the senior secured revolving credit facility
are unconditionally guaranteed on a senior basis by most of our
subsidiaries. The senior secured revolving credit facility
accrues interest at our option, at either (a) the base
rate, which is based on the greater of (1) the prime rate
or (2) the federal funds rate plus one-half of 1%, plus an
applicable spread ranging from 0.0% to 0.75% (based on a
leverage ratio) or (b) the applicable LIBOR rate plus an
applicable spread ranging from 1.0% to 1.75% (based on a
leverage ratio). In addition, the lenders under the senior
secured revolving credit facility are entitled to customary
facility fees based on (a) unused commitments under the
facility and (b) letters of credit outstanding. We incurred
$5.1 million of deferred financing costs in connection with
the establishment of this facility, which are being amortized
over five years, the life of the senior secured revolving credit
facility. This facility requires us to maintain a minimum net
worth of no less than $1.2 billion plus 50% of our
consolidated net income for each fiscal quarter after
April 23, 2002, excluding any fiscal quarter for which
consolidated income is negative; an EBITDA (earnings before
interest, taxes, depreciation and amortization) to interest
expense ratio of no less than 3.00 to 1.00; and a funded debt to
EBITDA ratio of no greater than 3.50 to 1.00 prior to
April 24, 2004 and of no greater than 3.00 to 1.00 on or
after April 24, 2004. As of December 31, 2006, we were
in compliance with these covenants. As of December 31,
2006, we had $1.0 million outstanding for letters of credit
under this facility.
On September 20, 2001, our universal shelf registration
statement on
Form S-3
was declared effective by the Securities and Exchange
Commission. This universal shelf registration statement
registered a total of $1.3 billion of our securities for
future offers and sales in one or more transactions and in any
combination of debt
and/or
equity. During November 2001, we completed the sale of
17,992,000 newly issued shares of common stock for
$38.00 per share ($36.67 per share net of commissions
and expenses) resulting in net proceeds of $659.8 million.
As of December 31, 2006, there was $616.3 million of
securities remaining registered for future offers and sales
under the shelf registration statement.
Impact
of Inflation
We have experienced only moderate raw material and labor price
increases in recent years. While we have passed some price
increases along to our customers, we have primarily benefited
from sales growth negating most inflationary pressures.
Critical
Accounting Policies and Estimates
We have chosen accounting policies that we believe are
appropriate to accurately and fairly report our operating
results and financial position, and apply those accounting
policies in a consistent manner.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period.
Significant estimates for which it is reasonably possible that a
material change in estimate could occur in the near term include
forecasted future cash flows used in testing for impairments of
intangible and tangible assets and loss accruals for excess
inventory and fixed purchase commitments under our supply
contracts. Forecasted future cash flows in particular require
considerable judgment and are subject to inherent imprecision.
In the case of impairment testing, changes in estimates of
future cash flows could result in a material impairment charge
and, whether they result in an immediate impairment charge,
could result prospectively in a
62
reduction in the estimated remaining useful life of tangible or
intangible assets, which could be material to the financial
statements.
Other significant estimates include accruals for Medicaid and
other rebates, returns and chargebacks, allowances for doubtful
accounts and estimates used in applying the revenue recognition
policy and accounting for the Amended and Restated Co-Promotion
Agreement with Wyeth.
We are subject to risks and uncertainties that may cause actual
results to differ from the related estimates, and our estimates
may change from time to time in response to actual developments
and new information.
The significant accounting estimates that we believe are
important to aid in fully understanding our reported financial
results include the following:
|
|
|
|
|
Intangible assets, goodwill, and other long-lived
assets. When we acquire product rights in
conjunction with either business or asset acquisitions, we
allocate an appropriate portion of the purchase price to
intangible assets, goodwill and other long-lived assets. The
purchase price is allocated to product rights and trademarks,
patents, acquired research and development, if any, and other
intangibles using the assistance of valuation consultants. We
estimate the useful lives of the assets by factoring in the
characteristics of the products such as: patent protection,
competition by products prescribed for similar indications,
estimated future introductions of competing products, and other
issues. The factors that drive the estimate of the life of the
asset are inherently uncertain. However, patents have specific
legal lives over which they are amortized. Conversely,
trademarks and product rights have no specific legal lives.
Trademarks and product rights will continue to be an asset to us
after the expiration of the patent, as their economic value is
not tied exclusively to the patent. We believe that by
establishing separate lives for the patent versus the trademark
and product rights, we are in essence using an accelerated
method of amortization for the product as a whole. This results
in greater amortization in earlier years when the product is
under patent protection, as we are amortizing both the patent
and the trademark and product rights, and less amortization when
the product faces potential generic competition, as the
amortization on the patent is eliminated. Because we have no
discernible evidence to show a decline in cash flows for
trademarks and product rights, or for patents, we use the
straight-line method of amortization for both intangibles.
|
We review our property, plant and equipment and intangible
assets for possible impairment whenever events or circumstances
indicate that the carrying amount of an asset may not be
recoverable. We review our goodwill for possible impairment
annually, or whenever events or circumstances indicate that the
carrying amount may not be recoverable. In any event, we
evaluate the remaining useful lives of our intangible assets
each reporting period to determine whether events and
circumstances warrant a revision to the remaining period of
amortization. This evaluation is performed through our quarterly
evaluation of intangibles for impairment. Further, on an annual
basis, we review the life of each intangible asset and make
adjustments as deemed appropriate. In evaluating goodwill for
impairment, we estimate the fair value of our individual
business reporting units on a discounted cash flow basis.
Assumptions and estimates used in the evaluation of impairment
may affect the carrying value of long-lived assets, which could
result in impairment charges in future periods. Such assumptions
include projections of future cash flows and, in some cases, the
current fair value of the asset. In addition, our depreciation
and amortization policies reflect judgments on the estimated
useful lives of assets.
We may incur impairment charges in the future if prescriptions
for, or sales of, our products are less than current
expectations and result in a reduction of our estimated
undiscounted future cash flows. This may be caused by many
factors, including competition from generic substitutes,
significant delays in the manufacture or supply of materials,
the publication of negative results of studies or clinical
trials, new legislation or regulatory proposals.
63
The gross carrying amount and accumulated amortization as of
December 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Branded
|
|
|
|
|
|
|
|
|
|
|
|
|
Altace®
|
|
$
|
276,150
|
|
|
$
|
85,224
|
|
|
$
|
190,926
|
|
Other Cardiovascular/metabolic
|
|
|
80,770
|
|
|
|
45,413
|
|
|
|
35,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular/metabolic
|
|
|
356,920
|
|
|
|
130,637
|
|
|
|
226,283
|
|
Intal®
|
|
|
61,726
|
|
|
|
22,474
|
|
|
|
39,252
|
|
Other Hospital/acute care
|
|
|
188,018
|
|
|
|
58,337
|
|
|
|
129,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital/acute care
|
|
|
249,744
|
|
|
|
80,811
|
|
|
|
168,933
|
|
Skelaxin®
|
|
|
203,015
|
|
|
|
48,179
|
|
|
|
154,836
|
|
Sonata®
|
|
|
23,146
|
|
|
|
23,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neuroscience
|
|
|
226,161
|
|
|
|
71,325
|
|
|
|
154,836
|
|
Other
|
|
|
144,674
|
|
|
|
62,029
|
|
|
|
82,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Branded
|
|
|
977,499
|
|
|
|
344,802
|
|
|
|
632,697
|
|
Meridian Medical
Technologies
|
|
|
172,464
|
|
|
|
24,484
|
|
|
|
147,980
|
|
Royalties
|
|
|
2,470
|
|
|
|
2,124
|
|
|
|
346
|
|
Contract
manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
All other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trademark and product rights
|
|
$
|
1,152,433
|
|
|
$
|
371,410
|
|
|
$
|
781,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts for impairments and amortization expense and the
amortization period used for the twelve months ended
December 31, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2006
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
Amortization
|
|
|
Life
|
|
|
|
|
|
Amortization
|
|
|
|
Impairments
|
|
|
Expense
|
|
|
(Years)
|
|
|
Impairments
|
|
|
Expense
|
|
|
|
(In thousands)
|
|
|
|
|
|
(In thousands)
|
|
|
Branded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Altace®
|
|
|
|
|
|
$
|
15,010
|
|
|
|
20
|
|
|
$
|
|
|
|
$
|
13,352
|
|
Other Cardiovascular/metabolic
|
|
|
|
|
|
|
7,283
|
|
|
|
|
|
|
|
43,243
|
|
|
|
7,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular/metabolic
|
|
|
|
|
|
|
22,293
|
|
|
|
|
|
|
|
43,243
|
|
|
|
21,024
|
|
Intal®
|
|
|
44,466
|
|
|
|
7,611
|
|
|
|
11
|
|
|
|
|
|
|
|
6,047
|
|
Other Hospital/acute care
|
|
|
3,376
|
|
|
|
13,635
|
|
|
|
|
|
|
|
5,970
|
|
|
|
9,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital/acute care
|
|
|
47,842
|
|
|
|
21,246
|
|
|
|
|
|
|
|
5,970
|
|
|
|
15,461
|
|
Skelaxin®
|
|
|
|
|
|
|
15,548
|
|
|
|
13.5
|
|
|
|
|
|
|
|
15,548
|
|
Sonata®
|
|
|
|
|
|
|
|
|
|
|
2.5
|
|
|
|
157,975
|
|
|
|
9,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neuroscience
|
|
|
|
|
|
|
15,548
|
|
|
|
|
|
|
|
157,975
|
|
|
|
24,665
|
|
Other
|
|
|
|
|
|
|
8,197
|
|
|
|
|
|
|
|
|
|
|
|
7,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Branded
|
|
|
47,842
|
|
|
|
67,284
|
|
|
|
|
|
|
|
207,188
|
|
|
|
68,973
|
|
Meridian Medical
Technologies
|
|
|
|
|
|
|
7,284
|
|
|
|
|
|
|
|
|
|
|
|
5,165
|
|
Royalties
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
Contract
manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trademark and product rights
|
|
$
|
47,842
|
|
|
$
|
74,610
|
|
|
|
|
|
|
$
|
207,188
|
|
|
$
|
74,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
The remaining patent amortization period compared to the
remaining amortization period for trademarks and product rights
associated with significant products is as follows:
|
|
|
|
|
|
|
|
|
|
|
Remaining Life at December 31, 2006
|
|
|
|
|
|
|
Trademark &
|
|
|
|
Patent
|
|
|
Product Rights
|
|
|
Altace®
|
|
|
2 years 4 months
|
|
|
|
12 years
|
|
Skelaxin®
|
|
|
|
|
|
|
10 years
|
|
Sonata®
|
|
|
|
|
|
|
|
|
Intal®
|
|
|
|
|
|
|
7 years
|
|
|
|
|
|
|
Inventories. Our inventories are valued at the
lower of cost or market value. We evaluate our entire inventory
for short-dated or slow-moving product and inventory commitments
under supply agreements based on projections of future demand
and market conditions. For those units in inventory that are so
identified, we estimate their market value or net sales value
based on current realization trends. If the projected net
realizable value is less than cost, on a product basis, we make
a provision to reflect the lower value of that inventory. This
methodology recognizes projected inventory losses at the time
such losses are evident rather than at the time goods are
actually sold. We maintain supply agreements with some of our
vendors which contain minimum purchase requirements. We estimate
future inventory requirements based on current facts and trends.
Should our minimum purchase requirements under supply agreements
or if our estimated future inventory requirements exceed actual
inventory quantities that we will be able to sell to our
customers, we record a charge in costs of revenues.
|
|
|
|
Accruals for rebates, returns, and
chargebacks. We establish accruals for returns,
chargebacks, Medicaid, Medicare, and commercial rebates in the
same period we recognize the related sales. The accruals reduce
revenues and are included in accrued expenses. At the time a
rebate or chargeback payment is made or a product return is
received, which occurs with a delay after the related sale, we
record a reduction to accrued expenses and, at the end of each
quarter, adjust accrued expenses for differences between
estimated and actual payments. Due to estimates and assumptions
inherent in determining the amount of returns, chargebacks and
rebates, the actual amount of product returns and claims for
chargebacks and rebates may be different from our estimates.
|
Our product returns accrual is primarily based on estimates of
future product returns over the period during which customers
have a right of return which is in turn based in part on
estimates of the remaining shelf life of our products when sold
to customers. Future product returns are estimated primarily on
historical sales and return rates. We also consider the level of
inventory of our products in the distribution channel. We base
our estimate of our Medicaid rebate, Medicare rebate and
commercial rebate accruals on estimates of usage by
rebate-eligible customers, estimates of the level of inventory
of our products in the distribution channel that remain
potentially subject to those rebates, and the terms of our
commercial and regulatory rebate obligations. We base our
estimate of our chargeback accrual on our estimates of the level
of inventory of our products in the distribution channel that
remain subject to chargebacks, and specific contractual and
historical chargeback rates. The estimate of the level of our
products in the distribution channel is based on data provided
by our three key wholesalers under inventory management
agreements.
Our accruals for returns, chargebacks and rebates are adjusted
as appropriate for specific known developments that may result
in a change in our product returns or our rebate and chargeback
obligations. In the case of product returns, we monitor demand
levels for our products and the effects of the introduction of
competing products and other factors on this demand. When we
identify decreases in demand for products or experience higher
than historical rates of returns caused by unexpected discrete
events, we further analyze these products for potential
additional supplemental reserves.
|
|
|
|
|
Revenue recognition. Revenue is recognized
when title and risk of loss are transferred to customers,
collection of sales is reasonably assured, and we have no
further performance obligations. This is generally at the time
products are received by the customer. Accruals for estimated
returns, rebates and
|
65
|
|
|
|
|
chargebacks, determined based on historical experience, reduce
revenues at the time of sale and are included in accrued
expenses. Medicaid and certain other governmental pricing
programs involve particularly difficult interpretations of
relevant statutes and regulatory guidance, which are complex
and, in certain respects, ambiguous. Moreover, prevailing
interpretations of these statutes and guidance can change over
time. Royalty revenue is recognized based on a percentage of
sales (namely, contractually
agreed-upon
royalty rates) reported by third parties. For additional
information, please see Note 2, Summary of
Significant Accounting Policies, in Part 15(a)(1),
Exhibits and Financial Statement Schedules.
|
Recently
Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements
(SFAS No. 157). This statement defines
fair value, establishes a framework for measuring fair value,
and expands disclosures about fair value measurements. The
statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. We are in the process of
evaluating the effect of SFAS No. 157 on our financial
statements and are planning to adopt this standard in the first
quarter of 2008.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48), which clarifies the accounting
for uncertainty in tax positions by prescribing a recognition
threshold a tax position is required to meet before being
recognized in the financial statements. The provisions of
FIN 48 are effective for fiscal years beginning after
December 15, 2006. We are currently evaluating the effect
of FIN 48 on our financial statements and currently plan to
adopt this interpretation in the first quarter of 2007. We
believe the adoption of FIN 48 will not have a material
effect on our financial statements.
In November 2004, the Financial Accounting Standards Board
issued SFAS No. 151, Inventory Costs, an
amendment of Accounting Research Bulletin No. 43.
SFAS No. 151 requires certain production overhead
costs to be allocated to inventory based upon the normal
capacity of the manufacturing facility. When our manufacturing
facilities are operating below their normal capacity,
unfavorable variances cannot be allocated to inventory and must
be expensed in the period in which they are incurred. Normal
capacity is not defined as full capacity by
SFAS No. 151. SFAS No. 151 instead provides
that normal capacity refers to a range of production levels
expected to be achieved over a number of periods or seasons
under normal circumstances. As of December 31, 2006, we
estimate capacity utilization was approximately 20% at the
Rochester, Michigan facility, approximately 30% at the Bristol,
Tennessee facility, approximately 75% at the St. Petersburg,
Florida facility, approximately 75% at the St. Louis, Missouri
facility and approximately 100% at the Middleton, Wisconsin
facility. We believe all of our operating facilities, except for
the Rochester, Michigan facility, are currently operating at
levels considered to be normal capacity as defined
by SFAS No. 151 as these plants have operated at their
current levels for a number of periods and are expected to
continue to operate within a range of this normal capacity in
the foreseeable future. The margins provided by branded
pharmaceutical products are such that they allow manufacturers
to operate facilities at lower volumes, or at volumes below
theoretical capacity. Additionally, lower capacity levels at
certain facilities are, at times, due to the complexity and high
regulatory standards associated with the pharmaceutical
manufacturing process. With respect to our Bristol, Tennessee
facility, we anticipate no abnormally higher or lower production
levels in the current year and, therefore, have concluded that
the projected level of production is within a range of normal
capacity and the margins on the branded pharmaceutical products
produced at this facility will result in an adequate return on
our investment. Consequently, we believe that it is appropriate
to use the expected production level to allocate fixed
production overhead. The Rochester facility is currently
operating at a level below normal capacity primarily due to a
decline in contract manufacturing in recent years. The
company-owned products manufactured at this facility are not
among our higher margin products. In 2003, we began expensing,
and continue to expense, a portion of the fixed overhead costs
of this facility as period costs in accordance with Accounting
Research Bulletin No. 43. Accordingly, the adoption of
SFAS No. 151, as of January 1, 2006, did not have
an incremental effect on our financial statements.
66
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
We are exposed to market risk for changes in the market values
of some of our investments (Investment Risk) and the effect of
interest rate changes (Interest Rate Risk). Our financial
instruments are not currently subject to foreign currency risk
or commodity price risk. We have no financial instruments held
for trading purposes. At December 31, 2006, 2005 and 2004,
we did not hold any derivative financial instruments, other than
utility contracts which qualify as normal purchase and sales and
derivatives associated with the convertible senior notes. The
quantitative and qualitative disclosures about market risk are
set forth below.
Interest
Rate Risk
The fair market value (fair value) of long-term
fixed interest rate debt is subject to interest rate risk.
Generally, the fair market value of fixed interest rate debt
will increase as interest rates fall and decrease as interest
rates rise. In addition, the fair value of our convertible
debentures is affected by our stock price. The estimated fair
value of our total long-term debt at December 31, 2006 was
$391.5 million. Fair values were determined from available
market prices, using current interest rates and terms to
maturity. If interest rates were to increase or decrease 1%, the
fair value of our long-term debt would increase or decrease by
approximately $23.0 million.
Investment
Risk
We have marketable securities which are carried at fair value
based on current market quotes. Gains and losses on securities
are based on the specific identification method.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Our audited consolidated financial statements and related notes
as of December 31, 2006 and 2005 and for each of the three
years ended December 31, 2006, 2005 and 2004 are included
under Item 15 and begin on
page F-1.
|
|
Item 9.
|
Changes
in Accountants and Disagreements with Accountants on Accounting
and Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the
reports we file or submit under the Securities Exchange Act of
1934, as amended (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 our management,
including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding
required financial disclosure.
Management, with the participation of the Chief Executive
Officer and Chief Financial Officer, carried out an evaluation,
as required by
Rule 13a-15(b)
under the Exchange Act, of the effectiveness of the design and
operation of the disclosure controls and procedures (as defined
in Exchange Act
Rule 13a-15(e))
as of December 31, 2006.
Based on this evaluation by management, the Chief Executive
Officer and Chief Financial Officer have concluded that, as of
December 31, 2006, our disclosure controls and procedures
were effective.
Managements
Report on Internal Control over Financial
Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting as such term
is defined in Exchange Act
Rule 13a-15(f).
Because of its inherent limitations, internal
67
control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.
Management has conducted an evaluation of the effectiveness of
our internal control over financial reporting as of
December 31, 2006, based on the framework and criteria
established in Internal Control Integrated
Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this
evaluation, our management has concluded that internal control
over financial reporting was effective as of December 31,
2006.
Managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2006 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in its report which appears herein.
Changes
in Internal Control over Financial Reporting
There were no changes in our internal control over financial
reporting that occurred during the quarter ended
December 31, 2006 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
The information called for by Part III of
Form 10-K
(Item 10 Directors and Executive Officers of
the Registrant, Item 11 Executive Compensation,
Item 12 Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters, Item 13 Certain Relationships and
Related Transactions, and Item 14 Principal
Accounting Fees and Services), is incorporated by reference from
our proxy statement related to our 2007 annual meeting of
shareholders, which will be filed with the SEC not later than
April 30, 2007 (120 days after the end of the fiscal
year covered by this report).
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) Documents filed as a part of this report:
(1) Financial Statements
|
|
|
|
|
|
|
Page Number
|
|
|
Report of Independent Registered
Public Accounting Firm
|
|
|
F-1
|
|
Consolidated Balance Sheets as of
December 31, 2006 and 2005
|
|
|
F-3
|
|
Consolidated Statements of Income
(Loss) for the years ended December 31, 2006, 2005 and 2004
|
|
|
F-4
|
|
Consolidated Statements of
Shareholders Equity and Other Comprehensive Income (Loss)
for the years ended December 31, 2006, 2005 and 2004
|
|
|
F-5
|
|
Consolidated Statements of Cash
Flows for the years ended December 31, 2006, 2005 and 2004
|
|
|
F-6
|
|
Notes to Consolidated Financial
Statements
|
|
|
F-7
|
|
|
|
|
|
|
(2) Financial Statement
Schedule Valuation and Qualifying Accounts
|
|
|
S-1
|
|
All other schedules have been omitted because of the absence of
conditions under which they are required or because the required
information is given in the above-listed financial statements or
notes thereto.
68
(b) Exhibits
The following Exhibits are filed herewith or incorporated herein
by reference:
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1(1)
|
|
Second Amended and Restated
Charter of King Pharmaceuticals, Inc.
|
|
3
|
.2(2)
|
|
Amended and Restated Bylaws of
King Pharmaceuticals, Inc.
|
|
4
|
.1(2)
|
|
Specimen Common Stock Certificate
|
|
4
|
.2(2)
|
|
Form of Rights Agreement by and
between King Pharmaceuticals, Inc. and The Bank of New York
(successor in interest to Union Planters National Bank)
|
|
10
|
.1(3)
|
|
Co-Promotion Agreement, dated as
of June 22, 2000, between American Home Products
Corporation and King Pharmaceuticals, Inc.
|
|
10
|
.2(3)
|
|
Asset Purchase Agreement, dated as
of June 22, 2000, between American Home Products
Corporation and King Pharmaceuticals, Inc.
|
|
10
|
.3(4)
|
|
Amended and Restated Co-Promotion
Agreement, dated as of July 5, 2006, by and between King
Pharmaceuticals, Inc. and Wyeth
|
|
10
|
.4(5)
|
|
Indenture, dated as of
March 29, 2006, among King Pharmaceuticals, Inc., certain
Subsidiary Guarantors and The Bank of New York, as trustee,
relating to Kings
11/4%
Convertible Notes due 2026
|
|
10
|
.5(5)
|
|
Registration Rights Agreement
dated as of March 29, 2006 between King Pharmaceuticals,
Inc., certain Subsidiary Guarantors and the initial purchasers
of Kings
11/4%
Convertible Notes due 2026
|
|
10
|
.6(6)*
|
|
1998 King Pharmaceuticals, Inc.
Non-Employee Director Stock Option Plan
|
|
10
|
.7(2)*
|
|
1997 Incentive and Nonqualified
Stock Option Plan for Employees of King Pharmaceuticals, Inc.
|
|
10
|
.8(6)*
|
|
1989 Incentive Stock Option Plan
of Jones Medical Industries, Inc.
|
|
10
|
.9(6)*
|
|
Jones Medical Industries, Inc.
1994 Incentive Stock Plan
|
|
10
|
.10(6)*
|
|
Jones Medical Industries, Inc.
1997 Incentive Stock Plan
|
|
10
|
.11(7)*
|
|
King Pharmaceuticals, Inc. 401(k)
Retirement Savings Plan
|
|
10
|
.12(8)*
|
|
The Medco Research, Inc. 1989
Stock Option and Stock Appreciation Rights Plan, as amended
through July 29, 1998
|
|
10
|
.13(9)
|
|
Credit Agreement dated as of
April 23, 2002, among King Pharmaceuticals, Inc., and the
Lenders therein, Credit Suisse First Boston, Cayman Islands
Branch, as Administrative Agent, as Collateral Agent and as
Swingline Lender, and Bank of America, NA, J.P. Morgan
Securities Inc., and UBS Warburg LLC as Co-Syndication Agents,
Wachovia Bank National Association, as Documentation Agent,
Credit Suisse First Boston as Sole Lead Arranger and Bookrunner
|
|
10
|
.14(10)*
|
|
King Pharmaceuticals, Inc.
Non-Employee Directors Deferred Compensation Plan
|
|
10
|
.15(11)*
|
|
Offer Letter to Brian A. Markison,
dated July 15, 2004
|
|
10
|
.16(11)
|
|
Collaborative Development and
Marketing Agreement dated August 12, 2004 by and between
Palatin Technologies, Inc. and King Pharmaceuticals, Inc.
|
|
10
|
.17(11)*
|
|
Separation and Non-Disclosure
Agreement dated July 13, 2004 by and between King
Pharmaceuticals, Inc. and Jefferson J. Gregory
|
|
10
|
.18(11)*
|
|
Severance and Non-Disclosure
Agreement dated May 7, 2004 by and between King
Pharmaceuticals, Inc. and Kyle P. Macione
|
|
10
|
.19(12)*
|
|
King Pharmaceuticals, Inc.
Severance Pay Plan: Tier I (Effective March 15, 2005)
|
|
10
|
.20(13)*
|
|
Offer letter to Joseph
Squicciarino dated May 25, 2005
|
|
10
|
.21(13)*
|
|
Offer letter to Eric J. Bruce
dated May 19, 2005
|
|
10
|
.22(13)*
|
|
2005 Executive Management
Incentive Award
|
|
10
|
.23(13)*
|
|
Salary Amendments For Certain
Executive Officers
|
|
10
|
.24(13)*
|
|
King Pharmaceuticals, Inc.
Executive Deferred Compensation Plan
|
|
10
|
.25(14)*
|
|
Form of Restricted Stock
Certificate and Restricted Stock Grant Agreement
|
|
10
|
.26(14)*
|
|
Form of Option Certificate and
Nonstatutory Stock Option Agreement
|
|
10
|
.27(15)
|
|
Settlement Agreement, dated as of
October 31, 2005, among the United States of America acting
through the entities named therein, King Pharmaceuticals, Inc.
and Monarch Pharmaceuticals, Inc.
|
|
10
|
.28(15)
|
|
Settlement Agreement, dated as of
October 31, 2005, among the state of Massachusetts, King
Pharmaceuticals, Inc. and Monarch Pharmaceuticals, Inc. and
general description of the other state settlement agreements
|
69
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.29(15)
|
|
Corporate Integrity Agreement,
dated as of October 31, 2005, between the Office of
Inspector General of the Department of Health and Human Services
and King Pharmaceuticals, Inc.
|
|
10
|
.30(16)*
|
|
Retirement and Consulting
Agreement, dated as of April 1, 2005, and Waiver, Release
and Non-Solicitation, Noncompete and Nondisclosure Agreement,
dated as of May 12, 2005, by and between King
Pharmaceuticals, Inc. and James R. Lattanzi
|
|
10
|
.31(17)*
|
|
First Amendment to Retirement and
Consulting Agreement, dated as of November 4, 2005, by and
between the Company and James R. Lattanzi
|
|
10
|
.32(18)*
|
|
King Pharmaceuticals, Inc.
Incentive Plan
|
|
10
|
.33(19)*
|
|
Compensation Policy for
Non-Employee Directors
|
|
10
|
.34(20)*
|
|
Waiver, Release and
Non-Solicitation, NonCompete and Nondisclosure Agreement, dated
as of November 1, 2005, by and between King
Pharmaceuticals, Inc. and John A. A. Bellamy
|
|
10
|
.35(20)*
|
|
Addendum to the Waiver, Release
and Non-Solicitation, Noncompete and Nondisclosure Agreement,
dated as of December 20, 2005, by and between King
Pharmaceuticals, Inc. and John A. A. Bellamy
|
|
10
|
.36(20)
|
|
Collaboration Agreement by and
between King Pharmaceuticals, Inc. and Pain Therapeutics, Inc.,
dated as of November 9, 2005
|
|
10
|
.37(20)
|
|
License Agreement by and between
King Pharmaceuticals, Inc. and Pain Therapeutics, Inc., dated as
of December 29, 2005
|
|
10
|
.38(20)
|
|
License Agreement, by and between
King Pharmaceuticals, Inc. and Mutual Pharmaceutical Company,
Inc., dated as of December 6, 2005
|
|
10
|
.39(20)*
|
|
Severance letter to John A. A.
Bellamy dated October 14, 2005
|
|
10
|
.40(21)*
|
|
First Amendment, dated as of
March 22, 2006, to the Credit Agreement, dated as of
April 23, 2002, among King Pharmaceuticals, Inc., the
Lenders and Credit Suisse First Boston, Cayman Islands Branch,
as Administrative Agent
|
|
10
|
.41(22)
|
|
Generic Distribution Agreement by
and between King Pharmaceuticals, Inc. and Cobalt
Pharmaceuticals, Inc., dated as of February 12, 2006
|
|
10
|
.42(22)
|
|
Product Supply Agreement by and
among King Pharmaceuticals, Inc., Selamine Limited, Robin Hood
Holdings Limited and Arrow Pharm Malta Limited, dated as of
February 12, 2006
|
|
10
|
.43(22)
|
|
Ramipril Application License
Agreement by and among King Pharmaceuticals, Inc., Arrow
International Limited and Robin Hood Holdings Limited, dated as
of February 12, 2006
|
|
10
|
.44(22)
|
|
Ramipril Patent License Agreement
by and among King Pharmaceuticals, Inc., Selamine Limited and
Robin Hood Holdings Limited, dated as of February 12, 2006
|
|
10
|
.45(22)
|
|
Dismissal Agreement by and among
King Pharmaceuticals, Inc., Cobalt Pharmaceuticals, Inc. and
Aventis Pharma Deutschland GmbH, dated as of February 27,
2006
|
|
10
|
.46(22)
|
|
Amended and Restated U.S. Product
Manufacturing Agreement by and between King Pharmaceuticals,
Inc. and Sanofi-Aventis Deutschland GmbH, dated as of
February 27, 2006
|
|
10
|
.47(22)
|
|
First Amendment to the U.S.
Product Agreement by and between King Pharmaceuticals, Inc. and
Sanofi-Aventis U.S. LLC, dated as of February 27, 2006
|
|
10
|
.48(22)*
|
|
Form of Long-Term Performance Unit
Award Agreement One Year Performance Cycle
|
|
10
|
.49(22)*
|
|
Form of Long-Term Performance Unit
Award Agreement Three Year Performance Cycle
|
|
10
|
.50(23)
|
|
Promotion Agreement, dated
June 27, 2006, by and between King Pharmaceuticals, Inc.
and Depomed, Inc.
|
|
10
|
.51(23)*
|
|
Form of Restricted Unit
Certificate and Restricted Unit Grant Agreement
|
|
10
|
.52(24)
|
|
Purchase Agreement, by and between
Ligand Pharmaceuticals Incorporated, King Pharmaceuticals, Inc.
and King Pharmaceuticals Research and Development, Inc., dated
as of September 6, 2006
|
|
10
|
.53(25)
|
|
Entry into Loan Agreement between
King Pharmaceuticals, Inc. and Ligand Pharmaceuticals
Incorporated, dated October 12, 2006
|
|
10
|
.54(26)*
|
|
Salary Amendments For Certain
Executive Officers
|
|
10
|
.55(27)
|
|
Settlement Agreement, dated
July 31, 2006, between King Pharmaceuticals, Inc., the
Affected Current and Former Officers and Directors and the
Plaintiffs in the Consolidated Class Action
|
|
10
|
.56(27)*
|
|
Form of Restricted Unit
Certificate and Restricted Unit Grant Agreement
|
70
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.57(28)
|
|
Amendment No. 1 to Purchase
Agreement, Contract Sales Force Agreement and Confidentiality
Agreement by and between Ligand Pharmaceuticals Incorporated,
King Pharmaceuticals, Inc. and King Pharmaceuticals Research and
Development, Inc., dated as of January 3, 2007, effective
as of November 30, 2006
|
|
10
|
.58(28)
|
|
Side Letter between King
Pharmaceuticals, Inc. and Ligand Pharmaceuticals Incorporated
dated December 29, 2006
|
|
10
|
.59(29)*
|
|
Salary Amendment For Chief
Financial Officer
|
|
10
|
.60(30)*
|
|
2006 Executive Management
Incentive Award
|
|
14
|
.1(31)
|
|
Corporate Code of Conduct and
Ethics
|
|
21
|
.1
|
|
Subsidiaries of the Registrant
|
|
23
|
.1
|
|
Consent of PricewaterhouseCoopers
LLP
|
|
31
|
.1
|
|
Certificate of Chief Executive
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
31
|
.2
|
|
Certificate of Chief Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
32
|
.1
|
|
Certificate of Chief Executive
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
32
|
.2
|
|
Certificate of Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
* |
|
Denotes management contract or compensatory plan or arrangement. |
|
|
|
Portions of this Exhibit have been omitted and filed separately
with the Securities and Exchange Commission as part of an
application for confidential treatment pursuant to the
Securities Exchange Act of 1934. |
|
(1) |
|
Incorporated by reference to Kings Quarterly Report on
Form 10-Q
filed August 9, 2006. |
|
(2) |
|
Incorporated by reference to Kings Registration Statement
on
Form S-1
(Registration
No. 333-38753)
filed October 24, 1997. |
|
(3) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed June 30, 2000. |
|
(4) |
|
Incorporated by reference to Kings Quarterly Report on
Form 10-Q
filed November 9, 2006. |
|
(5) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed March 30, 2006. |
|
(6) |
|
Incorporated by reference to Kings Registration Statement
on
Form S-8
filed September 6, 2000. |
|
(7) |
|
Incorporated by reference to Kings Registration Statement
on
Form S-8
filed February 26, 1999. |
|
(8) |
|
Incorporated by reference to Kings Registration Statement
on
Form S-8
filed March 9, 2000. |
|
(9) |
|
Incorporated by reference to Kings Quarterly Report on
Form 10-Q
filed May 15, 2002. |
|
|
|
(10) |
|
Incorporated by reference to Kings Annual Report on
Form 10-K
for the year ended December 31, 2003. |
|
(11) |
|
Incorporated by reference to Kings Quarterly Report on
Form 10-Q
filed March 21, 2005. |
|
(12) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed March 21, 2005. |
|
(13) |
|
Incorporated by reference to Kings Quarterly Report on
Form 10-Q
filed August 9, 2005. |
|
(14) |
|
Incorporated by reference to Kings Quarterly Report on
Form 10-Q
filed November 9, 2005. |
|
(15) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed November 4, 2005. |
|
(16) |
|
Incorporated by reference to Kings Amendment No. 1 to
Quarterly Report on
Form 10-Q
filed February 15, 2006. |
|
(17) |
|
Incorporated by reference to Kings Amendment No. 2 to
Current Report on
Form 8-K/A
filed February 15, 2006. |
|
(18) |
|
Incorporated by reference to Kings Definitive Proxy
Statement, filed April 28, 2005, related to the 2005 annual
meeting of shareholders. |
|
(19) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed August 8, 2006. |
|
(20) |
|
Incorporated by reference to Kings Annual Report on
Form 10-K
filed March 3, 2006. |
|
(21) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed March 28, 2006. |
71
|
|
|
(22) |
|
Incorporated by reference to Kings Quarterly Report on
Form 10-Q
filed May 10, 2006. |
|
(23) |
|
Incorporated by reference to Kings Quarterly Report on
Form 10-Q
filed August 9, 2006. |
|
(24) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed September 12, 2006. |
|
(25) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed October 18, 2006. |
|
(26) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed November 6, 2006. |
|
(27) |
|
Incorporated by reference to Kings Quarterly Report on
Form 10-Q
filed November 9, 2006. |
|
(28) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed January 5, 2007. |
|
(29) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed January 16, 2007. |
|
(30) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed February 27, 2006. |
|
(31) |
|
Incorporated by reference to Kings Current Report on
Form 8-K
filed December 8, 2005. |
72
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
King Pharmaceuticals, Inc.:
We have completed integrated audits of King Pharmaceuticals,
Inc.s consolidated financial statements and of its
internal control over financial reporting as of
December 31, 2006, in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our
opinions, based on our audits, are presented below.
Consolidated
financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of King
Pharmaceuticals, Inc. and its subsidiaries at December 31,
2006 and 2005, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2006 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
index appearing under Item 15(a)(2) presents fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements. These financial statements and financial statement
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit of financial statements includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
As discussed in Note 2 to the consolidated financial
statements, the Company changed the manner in which it accounts
for share-based compensation in 2006.
Internal
control over financial reporting
Also, in our opinion, managements assessment, included in
Managements Report on Internal Controls Over Financial
Reporting appearing under Item 9A, that the Company
maintained effective internal control over financial reporting
as of December 31, 2006 based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control
Integrated Framework issued by the COSO. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on managements
assessment and on the effectiveness of the Companys
internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external
F-1
purposes in accordance with generally accepted accounting
principles. A companys internal control over financial
reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 27, 2007
F-2
KING
PHARMACEUTICALS, INC.
CONSOLIDATED
BALANCE SHEETS
as of
December 31, 2006 and 2005
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
113,777
|
|
|
$
|
30,014
|
|
Investments in debt securities
|
|
|
890,185
|
|
|
|
494,663
|
|
Restricted cash
|
|
|
|
|
|
|
130,400
|
|
Accounts receivable, net of
allowance of $5,437 and $12,280
|
|
|
265,467
|
|
|
|
223,581
|
|
Inventories
|
|
|
215,458
|
|
|
|
228,063
|
|
Deferred income tax assets
|
|
|
81,991
|
|
|
|
81,777
|
|
Prepaid expenses and other current
assets
|
|
|
106,595
|
|
|
|
59,291
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,673,473
|
|
|
|
1,247,789
|
|
Property, plant and equipment, net
|
|
|
307,036
|
|
|
|
302,474
|
|
Goodwill
|
|
|
121,152
|
|
|
|
121,152
|
|
Intangible assets, net
|
|
|
851,391
|
|
|
|
967,194
|
|
Marketable securities
|
|
|
11,578
|
|
|
|
18,502
|
|
Other assets (includes restricted
cash of $15,968 and $14,129)
|
|
|
93,347
|
|
|
|
77,099
|
|
Deferred income tax assets
|
|
|
271,554
|
|
|
|
231,032
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,329,531
|
|
|
$
|
2,965,242
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
77,158
|
|
|
$
|
84,539
|
|
Accrued expenses
|
|
|
510,137
|
|
|
|
519,620
|
|
Income taxes payable
|
|
|
30,501
|
|
|
|
22,301
|
|
Current portion of long term debt
|
|
|
|
|
|
|
345,000
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
617,796
|
|
|
|
971,460
|
|
Long-term debt
|
|
|
400,000
|
|
|
|
|
|
Other liabilities
|
|
|
23,129
|
|
|
|
20,360
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,040,925
|
|
|
|
991,820
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(Note 18)
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock,
15,000,000 shares authorized, no shares issued or
outstanding
|
|
|
|
|
|
|
|
|
Common stock, no par value,
600,000,000 shares authorized, 243,151,223 and
242,493,416 shares issued and outstanding
|
|
|
1,244,986
|
|
|
|
1,222,246
|
|
Unearned compensation
|
|
|
|
|
|
|
(8,764
|
)
|
Retained earnings
|
|
|
1,043,902
|
|
|
|
754,953
|
|
Accumulated other comprehensive
(loss) income
|
|
|
(282
|
)
|
|
|
4,987
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,288,606
|
|
|
|
1,973,422
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
3,329,531
|
|
|
$
|
2,965,242
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
KING
PHARMACEUTICALS, INC.
CONSOLIDATED
STATEMENTS OF INCOME (LOSS)
for the
years ended December 31, 2006, 2005 and 2004
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,908,143
|
|
|
$
|
1,694,753
|
|
|
$
|
1,225,890
|
|
Royalty revenue
|
|
|
80,357
|
|
|
|
78,128
|
|
|
|
78,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,988,500
|
|
|
|
1,772,881
|
|
|
|
1,304,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues, exclusive of
depreciation, amortization and impairments shown below
|
|
|
419,808
|
|
|
|
322,985
|
|
|
|
352,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative, exclusive of co-promotion fees
|
|
|
496,215
|
|
|
|
409,451
|
|
|
|
409,775
|
|
Medicaid related charge
|
|
|
|
|
|
|
|
|
|
|
65,000
|
|
Mylan transaction costs
|
|
|
|
|
|
|
3,898
|
|
|
|
9,062
|
|
Co-promotion fees
|
|
|
217,750
|
|
|
|
223,134
|
|
|
|
111,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and
administrative
|
|
|
713,965
|
|
|
|
636,483
|
|
|
|
595,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
143,596
|
|
|
|
74,015
|
|
|
|
67,939
|
|
Research and
development in process upon acquisition
|
|
|
110,000
|
|
|
|
188,711
|
|
|
|
16,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development
|
|
|
253,596
|
|
|
|
262,726
|
|
|
|
84,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
147,549
|
|
|
|
147,049
|
|
|
|
162,115
|
|
Intangible asset impairment
|
|
|
47,842
|
|
|
|
221,054
|
|
|
|
149,592
|
|
Restructuring charges
|
|
|
3,194
|
|
|
|
4,180
|
|
|
|
10,827
|
|
Gain on sale of products
|
|
|
|
|
|
|
(1,675
|
)
|
|
|
(9,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
1,585,954
|
|
|
|
1,592,802
|
|
|
|
1,345,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
402,546
|
|
|
|
180,079
|
|
|
|
(41,264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
32,152
|
|
|
|
18,175
|
|
|
|
5,974
|
|
Interest expense
|
|
|
(9,857
|
)
|
|
|
(11,931
|
)
|
|
|
(12,588
|
)
|
Valuation charge
convertible notes receivable
|
|
|
|
|
|
|
|
|
|
|
(2,887
|
)
|
Loss on investment
|
|
|
|
|
|
|
(6,182
|
)
|
|
|
(6,520
|
)
|
Gain on early extinguishment of debt
|
|
|
628
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(1,157
|
)
|
|
|
(2,026
|
)
|
|
|
(749
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
21,766
|
|
|
|
(1,964
|
)
|
|
|
(16,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes
|
|
|
424,312
|
|
|
|
178,115
|
|
|
|
(58,034
|
)
|
Income tax expense (benefit)
|
|
|
135,730
|
|
|
|
61,485
|
|
|
|
(7,412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
288,582
|
|
|
|
116,630
|
|
|
|
(50,622
|
)
|
Discontinued operations
(Note 26):
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations, including loss on impairment
|
|
|
572
|
|
|
|
1,876
|
|
|
|
(172,750
|
)
|
Income tax expense (benefit)
|
|
|
205
|
|
|
|
673
|
|
|
|
(63,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) from
discontinued operations
|
|
|
367
|
|
|
|
1,203
|
|
|
|
(109,666
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
288,949
|
|
|
$
|
117,833
|
|
|
$
|
(160,288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: Income (loss) from
continuing operations
|
|
$
|
1.19
|
|
|
$
|
0.48
|
|
|
$
|
(0.21
|
)
|
Income (loss) from discontinued
operations
|
|
|
0.00
|
|
|
|
0.01
|
|
|
|
(0.45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1.19
|
|
|
$
|
0.49
|
|
|
$
|
(0.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: Income (loss) from
continuing operations
|
|
$
|
1.19
|
|
|
$
|
0.48
|
|
|
$
|
(0.21
|
)
|
Income (loss) from discontinued
operations
|
|
|
0.00
|
|
|
|
0.01
|
|
|
|
(0.45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1.19
|
|
|
$
|
0.49
|
|
|
$
|
(0.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
KING
PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
AND OTHER COMPREHENSIVE INCOME (LOSS)
for the years ended December 31, 2004, 2005 and
2006
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Unearned
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Balance, January 1, 2004,
|
|
|
241,190,852
|
|
|
$
|
1,205,970
|
|
|
$
|
|
|
|
$
|
797,408
|
|
|
$
|
1,113
|
|
|
$
|
2,004,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(160,288
|
)
|
|
|
|
|
|
|
(160,288
|
)
|
Net unrealized loss on marketable
securities, net of tax of $43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(132
|
)
|
|
|
(132
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(160,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
515,731
|
|
|
|
4,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
241,706,583
|
|
|
$
|
1,210,647
|
|
|
$
|
|
|
|
$
|
637,120
|
|
|
$
|
1,023
|
|
|
$
|
1,848,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,833
|
|
|
|
|
|
|
|
117,833
|
|
Net unrealized gain on marketable
securities, net of tax of $2,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,042
|
|
|
|
4,042
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(78
|
)
|
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock-based compensation
|
|
|
|
|
|
|
10,742
|
|
|
|
(10,742
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned compensation amortization
|
|
|
|
|
|
|
|
|
|
|
1,978
|
|
|
|
|
|
|
|
|
|
|
|
1,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock awards
|
|
|
690,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
96,141
|
|
|
|
857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
242,493,416
|
|
|
$
|
1,222,246
|
|
|
$
|
(8,764
|
)
|
|
$
|
754,953
|
|
|
$
|
4,987
|
|
|
$
|
1,973,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of Statement of Financial
Accounting Standard 123(R)
|
|
|
|
|
|
|
(8,764
|
)
|
|
|
8,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
288,949
|
|
|
|
|
|
|
|
288,949
|
|
Net unrealized loss on marketable
securities, net of tax of $2,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,067
|
)
|
|
|
(5,067
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(202
|
)
|
|
|
(202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
283,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
24,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
477,228
|
|
|
|
6,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,786
|
|
Issuance of share-based compensation
|
|
|
180,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
243,151,223
|
|
|
$
|
1,244,986
|
|
|
$
|
|
|
|
$
|
1,043,902
|
|
|
$
|
(282
|
)
|
|
$
|
2,288,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
KING
PHARMACEUTICALS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
for the
years ended December 31, 2006, 2005 and 2004
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash flows from operating
activities of continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
288,949
|
|
|
$
|
117,833
|
|
|
$
|
(160,288
|
)
|
(Income) loss from discontinued
operations
|
|
|
(367
|
)
|
|
|
(1,203
|
)
|
|
|
109,666
|
|
Adjustments to reconcile net income
(loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
147,549
|
|
|
|
147,049
|
|
|
|
162,115
|
|
Amortization of deferred financing
costs
|
|
|
2,874
|
|
|
|
3,096
|
|
|
|
3,145
|
|
Deferred income taxes
|
|
|
(39,010
|
)
|
|
|
(68,047
|
)
|
|
|
(17,083
|
)
|
Valuation charge on convertible
notes receivable
|
|
|
|
|
|
|
|
|
|
|
2,887
|
|
Impairment of intangible assets
|
|
|
47,842
|
|
|
|
221,054
|
|
|
|
149,592
|
|
In-process research and development
charges
|
|
|
110,000
|
|
|
|
188,711
|
|
|
|
16,300
|
|
Gain on early extinguishment of debt
|
|
|
(628
|
)
|
|
|
|
|
|
|
|
|
Gain on sale of products
|
|
|
|
|
|
|
(1,675
|
)
|
|
|
(9,524
|
)
|
Loss on investment
|
|
|
|
|
|
|
6,182
|
|
|
|
6,520
|
|
Other non-cash items, net
|
|
|
573
|
|
|
|
791
|
|
|
|
9,484
|
|
Stock based compensation
|
|
|
24,718
|
|
|
|
1,978
|
|
|
|
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(41,746
|
)
|
|
|
(43,407
|
)
|
|
|
57,978
|
|
Inventories
|
|
|
48,275
|
|
|
|
46,349
|
|
|
|
(15,205
|
)
|
Prepaid expenses and other current
assets
|
|
|
(45,796
|
)
|
|
|
(47,544
|
)
|
|
|
(16,161
|
)
|
Other assets
|
|
|
(20,173
|
)
|
|
|
(4,471
|
)
|
|
|
(3,483
|
)
|
Accounts payable
|
|
|
(8,568
|
)
|
|
|
(7,713
|
)
|
|
|
9,197
|
|
Accrued expenses and other
liabilities
|
|
|
(50,458
|
)
|
|
|
(52,544
|
)
|
|
|
43,566
|
|
Deferred revenue
|
|
|
(6,886
|
)
|
|
|
(9,092
|
)
|
|
|
(9,091
|
)
|
Income taxes
|
|
|
8,479
|
|
|
|
22,161
|
|
|
|
(78,708
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities of continuing operations
|
|
|
465,627
|
|
|
|
519,508
|
|
|
|
260,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities of continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments in debt
securities
|
|
|
(1,705,517
|
)
|
|
|
(1,175,159
|
)
|
|
|
(320,849
|
)
|
Proceeds from maturity and sale of
investments in debt securities
|
|
|
1,309,995
|
|
|
|
829,926
|
|
|
|
274,344
|
|
Transfer from/(to) restricted cash
|
|
|
128,561
|
|
|
|
(73,629
|
)
|
|
|
(2,331
|
)
|
Purchases of property, plant and
equipment
|
|
|
(45,816
|
)
|
|
|
(53,290
|
)
|
|
|
(55,141
|
)
|
Acquisition of primary care
business of Elan
|
|
|
|
|
|
|
|
|
|
|
(36,000
|
)
|
Purchases of product rights
|
|
|
(25,795
|
)
|
|
|
|
|
|
|
|
|
Palatin collaboration agreement
|
|
|
|
|
|
|
(10,000
|
)
|
|
|
(20,000
|
)
|
Purchases of intangible assets
|
|
|
|
|
|
|
(18,600
|
)
|
|
|
(22,200
|
)
|
Proceeds from sale of marketable
securities
|
|
|
|
|
|
|
6,453
|
|
|
|
|
|
Arrow International Limited
collaboration agreement
|
|
|
(60,000
|
)
|
|
|
|
|
|
|
|
|
Pain Therapeutic collaboration
agreement
|
|
|
|
|
|
|
(153,711
|
)
|
|
|
|
|
Mutual cross-license agreement
|
|
|
|
|
|
|
(35,000
|
)
|
|
|
|
|
Loan to Ligand
|
|
|
(37,750
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sale of intangible
assets
|
|
|
|
|
|
|
|
|
|
|
27,458
|
|
Other investing activities
|
|
|
7
|
|
|
|
3
|
|
|
|
648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities of continuing operations
|
|
|
(436,315
|
)
|
|
|
(683,007
|
)
|
|
|
(154,071
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities of continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock
options, net
|
|
|
7,338
|
|
|
|
857
|
|
|
|
4,677
|
|
Excess tax benefits from
stock-based compensation
|
|
|
484
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term
debt
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(342,691
|
)
|
|
|
|
|
|
|
(97
|
)
|
Debt issuance costs
|
|
|
(10,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities of continuing operations
|
|
|
54,451
|
|
|
|
857
|
|
|
|
4,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
10,185
|
|
Net cash provided by investing
activities of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
27,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents
|
|
|
83,763
|
|
|
|
(162,642
|
)
|
|
|
149,528
|
|
Cash and cash equivalents,
beginning of year
|
|
|
30,014
|
|
|
|
192,656
|
|
|
|
43,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
year
|
|
$
|
113,777
|
|
|
$
|
30,014
|
|
|
$
|
192,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
paid for: Interest
|
|
$
|
8,200
|
|
|
$
|
10,552
|
|
|
$
|
10,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
$
|
163,901
|
|
|
$
|
107,178
|
|
|
$
|
90,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
King Pharmaceuticals, Inc. (King or the
Company) is a vertically integrated pharmaceutical
company that performs basic research and develops, manufactures,
markets and sells branded prescription pharmaceutical products.
Through a national sales force, King markets its branded
pharmaceutical products to general/family practitioners,
internal medicine physicians, cardiologists, endocrinologists,
psychiatrists, neurologists, pain specialists, sleep
specialists, and hospitals across the United States and in
Puerto Rico. In addition, the Company receives royalties from
the rights to certain products (including
Adenoscan®)
previously sold.
These consolidated financial statements include the accounts of
King and all of its wholly owned subsidiaries. See Note 4
and Note 9. All intercompany transactions and balances have
been eliminated in consolidation.
Discontinued operations in these consolidated financial
statements represent the effect of the
Prefest®
and
Nordette®
product rights which the Company divested in 2004.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Use of Estimates. The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period.
Significant estimates for which it is reasonably possible that a
material change in estimate could occur in the near term include
forecasted future cash flows used in testing for impairments of
intangible and tangible assets and loss accruals for excess
inventory and fixed purchase commitments under the
Companys supply contracts. Forecasted future cash flows in
particular require considerable judgment and are subject to
inherent imprecision. In the case of impairment testing, changes
in estimates of future cash flows could result in an immediate
material impairment charge and, whether they result in an
impairment charge, could result prospectively in a reduction in
the estimated remaining useful life of tangible or intangible
assets, which could be material to the financial statements.
Other significant estimates include accruals for Medicaid,
Medicare and commercial rebates; returns; and chargebacks;
allowances for doubtful accounts; estimates used in applying the
revenue recognition policy and accounting for the Co-Promotion
Agreement with Wyeth. Reserves for returns; chargebacks;
Medicaid, Medicare and commercial rebates each use the estimate
of the level of inventory of the Companys products in the
distribution channel at the end of the period. The estimate of
the level of inventory of the Companys products in the
distribution channel is based on data provided by our three key
wholesalers under inventory management agreements.
The Company is subject to risks and uncertainties that may cause
actual results to differ from the related estimates, and the
Companys estimates may change from time to time in
response to actual developments and new information.
Revenue recognition. Revenue is recognized
when title and risk of loss are transferred to customers,
collection of sales is reasonably assured, and the Company has
no further performance obligations. This is generally at the
time products are received by the customer. Accruals for
estimated discounts, returns, rebates and chargebacks that are
determined based on historical experience, reduce revenues at
the time of sale and are included in accrued expenses. Royalty
revenue is recognized based on a percentage of sales (namely,
contractually
agreed-upon
royalty rates) reported by third parties.
Intangible Assets and Goodwill. Intangible
assets, which primarily include acquired product rights,
trademarks, and patents, are stated at cost, net of accumulated
amortization. Amortization is computed over
F-7
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the estimated useful lives, ranging from two to forty years,
using primarily the straight-line method. Goodwill is not
amortized, but is tested for impairment on an annual basis
during the first quarter, or more frequently if conditions
warrant. We estimate the useful lives of the assets by factoring
in the characteristics of the products such as: patent
protection, competition by products prescribed for similar
indications, estimated future introductions of competing
products, and other factors. The Company evaluates the remaining
useful lives of intangible assets each reporting period to
determine whether events and circumstances warrant a revision to
the remaining period of amortization. This evaluation is
performed through the quarterly evaluation of intangibles for
impairment. Further, on an annual basis, the Company reviews the
life of each intangible asset and makes adjustments as deemed
appropriate. The Company reviews its intangible assets for
possible impairment whenever events or circumstances indicate
that the carrying amount of an asset may not be recoverable. The
Company reviews goodwill for possible impairment annually, or
whenever events or circumstances indicate that the carrying
amount may not be recoverable. In evaluating goodwill for
impairment, the Company estimates fair value of the
Companys individual business reporting units on a
discounted cash flow basis. Assumptions and estimates used in
the evaluation of impairment may affect the carrying value of
long-lived assets, which could result in impairment charges in
future periods. Such assumptions include projections of future
cash flows and, in some cases, the current fair value of the
asset. In addition, the Companys amortization policies
reflect judgments on the estimated useful lives of assets.
Accruals for rebates, returns, and
chargebacks. The Company establishes accruals for
returns; chargebacks; and commercial, Medicare and Medicaid
rebate obligations in the same period it recognizes the related
sales. The accruals reduce revenues and are included in accrued
expenses. At the time a rebate or chargeback payment is made or
a product return is received, which occurs with a delay after
the related sale, the Company records a reduction to accrued
expenses and, at the end of each quarter, adjusts accrued
expenses for differences between estimated and actual payments.
Due to estimates and assumptions inherent in determining the
amount of returns, chargebacks and rebates, the actual amount of
product returns and claims for chargeback and rebates may differ
from the Companys estimates.
The Companys product returns accrual is primarily based on
estimates of future product returns over the period during which
customers have a right of return, which is in turn based in part
on estimates of the remaining shelf life of our products when
sold to customers. Future product returns are estimated
primarily based on historical sales and return rates. The
Company estimates its commercial, Medicare and Medicaid rebate
accruals based on estimates of utilization by rebate-eligible
customers, estimates of the level of inventory of its products
in the distribution channel that remain potentially subject to
those rebates, and the terms of its commercial Medicare and
Medicaid rebate obligations. The Company estimates its
chargeback accrual based on its estimates of the level of
inventory of its products in the distribution channel that
remain subject to chargebacks, and specific contractual and
historical chargeback rates. The estimate of the level of our
products in the distribution channel is based on data provided
by our three key wholesalers under inventory management
agreements.
The Companys accruals for returns, chargebacks and rebates
are adjusted as appropriate for specific known developments that
may result in a change in its product returns or its rebate and
chargeback obligations. In the case of product returns, the
Company monitors demand levels for its products and the effects
of the introduction of competing products and other factors on
this demand. When the Company identifies decreases in demand for
products or experiences higher than historical rates of returns
caused by unexpected discrete events, it further analyzes these
products for potential additional supplemental reserves.
Shipping and Handling Costs. The Company
incurred $3,777, $2,148, and $2,127 in 2006, 2005, and 2004,
respectively, related to third-party shipping and handling costs
classified as selling, general and administrative expenses in
the consolidated statements of operations. The Company does not
bill customers for such costs.
F-8
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash and Cash Equivalents. The Company
considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash
equivalents. The Companys cash and cash equivalents are
held in safekeeping by large domestic banks.
Restricted Cash. Cash escrowed for a specific
purpose is designated as restricted cash.
Investments in Debt Securities. The Company
invests in auction rate securities as part of its cash
management strategy. Auction rate securities are long-term
variable rate bonds tied to short-term interest rates that are
reset through an auction process generally every seven to
35 days. The Company classifies auction rate securities as
Investments in Debt Securities in the accompanying
consolidated balance sheet. As of the years ended
December 31, 2006 and 2005, there were no cumulative gross
unrealized holding gains or losses on investments in debt
securities.
Marketable Securities. The Company classifies
its marketable securities as
available-for-sale.
These securities are carried at fair market value based on
current market quotes, with unrealized gains and losses reported
in shareholders equity as a component of accumulated other
comprehensive income. Gains or losses on securities sold are
based on the specific identification method. The Company reviews
its investment portfolio as deemed necessary and, where
appropriate, adjusts individual securities for
other-than-temporary impairments. The Company does not hold
these securities for speculative or trading purposes.
Accounts Receivable and Allowance for Doubtful
Accounts. Trade accounts receivable are recorded
at the invoiced amount and do not bear interest. The allowance
for doubtful accounts is managements best estimate of the
amount of probable credit losses in the Companys existing
accounts receivable. Management determines the allowance based
on historical experience along with the present knowledge of
potentially uncollectible accounts. Management reviews its
allowance for doubtful accounts quarterly. Past due balances
over 120 days and greater than a specified amount are
reviewed individually for collectibility. All other balances are
reviewed on a pooled basis by type of receivable. Account
balances are charged off against the allowance when management
feels it is probable the receivable will not be recovered. The
Company does not have any off-balance-sheet credit exposure
related to customers.
Inventories. Inventories are stated at the
lower of cost or market. Cost is determined using the
first-in,
first-out (FIFO) method. Product samples held for distribution
to physicians and other healthcare providers represent
approximately 3% of inventory as of December 31, 2006 and
2005. The Company has fixed purchase commitments under supply
contracts for certain raw materials. A loss accrual is recorded
when the total inventory for a product is projected to be more
than the forecasted demand.
Income Taxes. Deferred tax assets and
liabilities are determined based on the difference between the
financial statement and the tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is
recorded when, in the opinion of management, it is more likely
than not that some or all of the deferred tax assets will not be
realized.
Litigation. At various times the Company may
have patent, product liability, consumer, commercial,
environmental and tax claims asserted against it and may be
subjected to litigation with respect to the claims. In addition,
the Company may be the subject of government investigations and
a party to other legal proceedings that arise from time to time
in the ordinary course of business (see Note 18). The
Company accrues for amounts related to these legal matters if it
is probable that a liability has been incurred and an amount is
reasonably estimable. If the estimated amount of the liability
is a range and some amount within the range appears to be a
better estimate than any other amount within the range, that
amount is accrued. When no amount within the range is a better
estimate than any other amount, the minimum amount in the range
is accrued. The Company capitalizes legal costs in the defense
of its patents to the extent there is an evident increase in the
value of the patent.
F-9
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Financial Instruments and Derivatives. The
Company does not use financial instruments for trading purposes.
On December 31, 2006 and 2005, the Company did not have any
interest rate protection agreements or other derivatives
outstanding other than utility contracts which qualify as normal
purchase and sales and derivatives associated with the
Convertible Senior Notes (see Note 13).
The fair value of financial instruments is determined by
reference to various market data or other valuation techniques
as appropriate. Unless otherwise disclosed, the fair values of
financial instruments approximate their recorded values.
Property, Plant and Equipment. Property, plant
and equipment are stated at cost. Maintenance and repairs are
expensed as incurred. Depreciation is computed over the
estimated useful lives of the related assets using the
straight-line method. The estimated useful lives are principally
15 to 40 years for buildings and improvements and three to
fifteen years for machinery and equipment.
The Company capitalizes certain computer software acquisition
and development costs incurred in connection with developing or
obtaining computer software for internal use. Capitalized
software costs are amortized over the estimated useful lives of
the software which generally range from three to seven years.
In the event that facts and circumstances indicate that the
carrying amount of property, plant and equipment may be
impaired, evaluation of recoverability is performed using the
estimated future undiscounted cash flows associated with the
asset compared to the assets carrying amount to determine
if a write-down is required. To the extent such projection
indicates that undiscounted cash flow is not expected to be
adequate to recover the carrying amount, the asset would be
written down to its fair value using discounted cash flows.
Research and Development Costs. Research and
development costs consist primarily of services performed by
third parties, and are expensed as incurred. This includes costs
to acquire in-process research and development projects for
products that have not received regulatory approval and do not
have an alternative future use. Milestone payments made to third
parties in connection with a product in development prior to its
regulatory approval are also expensed as incurred. Milestone
payments made to third parties with respect to a product on or
after its regulatory approval are capitalized and amortized over
the remaining useful life of the product. Amounts capitalized
for these payments are included in intangible assets.
Deferred Financing Costs. Financing costs
related to the $400,000 convertible senior notes are being
amortized over seven years to the first date the debt can be put
by the holders to the Company. Financing costs related to the
senior secured revolving credit facility are being amortized
over five years, the term of the facility. See Note 13 for
further discussion.
Insurance. The Company is self-insured with
respect to its healthcare benefit program. The Company pays a
fee to a third party to administer the plan. The Company has
stop loss coverage on a per employee basis as well as in the
aggregate. Self-insured costs are accrued based upon reported
claims and an estimated liability for claims incurred but not
reported.
Advertising. The Company expenses advertising
costs as incurred and these costs are classified as selling,
general and administrative expenses in the consolidated
statements of operations. Advertising costs for the years ended
December 31, 2006, 2005, and 2004 were $92,492, $85,044,
and $87,821, respectively.
Promotional Fees to Wyeth. On June 22,
2000, the Company entered into a Co-Promotion Agreement with
Wyeth to
promote Altace®
in the United States and Puerto Rico through October 29,
2008, with possible extensions as outlined in the Co-Promotion
Agreement. Under the agreement, Wyeth paid an upfront fee of
$75,000 to King, which was classified as a liability and is
being amortized over the term of the agreement. In connection
with the Co-Promotion Agreement, the Company agreed to pay Wyeth
a promotional fee based on annual net sales of
Altace®.
On July 5, 2006 the Company entered into an Amended and
Restated Co-Promotion Agreement (Amended Co-Promotion
Agreement) with Wyeth regarding
Altace®.
Effective January 1, 2007, the Company assumed full
responsibility for selling, marketing and promoting
Altace®.
F-10
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Under the Amended Co-Promotion Agreement, the Company will pay
Wyeth a reduced annual fee based on net sales of Altace. The
annual fee is accrued quarterly based on a percentage of
Altace®
net sales at a rate equal to the expected relationship of the
expected fee for the year to applicable expected
Altace®
net sales for the year. See Note 9 for further discussion.
Stock Compensation. Effective January 1,
2006, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123(R), Share-Based
Payment, which requires the recognition of the fair value
of stock-based compensation in net earnings. The Company adopted
SFAS No. 123(R) using the modified prospective
application transition method and therefore the Companys
prior period consolidated financial statements have not been
restated and do not reflect the recognition of stock-based
compensation costs. Prior to the Companys adoption of
SFAS No. 123(R), it accounted for stock options under
the disclosure-only provision of SFAS No. 123,
Accounting for Stock Based Compensation, as amended
by SFAS No. 148. Under the disclosure-only provision
of SFAS No. 123, no compensation cost was recognized
for stock options granted prior to January 1, 2006.
SFAS No. 123(R) applies to options granted or modified
on or after January 1, 2006. Additionally, compensation
costs for options that were unvested as of January 1, 2006
must be recognized over their remaining service period. See
Note 20 for further discussion.
|
|
3.
|
Concentrations
of Credit Risk
|
A significant portion of the Companys sales is to
wholesaler customers in the pharmaceutical industry. The Company
monitors the extension of credit to wholesaler customers and has
not experienced significant credit losses. The following table
represents the relative percentage of accounts receivable from
significant wholesaler customers compared to net accounts
receivable:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Customer A
|
|
|
32
|
%
|
|
|
31
|
%
|
Customer B
|
|
|
28
|
%
|
|
|
21
|
%
|
Customer C
|
|
|
10
|
%
|
|
|
15
|
%
|
The following table represents a summary of sales to significant
wholesaler customers as a percentage of the Companys gross
sales, including revenues from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Customer A
|
|
|
32
|
%
|
|
|
27
|
%
|
|
|
25
|
%
|
Customer B
|
|
|
29
|
%
|
|
|
28
|
%
|
|
|
28
|
%
|
Customer C
|
|
|
13
|
%
|
|
|
14
|
%
|
|
|
15
|
%
|
The Companys investments in marketable securities as of
the years ended December 31, 2006 and 2005, consisted of
holdings in Palatin Technologies, Inc. common stock as
summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2005
|
|
|
2005
|
|
|
December 31,
|
|
|
December 31,
|
|
|
2006
|
|
|
2006
|
|
|
December 31,
|
|
|
|
2005
|
|
|
Gross
|
|
|
Gross
|
|
|
2005
|
|
|
2006
|
|
|
Gross
|
|
|
Gross
|
|
|
2006
|
|
|
|
Cost
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Cost
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Basis
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Basis
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Palatin common stock
|
|
$
|
12,242
|
|
|
$
|
6,260
|
|
|
|
|
|
|
$
|
18,502
|
|
|
$
|
12,242
|
|
|
|
|
|
|
$
|
664
|
|
|
$
|
11,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Financial Accounting Standards Board (FASB)
issued FASB Interpretations No. 46, Consolidation of
Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51 (ARB No. 51), in
January 2003, and a further interpretation of FIN 46
in December 2003
(FIN 46-R,
and collectively FIN 46). FIN 46 clarifies the
application of ARB No. 51, Consolidated Financial
Statements, to certain entities in which equity investors
do not have the characteristics of a controlling financial
interest or do not have
F-11
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties, referred to as variable interest entities
(VIE). While the Company has or has had interests in
Novavax and Palatin, the Company is not considered the primary
beneficiary of these entities. Therefore, in accordance with the
provisions of FIN No. 46, the Company has not
consolidated the financial statements of those entities into the
Companys consolidated financial statements.
The Companys calculation of its product returns reserves
is based on historical sales and return rates over the period
during which customers have a right of return. The Company also
considers current wholesale inventory levels of the
Companys products. Based on data received pursuant to the
Companys inventory management agreements with its three
key wholesale customers, there was a significant reduction of
wholesale inventory levels of the Companys products during
the first quarter of 2005. This reduction was primarily due to
sales to retail outlets by the Companys wholesale
customers, not returns of these products to the Company. This
reduction resulted in a change in estimate during the first
quarter of 2005 that decreased the Companys reserve for
returns by approximately $20,000 and increased net sales from
branded pharmaceuticals, excluding the adjustment to sales
classified as discontinued operations, by the same amount.
During the second quarter of 2005, the Company decreased its
reserve for returns by approximately $5,000 and increased its
net sales from branded pharmaceuticals, excluding the adjustment
to sales classified as discontinued operations, by the same
amount as a result of an additional reduction in wholesale
inventory levels of the Companys branded products.
During the third quarter of 2005, the Companys actual
returns of branded pharmaceutical products continued to decrease
significantly compared to actual returns during the quarterly
periods in 2004 and the first quarter of 2005. Additionally,
based on data received pursuant to the Companys inventory
management agreements with its key wholesale customers, the
Company continued to experience normalized wholesale inventory
levels of its branded pharmaceutical products during the third
quarter of 2005. Accordingly, the Company believed that the rate
of returns experienced during the second and third quarters of
2005 was more indicative of what it should expect in future
quarters and adjusted its reserve for returns accordingly. This
change in estimate resulted in a decrease of approximately
$15,000 in the reserve for returns in the third quarter of 2005
and a corresponding increase in net sales from branded
pharmaceutical products, excluding the adjustment to sales
classified as discontinued operations. As a result of this
increase in net sales, the co-promotion expense related to net
sales of
Altace®
in the third quarter of 2005 increased by approximately $5,000.
The effect of the change in estimate on third quarter 2005
operating income was, therefore, approximately $10,000.
As a result of actual returns during the first quarter of 2006,
the estimated rate of returns used in the calculation of the
Companys returns reserve for some of the Companys
products continued to decrease. During the first quarter of
2006, the Company decreased its reserve for returns by
approximately $8,000 and increased its net sales from branded
pharmaceuticals, excluding the adjustment to sales classified as
discontinued operations, by the same amount. As a result of this
increase in net sales, the co-promotion expense related to net
sales of
Altace®
in the first quarter of 2006 increased by approximately $1,000
and royalty expense related to net sales of
Skelaxin®
increased by approximately $1,000. The effect of the change in
estimate on first quarter 2006 operating income was, therefore,
approximately $6,000.
As a result of the Companys previously disclosed
determination that it underpaid amounts due to Medicaid and
other government pricing programs from 1998 through 2002, as
further discussed in Note 18, the Company refined its
calculation of the Average Manufacturers Price
(AMP) and Best Price in compliance with federal laws
and regulations. During the third quarter of 2005, the Company
began reporting to the Centers for Medicare and Medicaid
Services using the refined calculation for computing AMP and
Best Price. In addition, during the third quarter of 2005, the
Company recalculated rebates due with respect to prior
F-12
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
quarters utilizing the refined AMP and Best Price calculations.
As a result of this updated information, during the third
quarter of 2005, the Company decreased its reserve for estimated
Medicaid and other government pricing program obligations and
increased net sales from branded pharmaceutical products by
approximately $21,000, approximately $8,000 of which related to
prior years. This does not include the adjustment to sales
classified as discontinued operations. As a result of the
increase in net sales, the co-promotion expense related to net
sales of
Altace®
increased by approximately $6,000, approximately $4,000 of which
related to prior years. The effect of this change in estimate on
operating income was, therefore, approximately $15,000,
approximately $4,000 of which related to prior years.
During the third quarter of 2006, the Company reduced its rebate
expense and increased net sales from branded pharmaceutical
products by approximately $9,300 due to the determination that a
liability established in 2005 for a government pricing program
for military dependents and retirees was no longer probable.
Receivables, net of allowance for doubtful accounts, consist of
the following:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Trade
|
|
$
|
242,522
|
|
|
$
|
204,355
|
|
Royalty
|
|
|
20,444
|
|
|
|
18,540
|
|
Other
|
|
|
2,501
|
|
|
|
686
|
|
|
|
|
|
|
|
|
|
|
Total Receivables
|
|
$
|
265,467
|
|
|
$
|
223,581
|
|
|
|
|
|
|
|
|
|
|
Inventory consists of the following:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Raw materials
|
|
$
|
141,227
|
|
|
$
|
150,979
|
|
Work-in process
|
|
|
21,857
|
|
|
|
14,955
|
|
Finished goods (including $6,813
and $6,728 of sample inventory, respectively)
|
|
|
65,967
|
|
|
|
91,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
229,051
|
|
|
|
257,629
|
|
Less inventory valuation allowance
|
|
|
(13,593
|
)
|
|
|
(29,566
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
215,458
|
|
|
$
|
228,063
|
|
|
|
|
|
|
|
|
|
|
During 2006, the Company discontinued its
Lorabid®
product. At the time of the discontinuation of the product, the
Company donated inventory of approximately $10,700 which had
been previously fully reserved. The discontinuation and donation
of the product reduced the Companys finished goods
inventory and the inventory valuation allowance during 2006 and
had no impact on the accompanying Consolidated Statements of
Income (Loss).
F-13
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
Property,
Plant and Equipment
|
Property, plant and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Land
|
|
$
|
15,855
|
|
|
$
|
15,730
|
|
Buildings and improvements
|
|
|
136,167
|
|
|
|
120,221
|
|
Machinery and equipment
|
|
|
270,373
|
|
|
|
226,859
|
|
Capital projects in progress
|
|
|
46,542
|
|
|
|
62,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
468,937
|
|
|
|
425,752
|
|
Less accumulated depreciation
|
|
|
(161,901
|
)
|
|
|
(123,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
307,036
|
|
|
$
|
302,474
|
|
|
|
|
|
|
|
|
|
|
Included in net property, plant and equipment as of
December 31, 2006 and 2005 are computer software costs of
$18,582 and $20,536, respectively.
Depreciation expense for the years ended December 31, 2006,
2005 and 2004 was $41,785, $30,736 and $31,957, respectively,
which includes, $6,815, $7,845, and $6,688, respectively,
related to computer software.
The Companys Rochester, Michigan facility manufactures
products for the Company and various third-parties. As of
December 31, 2006, the net carrying value of the property,
plant and equipment at the Rochester facility, excluding the net
carrying value associated with the
Bicillin®
production facility, was $63,525. Overall production volume at
this facility declined in recent years. The Company currently is
transferring to this facility the manufacture of certain
products that are currently manufactured by the Company at other
Company facilities or for the Company by third parties. These
transfers should increase production and cash flow at the
Rochester facility. Management currently believes that the
long-term assets associated with the Rochester facility are not
impaired based on estimated undiscounted future cash flows.
However, if production volumes decline further or if the Company
is not successful in transferring additional production to the
Rochester facility, the Company may have to write-off a portion
of the property, plant, and equipment associated with this
facility.
The net book value of some of the Companys manufacturing
facilities currently exceeds fair market value. Management
currently believes that the long-term assets associated with
these facilities are not impaired based on estimated
undiscounted future cash flows. However, if the Company were to
approve a plan to sell or close any of the facilities for which
the carrying value exceeds fair market value, the Company would
have to write off a portion of the assets or reduce the
estimated useful life of the assets which would accelerate
depreciation.
During 2006, the Company decided to proceed with the
implementation of its plan to streamline manufacturing
activities in order to improve operating efficiency and reduce
costs, including the decision to transfer the production of
Levoxyl®
from its St. Petersburg, Florida facility to its Bristol,
Tennessee facility by the end of 2008. The Company believes that
the assets associated with the St. Petersburg facility are not
currently impaired based on estimated undiscounted cash flows
associated with these assets. However, during 2006, the Company
shortened the estimated useful lives of assets at the St.
Petersburg facility and therefore accelerated the depreciation
of these assets. For additional discussion, please see
Note 24, Restructuring Activities.
|
|
9.
|
Acquisitions,
Dispositions, Co-Promotions and Alliances
|
On September 6, 2006, the Company entered into a definitive
asset purchase agreement and related agreements with Ligand
Pharmaceuticals Incorporated (Ligand) to acquire
rights to Ligands product
F-14
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Avinza®
(morphine sulfate extended release).
Avinza®
is an extended release formulation of morphine and is indicated
as a once-daily treatment for moderate to severe pain in
patients who require continuous opioid therapy for an extended
period of time. The Company completed its acquisition of
Avinza®
on February 26, 2007. Under the terms of the asset purchase
agreement the Company made a $246,313 payment to Ligand to
acquire all the rights to
Avinza®
in the United States, its territories and Canada. In addition,
the Company paid Ligand for certain product-related liabilities
and other expenses totaling $49,087 and has assumed all existing
product royalty obligations. Of the total cash payment, $15,000
is set aside in an escrow account to fund potential liabilities
under the asset purchase agreement between the companies.
As part of the transaction, the Company has agreed to pay Ligand
an ongoing royalty and assume payment of Ligands royalty
obligations to third parties. The royalty the Company will pay
to Ligand consists of a 15% royalty during the first
20 months after the closing date. Subsequent royalty
payments to Ligand will be based upon calendar year net sales of
Avinza®
as follows:
|
|
|
|
|
If calendar year net sales are less than $200,000 the royalty
payment will be 5% of all net sales.
|
|
|
|
If calendar year net sales are greater than $200,000 then the
royalty payment will be 10% of all net sales up to $250,000,
plus 15% of net sales greater than $250,000.
|
In connection with the transaction, on October 12, 2006,
the Company entered into a loan agreement with Ligand for the
amount of $37,750. The principal amount of the loan was to be
used solely for the purpose of paying a specific liability
related to
Avinza®.
The loan was subject to certain market terms, including a 9.5%
interest rate and security interest in the assets that comprise
Avinza®
and certain of the proceeds of Ligands sale of certain
assets. On January 8, 2007, Ligand repaid the principal
amount of the loan of $37,750 and accrued interest of $883. The
Company forgave the interest on the loan and repaid Ligand at
the time of closing. Accordingly, at December 31, 2006, the
Company has not recognized interest income on the note
receivable.
On June 22, 2000, the Company entered into a Co-Promotion
Agreement with Wyeth to
promote Altace®
in the United States and Puerto Rico through October 29,
2008, with possible extensions as outlined in the Co-Promotion
Agreement. Under the agreement, Wyeth paid an upfront fee of
$75,000 to King, which was classified as a liability and is
being amortized over the term of the agreement. In connection
with the Co-Promotion Agreement, the Company agreed to pay Wyeth
a promotional fee based on annual net sales of
Altace®.
On July 5, 2006 the Company entered into an Amended and
Restated Co-Promotion Agreement (Amended Co-Promotion
Agreement) with Wyeth regarding
Altace®.
Effective January 1, 2007, the Company assumed full
responsibility for selling and marketing
Altace®.
For the full 2006 year, the Wyeth sales force co-promoted
the product with King and Wyeth shared in the marketing
expenses. Under the Amended Co-Promotion Agreement, the Company
will pay Wyeth a reduced annual fee as follows:
|
|
|
|
|
For 2006, 15% of
Altace®
net sales up to $165,000, 42.5% of
Altace®
net sales in excess of $165,000 and less than or equal to
$465,000, and 52.5% of
Altace®
net sales that are in excess of $465,000 and less than or equal
to $585,000.
|
|
|
|
For 2007, 30% of
Altace®
net sales, with the fee not to exceed $178,500.
|
|
|
|
For 2008, 22.5% of
Altace®
net sales, with the fee not to exceed $134,000.
|
|
|
|
For 2009, 14.2% of
Altace®
net sales, with the fee not to exceed $84,500.
|
|
|
|
For 2010, 25% of
Altace®
net sales, with the fee not to exceed $5,000.
|
The annual fee is accrued quarterly based on a percentage of
Altace®
net sales at a rate equal to the expected relationship of the
expected fee for the year to applicable expected
Altace®
net sales for the year.
Wyeth will pay the Company a $20,000 milestone fee if a
specified
Altace®
net sales threshold is achieved in 2008.
F-15
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On March 1, 2006, the Company acquired the exclusive right
to market and sell
EpiPen®
throughout Canada and other specific assets from Allerex
Laboratory LTD. Under the terms of the agreements, the initial
purchase price was $23,924, plus acquisition costs of $682. As
an additional component of the purchase price, the Company will
pay Allerex an earn-out equal to a percentage of future sales of
EpiPen®
in Canada over a fixed period of time. As these additional
payments accrue, the Company will increase intangible assets by
the amount of the accrual. The aggregate of these payments will
not exceed $13,164.
The allocation of the initial purchase price is as follows:
|
|
|
|
|
Intangible assets
|
|
$
|
23,985
|
|
Inventory
|
|
|
618
|
|
Fixed assets
|
|
|
3
|
|
|
|
|
|
|
|
|
$
|
24,606
|
|
|
|
|
|
|
At the time of the acquisition, the intangible assets were
assigned useful lives of 9.8 years. The acquisition is
allocated to the Meridian Medical Technologies segment. The
Company financed the acquisition using available cash on hand.
On February 12, 2006, the Company entered into a
collaboration with Arrow International Limited and certain of
its affiliates, excluding Cobalt Pharmaceuticals, Inc.
(collectively, Arrow), to commercialize one or more
novel formulations of ramipril, the active ingredient in the
Companys
Altace®
product. Under a series of agreements, Arrow has granted King
rights to certain current and future New Drug Applications
regarding novel formulations of ramipril and intellectual
property, including patent rights and technology licenses
relating to these novel formulations. Arrow will have
responsibility for the manufacture and supply of the new
formulations of ramipril for King. However, under certain
conditions King may manufacture and supply the formulations of
ramipril.
Upon execution of the agreements, King made an initial payment
to Arrow of $35,000. During the fourth quarter of 2006, the
Company made an additional payment of $25,000 to Arrow. Arrow
will also receive future payments from King of $50,000 during
2007. Additionally, Arrow will earn fees for the manufacture and
supply of the new formulations of ramipril.
In connection with the agreement with Arrow, the Company
recognized the above payments and future payments of $110,000 as
in-process research and development expense during 2006. This
amount was expensed as the in-process research and development
project had not received regulatory approval and had no
alternative future use. The in-process research and development
project is part of the branded pharmaceutical segment. This
project includes a New Drug Application (NDA) filed
by Arrow for a novel formulation of ramipril in January 2006. At
the time of the acquisition, the success of the project was
dependent on additional development activities and FDA approval.
The estimated costs to complete the project at the execution of
the agreement was approximately $3,500. The FDA approved the NDA
on February 27, 2007. The Company expects to be in a
position to launch the new formulation during the fourth quarter
of 2007 or the first quarter of 2008.
On February 12, 2006, the Company entered into an agreement
with Cobalt Pharmaceuticals, Inc. (Cobalt), an
affiliate of Arrow International Limited, whereby Cobalt has the
non-exclusive right to distribute a generic formulation of the
Companys currently marketed
Altace®
product in the U.S. market, which generic product would be
supplied by King.
On December 6, 2005, the Company entered into a
co-exclusive license agreement with Mutual Pharmaceutical
Company, Inc. (Mutual). Under the terms of the
agreement, each of the parties has granted the other a worldwide
license to certain intellectual property, including patent
rights and know-how, relating to metaxalone. The intellectual
property licensed to King relates to the potential for improved
dosing and administration of metaxalone. The Company paid Mutual
an upfront payment of $35,000 and began paying royalties on net
sales of products containing metaxalone January 1, 2006.
This royalty increased in the fourth
F-16
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
quarter of 2006 due to the achievement of a certain milestone
and may continue to increase depending on the achievement of
certain regulatory and commercial milestones in the future.
In connection with the license agreement with Mutual, the
upfront payment of $35,000 has been classified as in-process
research and development in the accompanying financial
statements. The intellectual property licensed to King relates
to the potential for improved dosing and administration of
metaxalone. The value of the in-process research and development
project was expensed on the date of acquisition as it had not
received regulatory approval. The Company is in the process of
evaluating a potential new formulation of
Skelaxin®.
The success of the project will depend on additional
in vitro and in vivo work in a clinical setting. The costs
and the time-line of the potential project are being evaluated.
The in-process research and development is part of the branded
pharmaceutical segment.
During the fourth quarter of 2005, the Company entered into a
strategic alliance with Pain Therapeutics, Inc. (Pain
Therapeutics) to develop and commercialize
Remoxytm
and other abuse-deterrent opioid painkillers.
Remoxytm
is an investigational drug in late-stage clinical development by
Pain Therapeutics for the treatment of
moderate-to-severe
chronic pain. The Company paid $150,000 on entry into the
strategic alliance plus acquisition costs of approximately
$3,700 and made a milestone payment of $5,000 in July 2006. In
addition, the Company could make additional milestone payments
of up to $145,000 in cash based on the successful clinical and
regulatory development of
Remoxytm
and other abuse-deterrent opioid products. This includes a
$15,000 cash payment upon acceptance of a regulatory filing for
Remoxytm
and an additional $15,000 upon its approval. The Company is
responsible for all research and development expenses related to
this alliance, which could total $100,000. After regulatory
approval and commercialization of
Remoxytm
or other abuse-deterrent opioid products developed through this
alliance, the Company will pay a royalty of 15% of cumulative
net sales up to $1,000,000 and 20% of cumulative net sales over
$1,000,000. King is also responsible for the payment of
third-party royalty obligations of Pain Therapeutics related to
products developed under this collaboration. The Company
determined Pain Therapeutics is a variable interest entity, but
the Company is not considered to be the primary beneficiary of
this entity. Therefore, in accordance with the provisions of
FIN No. 46, the Company has not consolidated the
financial statements of this entity into the Companys
consolidated financial statements.
In connection with the strategic alliance with Pain
Therapeutics, the initial collaboration fee and acquisition
costs of $153,711 were classified as in-process research and
development in the accompanying financial statements. The value
of the in-process research and development project was expensed
on the date of acquisition as it had not received regulatory
approval and had no alternative future use.
Remoxytm
is in Phase III of clinical development. If Phase III
of clinical development is successful, the Company currently
anticipates obtaining FDA approval in 2009. The Company believes
there is a reasonable probability of completing the project
successfully. However, the success of the project depends on the
outcome of Phase III of clinical development and the
ability to successfully manufacture the product. If the project
is not successfully completed, it could have a material effect
on our cash flows and results of operations. The in-process
research and development is part of the branded pharmaceutical
segment.
On November 22, 2004, the Company sold all of its rights in
Prefest®
for approximately $15,000. On December 23, 2004, the
Company sold all of its rights in
Nordette®
for approximately $12,000. See Note 26 for additional
information related to
Prefest®
and
Nordette®.
On August 12, 2004, the Company entered into a
collaborative agreement with Palatin to jointly develop and, on
obtaining necessary regulatory approvals, commercialize
Palatins bremelanotide for the treatment of male and
female sexual dysfunction for $20,000 plus acquisition costs of
$498. Pursuant to the terms of the agreement, Palatin has
granted King a co-exclusive license with Palatin to
bremelanotide in North America and an exclusive right to
collaborate in the licensing or sublicensing of bremelanotide
with Palatin outside North America. At the time of closing King
received 1,176,125 shares of Palatin common stock and
235,225 warrants for the right to purchase Palatin common stock.
Of the total purchase price, $3,093 was allocated to
F-17
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the common stock, $260 was allocated to the warrants, and the
remaining $17,145 was allocated to in-process research and
development. During the third quarter of 2005, King invested an
additional $10,000 in Palatin under the terms of this
collaboration agreement. King received 4,499,336 shares of
common stock and 719,894 warrants for the right to purchase
Palatin Technologies, Inc. common stock. Of the total
investment, $9,149 was allocated to the common stock and $851
was allocated to the warrants. In addition to the initial
purchase price and the investment during 2005, King may pay
additional potential milestone payments to Palatin of up to
$90,000 for achieving certain development and regulatory
approval targets. A portion of these milestone payments could
consist of additional equity investments in Palatin. After
regulatory approval and commercialization of bremelanotide, King
may also pay potential milestone payments to Palatin of up to
$130,000 upon achieving specified annual North American net
sales thresholds. King and Palatin will share all collaboration
development and marketing costs associated with and
collaboration net profits derived from bremelanotide based upon
an agreed percentage.
On July 19, 2004, the Company and Novavax, Inc.
(Novavax) mutually agreed to end their co-promotion
and license agreements regarding
Estrasorbtm.
As part of this transaction, Novavax reacquired all rights to
Estrasorbtm
as well as all rights to other womens health products that
Novavax may successfully develop utilizing its micellar
nanoparticle technology. Additionally, Novavax repurchased all
of its convertible notes held by King, acquired a portion of
Kings womens health field sales force, and received
approximately $8,000 from the Company to provide support for
marketing and promotion. In return, Novavax paid King $22,000
and issued approximately 3,775,610 shares of Novavax common
stock to King. This transaction resulted in a net gain in the
amount of $4,021 during the third quarter of 2004. As a result
of this transaction, King owned approximately
4,100,931 shares of common stock of Novavax that the
Company accounted for as available for sale securities. As of
September 30, 2004, March 31, 2005 and June 30,
2005, the Company determined the decline in fair value of the
Companys equity interest in Novavax was other than
temporary and recorded charges of $6,520, $6,853 and $369,
respectively, which is reflected in loss on investment in the
accompanying consolidated financial statements. During the third
quarter of 2005, the Company sold its equity interest in Novavax
resulting in a gain on the sale of $1,040.
During 2000, 2001 and 2002, the Company acquired convertible
senior notes of $40,000 from Novavax. The Company sold all of
its Novavax convertible notes to Novavax on July 19, 2004.
During 2004, the Company increased a valuation allowance on the
convertible senior notes by $2,887. The Company determined the
amount of the valuation allowance by reference to the
June 30, 2004 quoted market price of the Novavax common
stock.
On June 30, 2004, the Company sold the
Anusol-HC®
and
Proctocort®
product lines to Salix Pharmaceuticals, Inc. (Salix)
for $13,000. In addition, the Company sold inventory of
Anusol-HC®
and
Proctocort®
to Salix for $337. The assets sold included related product
assets, intangible property, advertising and promotional
materials, and labeling and packaging materials. As part of the
transaction, the Company agreed to contract manufacture the
Anusol-HC®
and
Proctocort®
product lines for approximately two years after the closing. The
Company recorded a $4,715 gain on the sale of the
Anusol-HC®
and
Proctocort®
product lines, which is included in the gain on sale of products
in the accompanying consolidated financial statements.
On June 12, 2003, the Company acquired the primary care
business of Elan Corporation, plc (Elan) and of some
of its subsidiaries in the United States and Puerto Rico,
including the rights to
Sonata®
and
Skelaxin®
and rights pertaining to potential new formulations of these
products, together with Elans United States primary care
field sales force. In connection with this acquisition, $163,416
was placed into escrow to satisfy the deferred obligations to
Wyeth that were assumed by the Company in connection with the
acquisition. Since the Company was entitled to the interest
income and can direct investments of the escrow fund, the
Company included the escrow amount in current restricted cash
and other long-term assets as restricted cash. The $163,416
placed into escrow was included in the purchase price as
liabilities acquired. These deferred
F-18
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
obligations were payable on a quarterly basis through March
2005. During 2005 and 2004, the deferred obligation paid to
Wyeth from funds in escrow was $29,605 and $66,060, respectively.
On December 30, 2002, the Company acquired the exclusive
rights to
Synercid®
from Sanofi-Aventis. As additional consideration to
Sanofi-Aventis for
Synercid®,
the Company agreed to potential milestone payments totaling
$75,000. On December 31, 2005, December 31, 2004, and
December 31, 2003, the Company paid Sanofi-Aventis
milestone payments of $18,600, $21,200, and $10,300,
respectively, for the continued recognition of
Synercid®
as an effective treatment for vancomycin-resistant enterococcus
faecium. The remaining $25,000 milestone is payable to
Sanofi-Aventis if
Synercid®
should receive FDA approval to treat methicillin resistant
staphylococcus aureus, or King will pay Sanofi-Aventis a
one-time payment of $5,000 the first time during any
twelve-month period net sales of
Synercid®
exceed $60,000, and a one-time payment of $20,000 the first time
during any twelve-month period net sales of
Synercid®
exceed $75,000.
|
|
10.
|
Intangible
Assets and Goodwill
|
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Trademarks and product rights
|
|
$
|
1,152,433
|
|
|
$
|
371,410
|
|
|
$
|
1,174,028
|
|
|
$
|
296,801
|
|
Patents
|
|
|
272,833
|
|
|
|
202,873
|
|
|
|
261,277
|
|
|
|
171,976
|
|
Other intangibles
|
|
|
9,459
|
|
|
|
9,051
|
|
|
|
9,459
|
|
|
|
8,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
1,434,725
|
|
|
$
|
583,334
|
|
|
$
|
1,444,764
|
|
|
$
|
477,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the years ended December 31, 2006,
2005 and 2004 was $105,764, $116,313 and $130,158, respectively.
Estimated annual amortization expense for intangible assets
owned by the Company at December 31, 2006 for each of the
five succeeding fiscal years is as follows:
|
|
|
|
|
Fiscal Year Ended December 31,
|
|
Amount
|
|
|
2007
|
|
$
|
88,062
|
|
2008
|
|
|
85,402
|
|
2009
|
|
|
74,716
|
|
2010
|
|
|
69,574
|
|
2011
|
|
|
69,574
|
|
Note that the above table does not include amortization for the
Avinza®
product because the Company acquired this product in 2007.
Prescriptions for
Intal®
and
Tilade®
have not met expectations. As a result, the Company lowered its
future sales forecast for these products in the fourth quarter
of 2006 and decreased the estimated remaining useful life of the
products, which decreased the estimated undiscounted future cash
flows associated with the
Intal®
and
Tilade®
intangible assets to a level below their carrying value.
Accordingly, the Company recorded an intangible asset impairment
charge of $47,563 during the fourth quarter of 2006 to adjust
the carrying value of
Intal®
and
Tilade®
intangible assets on the Companys balance sheet to reflect
the estimated fair value of these assets. The Company determined
the fair value of the intangible assets associated with
Intal®
and
Tilade®
based on estimated discounted future cash flows.
Intal®
and
Tilade®
are included in the Companys branded pharmaceuticals
reporting segment.
New competitors to
Sonata®
entered the market during 2005. Prescriptions for
Sonata®
have not met expectations. As a result, the Company lowered its
future sales forecast for this product in both the second and
F-19
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fourth quarters of 2005, which decreased the estimated
undiscounted future cash flows associated with the
Sonata®
intangible assets to a level below their carrying values as of
those dates. Accordingly, the Company recorded intangible asset
impairment charges of $126,923 and $42,582 during the second and
fourth quarters of 2005, respectively, to adjust the carrying
value of the
Sonata®
intangible assets on the Companys balance sheet to reflect
the estimated fair value of these assets. The Company determined
the fair value of the intangible assets associated with
Sonata®
based on its estimated discounted future cash flows as of those
dates.
Sonata®
is included in the Companys branded pharmaceuticals
reporting segment.
During the third and fourth quarters of 2004, the Company
recorded intangible asset impairment charges totaling $82,081
due to the Companys decision to discontinue the clinical
program to develop a modified-release formulation of
Sonata®.
These impairment charges were based on the estimated fair values
of the expected cash flows of the intangible asset at the
balance sheet dates.
As a result of a continuing decline in
Corzide®
prescriptions and the anticipation of additional competition in
the future, the Company lowered its future sales forecast for
this product which decreased the estimated undiscounted future
cash flows associated with the
Corzide®
intangible assets to a level below their carrying value.
Accordingly, the Company recorded an intangible asset impairment
charge of $43,243 during the fourth quarter of 2005 to adjust
the carrying value of the
Corzide®
intangible assets on the Companys balance sheet to reflect
the estimated fair value of these assets. The Company determined
the fair value of the intangible assets associated with
Corzide®
based on its estimated discounted future cash flows.
Corzide®
is included in the Companys branded pharmaceuticals
reporting segment.
As a result of a continuing decline in end-user demand for
Synercid®
outside of the United States, the Company determined the
estimated undiscounted future cash flows associated with sales
of this product outside of the United States were at a level
below their carrying value of the
Synercid®
intangible assets that are assigned to the markets for this drug
outside of the United States. Accordingly, the Company recorded
an intangible asset impairment charge of $8,306 during the
fourth quarter of 2005 to adjust the carrying value of these
Synercid®
intangible assets on the Companys balance sheet to reflect
the estimated fair value of these assets. The Company determined
the fair value of the intangible assets associated with the
markets for
Synercid®
outside the United States based on their estimated discounted
future cash flows.
Synercid®
is included in the Companys branded pharmaceuticals
reporting segment.
The Rochester, Michigan facility manufactures several products
for the Company, including
Aplisol®
and
Coly-Mycin®.
The products that are manufactured at this facility are
considered one asset group and evaluated for impairment
together. The Company reviewed the Rochester intangible assets
for impairment under SFAS No. 144. Based on that
review, the Company determined that the Rochester intangible
assets were impaired and recorded an impairment charge of
$17,492 during the third quarter of 2004. The Rochester
intangible assets are part of the branded pharmaceutical segment.
During the first quarter of 2004, the Company recorded
intangible asset impairment charges totaling $34,936 primarily
due to a greater than anticipated decline in prescriptions for
Florinef®
and
Tapazole®
as a result of the availability of generics for these products.
The Company determined the fair value of the intangible assets
associated with
Florinef®
and
Tapazole®
based on managements discounted cash flow projections for
these products.
Florinef®
and
Tapazole®
are included in the Companys branded pharmaceuticals
reporting segment.
The Company reviewed the
Lorabid®
intangible assets for impairment under SFAS No. 144.
Based on that review, the Company determined that the
Lorabid®
intangible assets were impaired and recorded an impairment
charge of $4,400 in the third quarter of 2004 to write down the
assets to their estimated fair value.
Lorabid®
is included in the Companys branded pharmaceutical
reporting segment.
During the third quarter of 2004, the Company incurred
intangible asset impairment charges totaling $10,711, that were
related to certain of the Companys smallest branded
pharmaceutical products. The
F-20
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
impairment charges related to the branded pharmaceutical
products were primarily the result of declining prescriptions.
All of the affected intangible assets were part of the branded
pharmaceuticals segment.
Demand for some of the Companys non-key products,
including but not limited to
Synercid®,
declined over the past year at a rate which triggered a review
of the intangible assets associated with these products. As of
December 31, 2006, the net intangible assets associated
with
Synercid®
totals approximately $85,868. The Company believes that these
intangible assets are not currently impaired based on estimated
undiscounted cash flows associated with these assets. However,
if demand for the products associated with these intangible
assets declines below current expectations, the Company may have
to reduce the estimated remaining useful life
and/or write
off a portion or all of these intangible assets.
Goodwill at December 31, 2006, 2005 and 2004 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded
|
|
|
Meridian
|
|
|
|
|
|
|
Segment
|
|
|
Segment
|
|
|
Total
|
|
|
Goodwill at December 31, 2006
|
|
$
|
12,742
|
|
|
$
|
108,410
|
|
|
$
|
121,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill at December 31, 2005
|
|
$
|
12,742
|
|
|
$
|
108,410
|
|
|
$
|
121,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill at December 31, 2004
|
|
$
|
12,742
|
|
|
$
|
108,410
|
|
|
$
|
121,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company leases certain office and manufacturing equipment
and automobiles under non-cancelable operating leases with terms
from one to five years. Estimated future minimum lease payments
as of December 31, 2006 for leases with initial or
remaining terms in excess of one year are as follows:
|
|
|
|
|
2007
|
|
$
|
17,786
|
|
2008
|
|
|
16,470
|
|
2009
|
|
|
16,483
|
|
2010
|
|
|
16,231
|
|
2011
|
|
|
16,669
|
|
Thereafter
|
|
|
19,751
|
|
Lease expense for the years ended December 31, 2006, 2005
and 2004 was approximately $12,610, $12,085 and $12,982,
respectively.
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Rebates (see Note 18)
|
|
$
|
105,620
|
|
|
$
|
172,740
|
|
Accrued co-promotion fees
|
|
|
60,191
|
|
|
|
78,772
|
|
Elan settlement (see Note 18)
|
|
|
50,128
|
|
|
|
|
|
Arrow accrual (see Note 9)
|
|
|
50,000
|
|
|
|
|
|
Product returns
|
|
|
42,001
|
|
|
|
50,902
|
|
Chargebacks
|
|
|
13,939
|
|
|
|
13,153
|
|
Medicaid settlement
|
|
|
28
|
|
|
|
65,000
|
|
Other
|
|
|
188,230
|
|
|
|
139,053
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
510,137
|
|
|
$
|
519,620
|
|
|
|
|
|
|
|
|
|
|
F-21
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Convertible senior notes(a)
|
|
$
|
400,000
|
|
|
$
|
|
|
Convertible debentures(b)
|
|
|
|
|
|
|
345,000
|
|
Senior secured revolving credit
facility(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
400,000
|
|
|
|
345,000
|
|
|
|
|
|
|
|
|
|
|
Less current portion
|
|
|
|
|
|
|
345,000
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
400,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
During the first quarter of 2006, the Company issued $400,000 of
11/4% Convertible
Senior Notes due April 1, 2026 (Notes). The
Notes are unsecured obligations and are guaranteed by each of
the Companys domestic subsidiaries on a joint and several
basis. The Notes accrue interest at an initial rate of
11/4%.
Beginning with the six-month interest period that commences on
April 1, 2013, the Company will pay additional interest
during any six-month interest period if the average trading
price of the Notes during the five consecutive trading days
ending on the second trading day immediately preceding the first
day of such six-month period equals 120% or more of the
principal amount of the Notes. Interest is payable on
April 1 and October 1 of each year, beginning
October 1, 2006. |
|
|
|
On or after April 5, 2013, the Company may redeem for cash
some or all of the Notes at any time at a price equal to 100% of
the principal amount of the Notes to be redeemed, plus any
accrued and unpaid interest, and liquidated damages, if any, to
but excluding the date fixed for redemption. Holders may require
the Company to purchase for cash some or all of their Notes on
April 1, 2013, April 1, 2016 and April 1, 2021,
or upon the occurrence of a fundamental change (such as a change
of control or a termination of trading), at 100% of the
principal amount of the Notes to be purchased, plus any accrued
and unpaid interest, and liquidated damages, if any, to but
excluding the purchase date. |
|
|
|
Prior to April 1, 2012, the Notes are convertible under the
following circumstances: |
|
|
|
if the price of the Companys common stock
reaches a specified threshold during specified periods,
|
|
|
|
if the Notes have been called for redemption, or
|
|
|
|
if specified corporate transactions or other
specified events occur.
|
|
|
|
The Notes are convertible at any time on and after April 1,
2012, until the close of business on the business day
immediately preceding maturity. Subject to certain exceptions,
the Company will deliver cash and shares of the Companys
common stock, as follows: (i) an amount in cash equal to
the lesser of (a) the principal amount of Notes surrendered
for conversion and (b) the product of the conversion rate
and the average price of the Companys common stock (the
conversion value), and (ii) if the conversion
value is greater than the principal amount, a specified amount
in cash or shares of the Companys common stock, at the
Companys election. The initial conversion price is
approximately $20.83 per share of common stock. If certain
corporate transactions occur on or prior to April 1, 2013,
the Company will increase the conversion rate in certain
circumstances. |
|
|
|
The Company has reserved 23,732,724 shares of common stock
in the event the Notes are converted into shares of the
Companys common stock. |
|
|
|
In connection with the issuance of the Notes, the Company
incurred approximately $10,680 of deferred financing costs that
are being amortized over seven years. |
F-22
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(b) |
|
During the fourth quarter of 2001, the Company issued $345,000
of
23/4% Convertible
Debentures due November 15, 2021 (Debentures).
On March 29, 2006, the Company repurchased $165,000 of the
Debentures prior to maturity for $163,350, resulting in a gain
of $1,650. In addition, the Company wrote off deferred financing
costs of $628 relating to the repurchased Debentures. On
June 2, 2006, the Company completed a tender offer,
repurchasing $175,743 of the Debentures at a purchase price of
$175,084, resulting in a gain of $659. In addition, the Company
wrote off financing costs of $1,053 relating to the repurchased
Debentures. On May 16, 2006, the interest rate on the
Debentures was reset to 3.5%. On November 20, 2006 the
Company redeemed the remaining Debentures of $4,257 at a price
of 100% of the principal amount plus accrued interest. |
|
(c) |
|
On April 23, 2002, the Company established a $400,000
five-year Senior Secured Revolving Credit Facility which matures
in April 2007. The facility has been collateralized in general
by all real estate with a value of $5,000 or more and all
personal property of the Company and its significant
subsidiaries. The Companys obligations under the Senior
Secured Revolving Credit Facility are unconditionally guaranteed
on a senior basis by significant subsidiaries. The Senior
Secured Revolving Credit Facility accrues interest at the
Companys option, at either (a) the base rate (which
is based on the greater of (1) the prime rate or
(2) the federal funds rate plus one-half of 1%) plus an
applicable spread ranging from 0.0% to 0.75% (based on a
leverage ratio) or (b) the applicable LIBOR rate plus an
applicable spread ranging from 1.0% to 1.75% (based on a
leverage ratio). In addition, the lenders under the Senior
Secured Revolving Credit Facility are entitled to customary
facility fees based on (a) unused commitments under the
Senior Secured Revolving Credit Facility and (b) letters of
credit outstanding. As of December 31, 2006, the Company
had $1,043 of letters of credit outstanding under this facility. |
|
|
|
To establish the Senior Secured Revolving Credit Facility, the
Company incurred $5,067 of deferred financing costs that are
being amortized over five years, the life of the Senior Secured
Revolving Credit Facility. |
|
|
|
The Senior Secured Revolving Credit Facility requires the
Company to maintain a minimum net worth of no less than
$1.2 billion plus 50% of the Companys consolidated
net income for each fiscal quarter after April 23, 2002,
excluding any fiscal quarter for which consolidated income is
negative; an EBITDA to interest expense ratio of no less than
3.00 to 1.00; and a funded debt to EBITDA ratio of no greater
than 3.50 to 1.00 prior to April 24, 2004 and of no greater
than 3.00 to 1.00 on or after April 24, 2004. As of
December 31, 2006, the Company has complied with these
covenants. |
F-23
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amortization expense related to deferred financing costs was
$2,874, $3,096 and $3,145 for 2006, 2005 and 2004, respectively,
and is included in interest expense.
For the years ended December 31, 2006, 2005 and 2004, the
Company capitalized interest of approximately $1,243, $1,720,
and $1,185, respectively, related to construction in process.
Accrued interest as of December 31, 2006 and 2005 was $1,236 and
$1,212, respectively.
Other liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Deferred revenue from co-promotion
revenue fees
|
|
$
|
14,038
|
|
|
$
|
16,512
|
|
Non-qualified deferred compensation
|
|
|
2,392
|
|
|
|
338
|
|
Other
|
|
|
6,699
|
|
|
|
3,510
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,129
|
|
|
$
|
20,360
|
|
|
|
|
|
|
|
|
|
|
|
|
15.
|
Financial
Instruments
|
The following disclosures of the estimated fair values of
financial instruments are made in accordance with the
requirements of SFAS No. 107, Disclosures About
Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Company using
available market information and appropriate valuation
methodologies.
Cash and Cash Equivalents, Accounts Receivable and Accounts
Payable. The carrying amounts of these items are
a reasonable estimate of their fair values.
Marketable Securities and Investments in Debt
Securities. The fair value of marketable
securities and investments in debt securities are based
primarily on quoted market prices. If quoted market prices are
not readily available, fair values are based on quoted market
prices of comparable instruments.
Long-Term Debt. The fair value of the
Companys long-term debt, including the current portion, at
December 31, 2006 and 2005 is estimated to be approximately
$391,496 and $336,592, respectively, using quoted market price.
The net income tax expense (benefit) from continuing operations
is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
169,130
|
|
|
$
|
124,799
|
|
|
$
|
3,152
|
|
State
|
|
|
4,575
|
|
|
|
5,076
|
|
|
|
6,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
$
|
173,705
|
|
|
$
|
129,875
|
|
|
$
|
9,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(36,281
|
)
|
|
$
|
(72,458
|
)
|
|
$
|
(17,780
|
)
|
State
|
|
|
(1,694
|
)
|
|
|
4,068
|
|
|
|
676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
$
|
(37,975
|
)
|
|
$
|
(68,390
|
)
|
|
$
|
(17,104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense (benefit)
|
|
$
|
135,730
|
|
|
$
|
61,485
|
|
|
$
|
(7,412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of the difference between the federal statutory
tax rate and the effective income tax rate as a percentage of
income from continuing operations before income taxes is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Federal statutory tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes, net of federal
benefit
|
|
|
0.7
|
|
|
|
5.1
|
|
|
|
(12.4
|
)
|
Charitable donations
|
|
|
(0.9
|
)
|
|
|
(5.4
|
)
|
|
|
25.4
|
|
Domestic Manufacturing Deduction
|
|
|
(1.2
|
)
|
|
|
(1.6
|
)
|
|
|
|
|
Tax-exempt interest income
|
|
|
(2.0
|
)
|
|
|
(2.2
|
)
|
|
|
0.8
|
|
Fines and penalties
|
|
|
|
|
|
|
|
|
|
|
(39.3
|
)
|
Other
|
|
|
0.4
|
|
|
|
3.6
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
32.0
|
%
|
|
|
34.5
|
%
|
|
|
12.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities
are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Accrued expenses and reserves
|
|
$
|
83,723
|
|
|
$
|
82,837
|
|
Net operating losses
|
|
|
3,048
|
|
|
|
3,340
|
|
Intangible assets
|
|
|
275,798
|
|
|
|
262,227
|
|
Charitable contribution carryover
|
|
|
22,274
|
|
|
|
35,210
|
|
Other
|
|
|
10,596
|
|
|
|
2,701
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
395,439
|
|
|
|
386,315
|
|
Valuation allowance
|
|
|
(8,085
|
)
|
|
|
(9,214
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
387,354
|
|
|
|
377,101
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
(26,755
|
)
|
|
|
(33,538
|
)
|
Other
|
|
|
(7,054
|
)
|
|
|
(30,754
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(33,809
|
)
|
|
|
(64,292
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
353,545
|
|
|
$
|
312,809
|
|
|
|
|
|
|
|
|
|
|
The Company has $3,103 of foreign operating and capital loss
carryforwards which may be carried forward indefinitely; a
valuation allowance has been provided as it is more likely than
not that the deferred tax assets relating to those loss
carryforwards will not be fully realized. The Company also has
state net operating loss carryforwards of $68,828, which will
expire between 2012 and 2020. Additionally, a valuation
allowance has been provided against certain state deferred tax
assets where it is more likely than not that the deferred tax
asset will not be fully realized.
The Company sponsors a defined contribution employee retirement
savings 401(k) plan that covers all employees over 21 years
of age. The plan allows for employees contributions, which
are matched by the Company up to a specific amount under
provisions of the plan. Company contributions during the years
ended December 31, 2006, 2005 and 2004 were $5,904, $4,953,
and $4,858, respectively. The plan also provides for
discretionary profit-sharing contributions by the Company. There
were no discretionary profit-sharing contributions during the
years ended December 31, 2006, 2005 and 2004.
F-25
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
18.
|
Commitments
and Contingencies
|
Fen/Phen
Litigation
Many distributors, marketers and manufacturers of anorexigenic
drugs have been subject to claims relating to the use of these
drugs. Generally, the lawsuits allege that the defendants
(1) misled users of the products with respect to the
dangers associated with them, (2) failed to adequately test
the products and (3) knew or should have known about the
negative effects of the drugs, and should have informed the
public about the risks of such negative effects. Claims include
product liability, breach of warranty, misrepresentation and
negligence. The actions have been filed in various state and
federal jurisdictions throughout the United States. A
multi-district litigation (MDL) court has been
established in Philadelphia, Pennsylvania, In re
Fen-Phen Litigation. The plaintiffs seek, among other
things, compensatory and punitive damages
and/or
court-supervised medical monitoring of persons who have ingested
these products.
The Companys wholly-owned subsidiary, King Pharmaceuticals
Research and Development, Inc. (King Research and
Development), is a defendant in approximately 115
multi-plaintiff (1,536 plaintiffs) lawsuits involving the
manufacture and sale of dexfenfluramine, fenfluramine and
phentermine. These lawsuits have been filed in various
jurisdictions throughout the United States and in each of these
lawsuits King Research and Development, as the successor to
Jones Pharma, Incorporated (Jones), is one of many
defendants, including manufacturers and other distributors of
these drugs. Although Jones did not at any time manufacture
dexfenfluramine, fenfluramine, or phentermine, Jones was a
distributor of a generic phentermine product and, after its
acquisition of Abana Pharmaceuticals, was a distributor of
Obenix®,
Abanas branded phentermine product. The manufacturer of
the phentermine purchased by Jones has filed for bankruptcy
protection and is no longer in business. The plaintiffs in these
cases, in addition to the claims described above, claim injury
as a result of ingesting a combination of these weight-loss
drugs and are seeking compensatory and punitive damages as well
as medical care and court-supervised medical monitoring. The
plaintiffs claim liability based on a variety of theories,
including, but not limited to, product liability, strict
liability, negligence, breach of warranty, fraud and
misrepresentation.
King Research and Development denies any liability incident to
Jones distribution and sale of
Obenix®
or Jones generic phentermine product. King Research and
Developments insurance carriers are currently defending
King Research and Development in these lawsuits. The
manufacturers of fenfluramine and dexfenfluramine have settled
many of these cases. As a result of these settlements, King
Research and Development has routinely received voluntarily
dismissals without the payment of settlement proceeds. In the
event that King Research and Developments insurance
coverage is inadequate to satisfy any resulting liability, King
Research and Development will have to assume defense of these
lawsuits and be responsible for the damages, if any, that are
awarded against it.
While the Company cannot predict the outcome of these lawsuits,
management believes that the claims against King Research and
Development are without merit and intends to vigorously pursue
all defenses available. The Company is unable to disclose an
aggregate dollar amount of damages claimed because many of these
complaints are multi-party suits and do not state specific
damage amounts. Rather, these claims typically state damages as
may be determined by the court or similar language and state no
specific amount of damages against King Research and
Development. Consequently, the Company cannot reasonably
estimate possible losses related to the lawsuits.
In addition, the Company is one of many defendants in six
multi-plaintiff lawsuits that claim damages for personal injury
arising from its production of the anorexigenic drug phentermine
under contract for GlaxoSmithKline. While the Company cannot
predict the outcome of these suits, the Company believes that
the claims against it are without merit and the Company intends
to vigorously pursue all defenses available to it. The Company
is being indemnified in the six lawsuits by GlaxoSmithKline, for
which the Company manufactured the anorexigenic product,
provided that neither the lawsuits nor the associated
liabilities are
F-26
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
based upon the Companys independent negligence or
intentional acts. The Company intends to submit a claim for any
unreimbursed costs to its product liability insurance carrier.
However, in the event that GlaxoSmithKline is unable to satisfy
or fulfill its obligations under the indemnity, the Company
would have to assume defense of the lawsuits and be responsible
for damages, if any, that are awarded against it or for amounts
in excess of the Companys product liability coverage. A
reasonable estimate of possible losses related to these suits
cannot be made.
Thimerosal/Childrens
Vaccine Related Litigation
The Company and Parkedale Pharmaceuticals, Inc., a wholly-owned
subsidiary of the Company, are named as defendants in lawsuits
filed in California, Mississippi and Illinois (Madison County),
along with other pharmaceutical companies. The first of these
suits was filed in November 2001. Most of the defendants
manufactured or sold the mercury-based preservative thimerosal
or manufactured or sold childrens vaccines containing
thimerosal. The Company did not manufacture thimerosal or
manufacture or sell a childrens vaccine that contained
thimerosal. For two years the Company did manufacture and sell
an influenza vaccine that contained thimerosal. None of the
plaintiffs has alleged taking our influenza vaccine.
In these cases, the plaintiffs have attempted to link the
receipt of mercury-based products to neurological defects in
children. The plaintiffs claim unfair business practices,
fraudulent misrepresentations, negligent misrepresentations,
product liability, Proposition 65 violations, breach of implied
warranty, and claims premised on the allegation that the
defendants promoted products without any reference to the toxic
hazards and potential public health ramifications resulting from
the mercury-containing preservative. The plaintiffs also allege
that the defendants knew of the dangerous propensities of
thimerosal in their products.
The Company has given its product liability insurance carrier
proper notice of all of these matters and defense counsel is
vigorously defending the Companys interests. The Company
has filed motions to dismiss based on the Federal Vaccine Act
and lack of product identification. The Company was voluntarily
dismissed in Mississippi due, among other things, to lack of
product identification in the plaintiffs complaints. The
Company was voluntarily dismissed in both cases filed in
Chicago, Illinois. The California Proposition 65 claims were
dismissed in the California Trial Court. This dismissal was
affirmed in the California Court of Appeals and no further
appeals were filed. Subsequent Proposition 65 claims were
dismissed. The remaining California claims have been stayed
pending compliance with the processes and procedures of the
Federal Vaccine Act. Management believes that the claims against
the Company are without merit and the Company intends to defend
these lawsuits vigorously, but the Company is unable currently
to predict the outcome or to reasonably estimate the range of
potential loss, if any.
Hormone
Replacement Therapy
Currently, the Company is named as a defendant by 21 plaintiffs
in lawsuits involving the manufacture and sale of hormone
replacement therapy drugs. The first of these lawsuits was filed
in July 2004. Numerous pharmaceutical companies have also been
sued. The Company was sued by approximately 800 plaintiffs, but
most of those claims were voluntarily dismissed or dismissed by
the Court for lack of product identification. These remaining 21
lawsuits were filed in Alabama, Arkansas, Missouri,
Pennsylvania, Ohio, Florida, Maryland, Mississippi and
Minnesota. A federal multidistrict litigation court
(MDL) has been established in Little Rock, Arkansas,
In re: Prempro Products Liability Litigation, and all of
the plaintiffs claims have been transferred and are
pending in that Court except for one lawsuit pending in
Philadelphia, Pennsylvania State Court. Many of these plaintiffs
allege that the Company and other defendants failed to conduct
adequate research and testing before the sale of the products
and post-sale monitoring to establish the safety and efficacy of
the long-term hormone therapy regimen and, as a result, misled
consumers when marketing their products. Plaintiffs also allege
negligence, strict liability, design defect, breach of implied
warranty, breach of express warranty, fraud and
misrepresentation. Discovery of the plaintiffs claims
against the Company has
F-27
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
begun but is limited to document discovery. No trial has
occurred in the hormone replacement therapy litigation against
the Company or any other defendant except Wyeth. The first five
trials against Wyeth have resulted in one mistrial for juror
misconduct, two verdicts for Wyeth in the MDL and two
plantiffs verdicts for $1,500 and $3,000 in Philadelphia
State Court. The Company does not expect to have any trials set
in 2007. The Company intends to defend these lawsuits vigorously
but is currently unable to predict the outcome or to reasonably
estimate the range of potential loss, if any. The Company may
have limited insurance for these claims.
Average
Wholesale Price Litigation
In August 2004, King and Monarch Pharmaceuticals, Inc.
(Monarch), a wholly-owned subsidiary of King, were
named as defendants along with 44 other pharmaceutical
manufacturers in an action brought by the City of New York
(NYC) in federal court in the state of New York. NYC
claims that the defendants fraudulently inflated their average
wholesale prices (AWP) and fraudulently failed to
accurately report their best prices and their
average manufacturers prices and failed to pay proper
rebates pursuant to federal law. Additional claims allege
violations of federal and New York statutes, fraud and unjust
enrichment. For the period from 1992 to the present, NYC is
requesting money damages, civil penalties, declaratory and
injunctive relief, restitution, disgorgement of profits, and
treble and punitive damages. The United States District Court
for the District of Massachusetts has been established as the
MDL court for the case, In re: Pharmaceutical Industry
Average Wholesale Pricing Litigation.
Since the filing of the New York City case, forty seven New York
counties have filed lawsuits against the pharmaceutical
industry, including the Company and Monarch. All of these
lawsuits are currently pending in the MDL Court in the District
of Massachusetts. Motions to remand were filed in Erie, Oswego
and Schenectady after they were removed from the New York State
Courts. The allegations in all of these cases are virtually the
same as the allegations in the New York City case. Motions to
dismiss have been filed by all defendants in all New York City
and County cases pending in the MDL except for Oswego and
Schenectady. The Erie motion to dismiss was granted in part and
denied in part by the state court before removal. The MDL Court
has not ruled on any of the motions to dismiss or motions to
remand pending in the remaining cases.
In January 2005, the State of Alabama filed a lawsuit in State
Court against 79 defendants including the Company and Monarch.
The four causes of action center on the allegation that all
defendants fraudulently inflated AWPs of their products. A
motion to dismiss was filed and denied by the court, but the
Court did require an amended complaint to be filed. The Company
filed an answer and counter-claim for return of rebates overpaid
to the State. Alabama filed a motion to dismiss the
counter-claim which was granted. The Company perfected its
appeal of that ruling.
In October 2005, the State of Mississippi filed a lawsuit in
State Court against the Company, Monarch and eighty-four other
defendants and alleged fourteen causes of action. Many of those
causes of action allege that all defendants fraudulently
inflated the AWPs and wholesale acquisition costs
(WACs) of their products. A Motion to Dismiss the
criminal statute counts and a Motion For More Definite Statement
were granted. Mississippi was required to file an amended
complaint and in doing so dismissed the Company and Monarch from
the lawsuit without prejudice. These claims could be refiled.
A co-defendant removed the Alabama and Mississippi cases to
Federal Court on October 11, 2006. The Alabama case was
remanded to state court on November 2, 2006. These two
cases are in early stages of discovery. The relief sought in
both of these cases is similar to the relief sought in the New
York City lawsuit. The Company does not expect any trials to be
set in 2007. The Company intends to defend all of the AWP
lawsuits vigorously but is currently unable to predict the
outcome or reasonably estimate the range of potential loss, if
any.
F-28
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Settlement
of Governmental Pricing Investigation
On October 31, 2005, the Company entered into (i) a
definitive settlement agreement with the United States of
America, acting through the United States Department of Justice
and the United States Attorneys Office for the Eastern
District of Pennsylvania and on behalf of the Office of
Inspector General of the United States Department of Health and
Human Services (HHS/OIG) and the Department of
Veterans Affairs, to resolve the governmental investigations
related to the Companys underpayment of rebates owed to
Medicaid and other governmental pricing programs during the
period from 1994 to 2002 (the Federal Settlement
Agreement), and (ii) similar settlement agreements
with 48 states and the District of Columbia (collectively,
the 2005 State Settlement Agreements).
On March 6, 2006, the Company entered into a definitive
settlement agreement with the remaining state on substantially
the same terms as the other state settlements (this most recent
state settlement, the Federal Settlement Agreement and the 2005
State Settlement Agreements are collectively referred to as the
Settlement Agreements). Consummation of the Federal
Settlement Agreement and some state Settlement Agreements was
subject to court approval, which was granted by the United
States District Court for the Eastern District of Pennsylvania
(District Court) during the first quarter of 2006.
During the first quarter of 2006, the Company paid approximately
$129,268, comprising (i) all amounts due under each of the
Settlement Agreements and (ii) all the Companys
obligations to reimburse other parties for expenses related to
the settlement, including the previously disclosed legal fees of
approximately $787 and the previously disclosed settlement costs
of approximately $950.
The individual purportedly acting as a relator under
the False Claims Act has appealed certain decisions of the
District Court denying the relators request to be
compensated out of the approximately $31,000 that was paid by
the Company to those states that do not have legislation
providing for a relators share. The purported
relator has asserted for the first time on appeal that the
Company should be responsible for making such a payment to this
individual. The Company believes that this claim against it is
without merit and does not expect the result of the appeal to
have a material effect on it.
In addition to the Settlement Agreements, on October 31,
2005, the Company entered into a five-year corporate integrity
agreement with HHS/OIG (the Corporate Integrity
Agreement) pursuant to which the Company is required,
among other things, to keep in place the Companys current
compliance program, to provide periodic reports to HHS/OIG and
to submit to audits relating to the Companys Medicaid
rebate calculations.
The previously disclosed claim seeking damages from the Company
because of alleged retaliatory actions against the relator was
dismissed with prejudice on January 31, 2006.
The Settlement Agreements do not resolve any of the previously
disclosed civil suits that are pending against the Company and
related individuals and entities discussed in the section
Securities Litigation below.
SEC
Investigation
As previously reported, the Securities and Exchange Commission
(SEC) has also been conducting an investigation
relating to the Companys underpayments to governmental
programs, as well as into the Companys previously
disclosed errors relating to reserves for product returns. While
the SECs investigation is continuing with respect to the
product returns issue, the Staff of the SEC has advised the
Company that it has determined not to recommend enforcement
action against the Company with respect to the aforementioned
governmental pricing matter. The Staff of the SEC notified the
Company of this determination pursuant to the final paragraph of
Securities Act Release 5310. Although the SEC could still
consider charges against individuals in connection with the
governmental pricing matter, the Company does not believe that
any governmental unit with authority to assert criminal charges
is considering any charges of that kind.
F-29
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company continues to cooperate with the SECs ongoing
investigation. Based on all information currently available to
it, the Company does not anticipate that the results of the
SECs ongoing investigation will have a material adverse
effect on King, including by virtue of any obligations to
indemnify current or former officers and directors.
Securities
Litigation
Subsequent to the announcement of the SEC investigation
described above, beginning in March 2003, 22 purported
class action complaints were filed by holders of the
Companys securities against the Company, its directors,
former directors, executive officers, former executive officers,
a Company subsidiary, and a former director of the subsidiary in
the United States District Court for the Eastern District of
Tennessee, alleging violations of the Securities Act of 1933
and/or the
Securities Exchange Act of 1934, in connection with the
Companys underpayment of rebates owed to Medicaid and
other governmental pricing programs, and certain transactions
between the Company and the Benevolent Fund, a nonprofit
organization affiliated with certain former members of the
Companys senior management. These 22 complaints have been
consolidated in the United States District Court for the Eastern
District of Tennessee. In addition, holders of the
Companys securities filed two class action complaints
alleging violations of the Securities Act of 1933 in Tennessee
state court. The Company removed these two cases to the United
States District Court for the Eastern District of Tennessee,
where these two cases were consolidated with the other class
actions. The district court has appointed lead plaintiffs in the
consolidated action, and those lead plaintiffs filed a
consolidated amended complaint on October 21, 2003 alleging
that King, through some of its executive officers, former
executive officers, directors, and former directors, made false
or misleading statements concerning its business, financial
condition, and results of operations during periods beginning
February 16, 1999 and continuing until March 10, 2003.
Plaintiffs in the consolidated action also named the
underwriters of Kings November 2001 public offering as
defendants. The Company and other defendants filed motions to
dismiss the consolidated amended complaint.
On August 12, 2004, the United States District Court for
the Eastern District of Tennessee ruled on defendants
motions to dismiss. The Court dismissed all claims as to Jones
and as to defendants Dennis Jones and Henry Richards. The Court
also dismissed certain claims as to five other individual
defendants. The Court denied the motions to dismiss in all other
respects. Following the Courts ruling, on
September 20, 2004, the Company and the other remaining
defendants filed answers to plaintiffs consolidated
amended complaint.
In November 2005, the parties agreed to submit the matter to
non-binding mediation. After an extensive mediation process, an
agreement in principle to settle the litigation was reached on
April 26, 2006. On July 31, 2006, the parties entered
into a stipulation of settlement and a supplemental agreement
(together, the Settlement Agreement) to resolve the
litigation. On January 9, 2007, the Court granted final
approval of the Settlement Agreement. The Settlement Agreement
provides for a settlement amount of $38,250.
The Company previously estimated a probable loss contingency of
$38,250 for the class action lawsuit described above. The
Company believes all but an immaterial portion of this loss
contingency will be paid on behalf of the Company by its
insurance carriers. Accordingly, the Company previously recorded
a liability and a receivable for this amount, which are
classified in accrued expenses and prepaid and other current
assets, respectively, in the accompanying consolidated financial
statements.
Beginning in March 2003, four purported shareholder derivative
complaints were also filed in Tennessee state court alleging a
breach of fiduciary duty, among other things, by some of the
Companys current and former officers and directors, with
respect to the same events at issue in the federal securities
litigation described above. These cases have been consolidated,
and on October 11, 2006, plaintiffs voluntarily dismissed
claims against Brian Markison and Elizabeth Greetham. Discovery
with respect to the remaining claims in the case has commenced.
No trial date has been set.
F-30
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Beginning in March 2003, three purported shareholder derivative
complaints were likewise filed in Tennessee federal court,
asserting claims similar to those alleged in the state
derivative litigation. These cases have been consolidated, and
on December 2, 2003 plaintiffs filed a consolidated amended
complaint. On March 9, 2004, the court entered an order
indefinitely staying these cases in favor of the state
derivative action.
During the third quarter of 2006, the Company recorded an
anticipated insurance recovery of legal fees in the amount of
$6,750 for the class action and derivative suits described
above. In November of 2006, the Company received payment for the
recovery of these legal fees.
The Company is currently unable to predict the outcome or
reasonably estimate the range of potential loss, if any, except
as noted above, in the pending litigation. If the Company were
not to prevail in the pending litigation, which it cannot
predict or reasonably estimate at this time, its business,
financial condition, results of operations and cash flows could
be materially adversely affected.
Other
Legal Proceedings
Elan Corporation, plc (Elan) was working to develop
a modified release formulation of
Sonata®,
which the Company refers to as
Sonata® MR,
pursuant to an agreement the Company had with Elan which the
Company refers to as the
Sonata® MR
Development Agreement. In early 2005, the Company advised Elan
that it considered the
Sonata® MR
Development Agreement terminated for failure to satisfy the
target product profile required by the Company. Elan disputed
the termination and initiated an arbitration proceeding. During
December of 2006, the arbitration panel reached a decision in
favor of Elan and ordered the Company to pay Elan certain
milestone payments and other research and development related
expenses of approximately $49,800, plus interest from the date
of the decision. The Company recorded approximately $45,100 in
2006 and had previously recorded $5,000 in 2004, related to this
arbitration. These charges were classified in selling, general
and administrative expenses in the accompanying Consolidated
Statements of Income (Loss). In January 2007, the Company paid
Elan approximately $50,100, which included interest of
approximately $300.
Cobalt Pharmaceuticals, Inc. (Cobalt), a generic
drug manufacturer located in Mississauga, Ontario, Canada, filed
an Abbreviated New Drug Application (ANDA) with the
U.S. Food and Drug Administration (the FDA)
seeking permission to market a generic version of
Altace®.
The following U.S. patents are listed for
Altace®
in the FDAs Approved Drug Products With Therapeutic
Equivalence Evaluations (the Orange Book):
United States Patent No. 5,061,722 (the 722
patent), a composition of matter patent and United States
Patent No. 5,403,856 (the 856 patent), a
method-of-use
patent, with expiration dates of October 2008 and April 2012,
respectively. Under the federal Hatch-Waxman Act of 1984, any
generic manufacturer may file an ANDA with a certification (a
Paragraph IV certification) challenging the
validity or infringement of a patent listed in the FDAs
Orange Book four years after the pioneer company obtains
approval of its New Drug Application (NDA). Cobalt
filed a Paragraph IV certification alleging invalidity of
the 722 patent, and Aventis Pharma Deutschland GmbH
(Aventis) and the Company filed suit on
March 14, 2003 in the District Court for the District of
Massachusetts to enforce its rights under that patent. Pursuant
to the Hatch-Waxman Act, the filing of that suit provided the
Company an automatic stay of FDA approval of Cobalts ANDA
for 30 months (unless the patents are held invalid,
unenforceable, or not infringed) from no earlier than
February 5, 2003. That
30-month
stay expired in August 2005 and on October 24, 2005, the
FDA granted final approval of Cobalts ANDA. In March 2004,
Cobalt stipulated to infringement of the 722 patent.
Subsequent to filing its original complaint, the Company amended
its complaint to add an allegation of infringement of the
856 patent. The 856 patent covers one of
Altace®s
three indications for use. In response to the amended complaint,
Cobalt informed the FDA that it no longer seeks approval to
market its proposed product for the indication covered by the
856 patent. On this basis, the court granted Cobalt
summary judgment of
F-31
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
non-infringement
of the 856 patent. The courts decision does not
affect Cobalts infringement of the 722 patent. The
parties submitted a joint stipulation of dismissal on
April 4, 2006, and the Court granted dismissal.
The Company has received a request for information from the
U.S. Federal Trade Commission (FTC) in
connection with the dismissal without prejudice of the
Companys patent infringement litigation against Cobalt
under the Hatch-Waxman Act of 1984. The Company is cooperating
with the FTC in this investigation.
Lupin Ltd. (Lupin) filed an ANDA with the FDA
seeking permission to market a generic version of
Altace®
(Lupins ANDA). In addition to its ANDA, Lupin
filed a Paragraph IV certification challenging the validity
and infringement of the 722 patent, and seeking to market
its generic version of
Altace®
before expiration of the 722 patent. In July 2005, the
Company filed civil actions for infringement of the 722
patent against Lupin in the U.S. District Courts for the
District of Maryland and the Eastern District of Virginia.
Pursuant to the Hatch-Waxman Act, the filing of the lawsuit
against Lupin provides the Company with an automatic stay of FDA
approval of Lupins ANDA for up to 30 months (unless
the patents are held invalid, unenforceable, or not infringed)
from no earlier than June 8, 2005. On February 1,
2006, the Maryland and Virginia cases were consolidated into a
single action in the Eastern District of Virginia. On
June 5, 2006, the Court granted King summary judgment and
found Lupin to infringe the 722 patent. On June 14,
2006, during the trial, the Court dismissed Lupins
unenforceability claims as a matter of law, finding the
722 patent enforceable. On July 18, 2006, the Court
upheld the validity of the 722 patent. Lupin filed a
notice of appeal on July 19, 2006. Pursuant to the current
schedule, an appellate briefing will be completed by
March 12, 2007.
The Company intends to vigorously enforce its rights under the
722 and 856 patents. If a generic version of
Altace®
enters the market, the Companys business, financial
condition, results of operations and cash flows could be
materially adversely affected. As of December 31, 2006, the
Company had net intangible assets related to
Altace®
of $223,516. If a generic version of
Altace®
enters the market, the Company may have to write off a portion
or all of the intangible assets associated with this product.
Eon Labs, Inc. (Eon Labs), CorePharma, LLC
(CorePharma) and Mutual Pharmaceutical Co., Inc.
(Mutual) have each filed an ANDA with the FDA
seeking permission to market a generic version of
Skelaxin®
400 mg tablets. Additionally, Eon Labs ANDA seeks
permission to market a generic version of
Skelaxin®
800 mg tablets. United States Patent Nos. 6,407,128 (the
128 patent) and 6,683,102 (the 102
patent), two
method-of-use
patents relating to
Skelaxin®,
are listed in the FDAs Orange Book and do not expire until
December 3, 2021. Eon Labs and CorePharma have each filed
Paragraph IV certifications against the 128 and
102 patents and are alleging noninfringement, invalidity
and unenforceability of those patents. Mutual has filed a
Paragraph IV certification against the 102 patent
alleging noninfringement and invalidity of that patent. A patent
infringement suit was filed against Eon Labs on January 2,
2003 in the District Court for the Eastern District of New York;
against CorePharma on March 7, 2003 in the District Court
for the District of New Jersey (subsequently transferred to the
District Court for the Eastern District of New York); and
against Mutual on March 12, 2004 in the District Court for
the Eastern District of Pennsylvania concerning their proposed
400 mg products. Additionally, the Company filed a separate
suit against Eon Labs on December 17, 2004 in the District
Court for the Eastern District of New York, concerning its
proposed 800 mg product. Pursuant to the Hatch-Waxman Act,
the filing of the suit against CorePharma provided the Company
with an automatic stay of FDA approval of CorePharmas ANDA
for 30 months (unless the patents are held invalid,
unenforceable, or not infringed) from no earlier than
January 24, 2003. That
30-month
stay expired in July 2005. Also pursuant to the Hatch-Waxman
Act, the filing of the suits against Eon Labs provided the
Company with an automatic stay of FDA approval of Eon Labs
ANDA for its proposed 400 mg and 800 mg products for
30 months (unless the patents are held invalid,
unenforceable, or not infringed) from no earlier than
November 18, 2002 and November 3, 2004, respectively.
The 30-month
stay of FDA approval for Eon Labs ANDA for its proposed
400 mg product expired in May 2005. On May 17, 2006,
the District Court for the Eastern District of Pennsylvania
placed the Mutual case on the Civil Suspense Calendar pending
F-32
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the outcome of the FDA activity described below. On
June 16, 2006, the District Court for the Eastern District
of New York consolidated the Eon Labs cases with the CorePharma
case. The Company intends to vigorously enforce its rights under
the 128 and 102 patents to the full extent of the
law.
On March 9, 2004, the Company received a copy of a letter
from the FDA to all ANDA applicants for
Skelaxin®
stating that the use listed in the FDAs Orange Book for
the 128 patent may be deleted from the ANDA
applicants product labeling. The Company believes that
this decision is arbitrary, capricious, and inconsistent with
the FDAs previous position on this issue. The Company
filed a Citizen Petition on March 18, 2004 (supplemented on
April 15, 2004 and on July 21, 2004), requesting the
FDA to rescind that letter, require generic applicants to submit
Paragraph IV certifications for the 128 patent, and
prohibit the removal of information corresponding to the use
listed in the Orange Book. King concurrently filed a Petition
for Stay of Action requesting the FDA to stay approval of any
generic metaxalone products until the FDA has fully evaluated
the Companys Citizen Petition.
On March 12, 2004, the FDA sent a letter to the Company
explaining that Kings proposed labeling revision for
Skelaxin®,
which includes references to additional clinical studies
relating to food, age, and gender effects, was approvable and
only required certain formatting changes. On April 5, 2004,
the Company submitted amended labeling text that incorporated
those changes. On April 5, 2004, Mutual filed a Petition
for Stay of Action requesting the FDA to stay approval of the
Companys proposed labeling revision until the FDA has
fully evaluated and ruled upon the Companys Citizen
Petition, as well as all comments submitted in response to that
petition. The Company, CorePharma and Mutual have filed
responses and supplements to their pending Citizen Petitions and
responses. On December 8, 2005, Mutual filed another
supplement with the FDA in which it withdrew its prior Petition
for Stay, supplement, and opposition to Kings Citizen
Petition. On November 24, 2006, the FDA approved the
revision to the
Skelaxin®
labeling. In February 2007, the Company filed another
supplement to the companys Citizen Petition to reflect FDA
approval of the revision to the
Skelaxin®
labeling.
If the Companys Amended Citizen Petition is rejected,
there is a substantial likelihood that a generic version of
Skelaxin®
will enter the market, and the Companys business,
financial condition, results of operations and cash flows could
be materially adversely affected. As of December 31, 2006,
the Company had net intangible assets related to
Skelaxin®
of $154,836. If demand for
Skelaxin®
declines below current expectations, the Company may have to
write off a portion or all of these intangible assets.
The Company has entered into an agreement with a generic
pharmaceutical company to launch an authorized generic version
of
Skelaxin®
in the event the Company faces generic competition for
Skelaxin®.
However, the Company cannot provide any assurance regarding the
extent to which this strategy will be successful, if at all.
Sicor Pharmaceuticals, Inc. (Sicor Pharma), a
generic drug manufacturer located in Irvine California, filed an
ANDA with the FDA seeking permission to market a generic version
of
Adenoscan®.
U.S. Patent No. 5,070,877 (the 877
patent), a
method-of-use
patent with an expiration date of May 2009, is assigned to King
and listed in the FDAs Orange Book entry for
Adenoscan®.
Astellas Pharma US, Inc. (Astellas) is the exclusive
licensee of certain rights under the 877 patent and has
marketed
Adenoscan®
in the U.S. since 1995. A substantial portion of the
Companys revenues from its royalties segment is derived
from Astellas based on its net sales of
Adenoscan®.
Sicor Pharma has filed a Paragraph IV certification
alleging invalidity of the 877 patent and non-infringement
of certain claims of the 877 patent. King and Astellas
filed suit against Sicor Pharma and its parents/affiliates
Sicor, Inc., Teva Pharmaceuticals USA, Inc. (Teva)
and Teva Pharmaceutical Industries, Ltd., on May 26, 2005,
in the United States District Court for the District of Delaware
to enforce their rights under the 877 patent. Pursuant to
the Hatch-Waxman Act, the filing of that suit provides the
Company an automatic stay of FDA approval of Sicor Pharmas
ANDA for 30 months (unless the patents are held invalid,
unenforceable, or not infringed) from no earlier than
April 16, 2005. On May 16, 2006, Sicor Pharma
stipulated to infringement of the asserted claims of the
877 patent. Trial in this
F-33
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
action began on February 12, 2007. The Company intends to
vigorously enforce its rights under the 877 patent. Sicor
is also involved in litigation with Item Development AB
regarding U.S. Patent No. 5,731,296, a
method-of-use
patent with an expiration date of March 2015, which is also
listed in the Orange Book for
Adenoscan®.
If a generic version of
Adenoscan®
enters the market or competitive products enter the market, the
Companys business, financial condition, results of
operations and cash flows could be materially adversely affected.
Teva filed an ANDA with the FDA seeking permission to market a
generic version of
Sonata®.
In addition to its ANDA, Teva filed a Paragraph IV
certification challenging the enforceability of U.S. Patent
4,626,538 (the 538 patent) listed in the
Orange Book, a composition of matter patent which expires in
June 2008. In August 2005, King filed suit against Teva in the
United States District Court for the District of New Jersey to
enforce its rights under the 538 patent. Pursuant to the
Hatch-Waxman Act, the filing of that suit provides the Company
an automatic stay of FDA approval of Tevas ANDA for
30 months (unless the patents are held invalid,
unenforceable, or not infringed) from no earlier than
June 21, 2005. On September 25, 2006, the parties
filed a stipulation with the Court in which Teva admitted
infringement of the 538 patent. In October 2006, Teva
filed a summary judgment motion on the grounds that the
538 patent is unenforceable due to breach in the
common ownership requirement for terminally disclaimed patents.
The Company filed its opposition brief in November 2006. Oral
argument was heard on January 10, 2007, and the Court
subsequently denied Tevas summary judgment motion. The
Company intends to vigorously enforce its rights under the
538 patent. As of December 31, 2006, the Company had
zero net intangible assets related to
Sonata®.
If a generic form of
Sonata®
enters the market, the Companys business, financial
condition, results of operations and cash flows could be
materially adversely affected.
In addition to the matters discussed above, the Company is
involved in various other legal proceedings incident to the
ordinary course of its business. The Company does not believe
that unfavorable outcomes as a result of these other legal
proceedings would have a material adverse effect on its
financial position, results of operations and cash flows.
Other
Commitments and Contingencies
The following summarizes the Companys unconditional
purchase obligations at December 31, 2006:
|
|
|
|
|
2007
|
|
$
|
238,796
|
|
2008
|
|
|
104,150
|
|
2009
|
|
|
29,327
|
|
2010
|
|
|
14,853
|
|
2011
|
|
|
13,426
|
|
Thereafter
|
|
|
45,432
|
|
|
|
|
|
|
Total
|
|
$
|
445,984
|
|
|
|
|
|
|
The unconditional purchase obligations of the Company are
primarily related to minimum purchase requirements under
contracts with suppliers to purchase raw materials and finished
goods related to the Companys branded pharmaceutical
products and commitments associated with research and
development projects.
The Company has a supply agreement with a third party to produce
ramipril, the active ingredient in
Altace®.
This supply agreement requires the Company to purchase certain
minimum levels of ramipril as long as the Company maintains
market exclusivity on
Altace®
in the United States, and thereafter the parties must negotiate
in good faith the annual minimum purchase quantities. If the
Company is unable to maintain market exclusivity for
Altace®
in accordance with current expectations
and/or if
the Companys product life cycle management is not
successful, the Company may incur losses in connection with the
purchase commitments
F-34
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
under the supply agreement. In the event the Company incurs
losses in connection with the purchase commitments under the
supply agreement, there may be a material adverse effect upon
the Companys results of operations and cash flows.
The Company had a supply agreement with Eli Lilly to produce
Lorabid®
which required the Company to purchase certain minimum levels of
inventory of
Lorabid®
through September 1, 2005. Based on changes in estimated
prescription trends, the Company anticipated the minimum
purchase commitments under the supply agreement would be greater
than that which the Company would be able to sell to its
customers. As a result, the Company recorded income of $482
during 2005 and a charge of $4,483 during 2004, related to the
liability associated with the amount of its purchase commitments
in excess of expected demand.
The Company orders metaxalone, the active ingredient in
Skelaxin®,
from two suppliers. If sales of
Skelaxin®
are not consistent with current forecasts, the Company could
incur losses in connection with purchase commitments of
metaxalone, which could have a material adverse effect upon the
Companys results of operations and cash flows.
The Companys business is classified into five reportable
segments: branded pharmaceuticals, Meridian Medical
Technologies, royalties, contract manufacturing and all other.
Branded pharmaceuticals include a variety of branded
prescription products that are separately categorized into four
therapeutic areas, including cardiovascular/metabolic,
neuroscience, hospital/acute care, and other. These branded
prescription products are aggregated because of the similarity
in regulatory environment, manufacturing processes, methods of
distribution, and types of customer. Meridian develops,
manufactures, and sells to both commercial and government
markets pharmaceutical products that are administered with an
auto-injector. The principal source of revenues in the
commercial market is the
EpiPen®
product, an epinephrine filled auto-injector, which is primarily
prescribed for the treatment of severe allergic reactions and
which is primarily marketed, distributed and sold by Dey, L.P.
Government revenues are principally derived from the sale of
nerve agent antidotes and other emergency medicine auto-injector
products marketed to the U.S. Department of Defense and
other federal, state and local agencies, particularly those
involved in homeland security, as well as to approved foreign
governments. Contract manufacturing primarily includes
pharmaceutical manufacturing services the Company provides to
third-party pharmaceutical and biotechnology companies.
Royalties include revenues the Company derives from
pharmaceutical products after the Company has transferred the
manufacturing or marketing rights to third parties in exchange
for licensing fees or royalty payments.
The Company primarily evaluates its segments based on segment
profit. Reportable segments were separately identified based on
revenues, segment profit (excluding depreciation, amortization
and impairments) and total assets. Revenues among the segments
are presented in the individual segments and removed through
eliminations in the information below. Substantially all of the
eliminations relate to sales from the contract manufacturing
segment to the branded pharmaceuticals segment. The
Companys revenues are substantially all derived from
activities within the United States and Puerto Rico. The
Companys assets are substantially all located within the
United States and Puerto Rico.
F-35
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following represents selected information for the
Companys reportable segments for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$
|
1,724,701
|
|
|
$
|
1,542,124
|
|
|
$
|
1,076,517
|
|
Meridian Medical Technologies
|
|
|
164,760
|
|
|
|
129,261
|
|
|
|
123,329
|
|
Royalties
|
|
|
80,357
|
|
|
|
78,128
|
|
|
|
78,474
|
|
Contract manufacturing(1)
|
|
|
555,362
|
|
|
|
601,404
|
|
|
|
505,537
|
|
All other
|
|
|
2,181
|
|
|
|
1,201
|
|
|
|
(1
|
)
|
Eliminations(1)
|
|
|
(538,861
|
)
|
|
|
(579,237
|
)
|
|
|
(479,492
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total revenues
|
|
$
|
1,988,500
|
|
|
$
|
1,772,881
|
|
|
$
|
1,304,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$
|
1,407,024
|
|
|
$
|
1,319,200
|
|
|
$
|
824,949
|
|
Meridian Medical Technologies
|
|
|
90,185
|
|
|
|
66,303
|
|
|
|
64,033
|
|
Royalties
|
|
|
70,609
|
|
|
|
69,125
|
|
|
|
67,596
|
|
Contract manufacturing
|
|
|
(1,135
|
)
|
|
|
(4,888
|
)
|
|
|
(5,162
|
)
|
All other
|
|
|
2,009
|
|
|
|
156
|
|
|
|
10
|
|
Other operating costs and expenses
|
|
|
(1,166,146
|
)
|
|
|
(1,269,817
|
)
|
|
|
(992,690
|
)
|
Other income (expense)
|
|
|
21,766
|
|
|
|
(1,964
|
)
|
|
|
(16,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before tax
|
|
$
|
424,312
|
|
|
$
|
178,115
|
|
|
$
|
(58,034
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$
|
2,988,925
|
|
|
$
|
2,654,782
|
|
Meridian Medical Technologies
|
|
|
294,455
|
|
|
|
261,956
|
|
Royalties
|
|
|
21,626
|
|
|
|
20,444
|
|
Contract manufacturing
|
|
|
24,525
|
|
|
|
26,840
|
|
All other
|
|
|
|
|
|
|
1,220
|
|
|
|
|
|
|
|
|
|
|
Consolidated total assets
|
|
$
|
3,329,531
|
|
|
$
|
2,965,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Contract manufacturing revenues include $538,861, $579,237 and
$479,492 of intercompany sales for the years ended
December 31, 2006, 2005 and 2004, respectively. |
F-36
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following represents branded pharmaceutical revenues by
therapeutic area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular/metabolic
|
|
$
|
829,166
|
|
|
$
|
749,352
|
|
|
$
|
494,785
|
|
Neuroscience
|
|
|
500,982
|
|
|
|
427,767
|
|
|
|
298,928
|
|
Hospital/acute care
|
|
|
337,912
|
|
|
|
314,192
|
|
|
|
246,822
|
|
Other
|
|
|
56,641
|
|
|
|
50,813
|
|
|
|
35,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated branded
pharmaceutical revenues
|
|
$
|
1,724,701
|
|
|
$
|
1,542,124
|
|
|
$
|
1,076,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures of $45,816, $53,290 and $55,141 for the
years ended December 31, 2006, 2005 and 2004, respectively,
are substantially related to the branded pharmaceuticals and
contract manufacturing segments.
|
|
20.
|
Stock-Based
Compensation
|
Effective January 1, 2006, the Company adopted Statement of
Financial Accounting Standards (SFAS)
No. 123(R), Share-Based Payment, which requires
the recognition of the fair value of stock-based compensation in
net earnings. The Company adopted SFAS No. 123(R)
using the modified prospective application transition method and
therefore the Companys prior period condensed consolidated
financial statements have not been restated and do not reflect
the recognition of stock-based compensation costs. The Company
elected to use the alternative short cut method described in
FASB Staff Position 123(R)-3, Transition Election Related
to Accounting for Tax Effects of Share-Based Payment
Awards, for determining the pool of available paid in
capital against which any future tax benefit deficiencies
arising from the exercise of options may be offset.
For the year ended 2006, the Company incurred $21,130 of
compensation costs and $6,610 of income tax benefits related to
the Companys stock-based compensation arrangements, which
together reduced both basic and diluted income per common share
by $0.06. In addition, the Company recognized compensation
expense of $3,588 in 2006 as a result of a review of historical
equity-based
compensation grants. For further discussion, please see
Review of Historical
Equity-Based
Compensation Grants below. Prior to the Companys
adoption of SFAS No. 123(R), it accounted for stock
options under the disclosure-only provision of
SFAS No. 123, Accounting for Stock Based
Compensation, as amended by SFAS No. 148. Under
the disclosure-only provision of SFAS No. 123, no
compensation cost was recognized for stock options granted prior
to January 1, 2006. SFAS No. 123(R) applies to
options granted or modified on or after January 1, 2006.
Additionally, compensation costs for options that were unvested
as of January 1, 2006 must be recognized over their
remaining service period.
Prior to the Companys adoption of
SFAS No. 123(R), benefits of tax deductions in excess
of recognized compensation costs were reported as operating cash
flows. SFAS No. 123(R) requires excess tax benefits be
reported as a financing cash inflow rather than as a reduction
of taxes paid. During 2006, tax benefits in excess of recognized
compensation costs associated with stock option exercises were
$484 and are reflected as cash inflows from financing activities.
F-37
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For the year ended 2005 and 2004, had compensation costs for the
Companys stock compensation plans been recognized for
options granted, consistent with SFAS No. 123, the
Companys net income, basic income per common share and
diluted income per common share would include adjustments for
the following pro forma amounts:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
117,833
|
|
|
$
|
(160,288
|
)
|
Add: Stock based employee
compensation included in net income
|
|
|
1,220
|
|
|
|
|
|
Less: Stock based employee
compensation for all awards
|
|
|
7,942
|
|
|
|
5,943
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
111,111
|
|
|
$
|
(166,231
|
)
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
0.49
|
|
|
$
|
(0.66
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
0.46
|
|
|
$
|
(0.69
|
)
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
0.49
|
|
|
$
|
(0.66
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
0.46
|
|
|
$
|
(0.69
|
)
|
|
|
|
|
|
|
|
|
|
The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option pricing model.
Restricted
Stock Awards, Restricted Stock Units and Long-Term Performance
Unit Awards
Under its Incentive Plan the Company has granted Restricted
Stock Awards (RSAs) and Long-Term Performance Unit
Awards (LPUs) to certain employees and has granted
Restricted Stock Units (RSUs) to its non-employee
directors.
RSAs are grants of shares of common stock restricted from sale
or transfer for a period of time, generally three years from
grant, but may be restricted over other designated periods as
determined by the Companys Board of Directors or a
committee of the Board.
RSUs represent the right to receive a share of common stock at
the expiration of a restriction period, generally three years
from grant, but may be restricted over other designated periods
as determined by the Companys Board of Directors or a
committee of the Board. The RSUs granted to non-employee
directors under the current Compensation Policy for Non-Employee
Directors have a restriction period that generally ends one year
after grant.
The fair value of RSAs and RSUs is based upon the market price
of the underlying common stock as of the date of grant.
Compensation expense is recognized on a straight-line basis,
including an estimate for forfeitures, over the vesting period.
LPUs are rights to receive common stock of the Company in which
the number of shares ultimately received depends on the
Companys performance over time. The Company has granted
LPUs with two different performance criteria. LPUs were granted
with a one-year performance cycle, followed by a two-year
restriction period, at the end of which shares of common stock
will be earned based on 2006 operating targets. LPUs were also
granted based on a three-year performance cycle, at the end of
which shares of common stock will be earned based on
market-related performance targets over the years 2006 through
2008. At the end of the applicable performance period, the
number of shares of common stock awarded is determined by
adjusting upward or downward from the performance target in a
range between 0% and 200%. The final performance
F-38
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
percentage on which the number of shares of common stock issued
is based, considering performance metrics established for the
performance period, will be determined by the Companys
Board of Directors or a committee of the Board at its sole
discretion.
The fair value of LPUs with a one-year performance cycle is
based upon the market price of the underlying common stock as of
the date of grant. At each reporting period, compensation
expense is recognized based on the most probable performance
outcome, including an estimate for forfeitures, on a
straight-line basis over the vesting period. Total compensation
expense for each award is based on the actual number of shares
of common stock that vest multiplied by market price of the
common stock as of the date of grant.
The fair value of LPUs with a three-year performance cycle is
based on long-term market-based performance targets using a
Monte Carlo simulation model which considers the likelihood of
all possible outcomes and determines the number of shares
expected to vest under each simulation and the expected stock
price at that level. The fair value on grant date of the LPU is
recognized over the required service period and will not change
regardless of the Companys actual performance versus the
long-term market-based performance targets.
The following activity has occurred under the Companys
existing plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Restricted Stock
Awards:
|
|
|
|
|
|
|
|
|
Nonvested balance at
December 31, 2005
|
|
|
687,775
|
|
|
$
|
15.55
|
|
Granted
|
|
|
229,155
|
|
|
|
18.82
|
|
Vested
|
|
|
(48,878
|
)
|
|
|
15.64
|
|
Forfeited
|
|
|
(48,810
|
)
|
|
|
16.33
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance at
December 31, 2006
|
|
|
819,242
|
|
|
$
|
16.46
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
Units:
|
|
|
|
|
|
|
|
|
Nonvested balance at
December 31, 2005
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
50,918
|
|
|
|
17.27
|
|
Vested
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(5,750
|
)
|
|
|
17.39
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance at
December 31, 2006
|
|
|
45,168
|
|
|
$
|
17.26
|
|
|
|
|
|
|
|
|
|
|
Long-Term Performance Unit
Awards (one year performance cycle):
|
|
|
|
|
|
|
|
|
Nonvested balance at
December 31, 2005
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
1,040,180
|
|
|
|
19.68
|
|
Vested
|
|
|
(5,568
|
)
|
|
|
19.68
|
|
Forfeited
|
|
|
(29,612
|
)
|
|
|
19.68
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance at
December 31, 2006
|
|
|
1,005,000
|
|
|
$
|
19.68
|
|
|
|
|
|
|
|
|
|
|
F-39
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Long-Term Performance Unit
Awards (three year performance cycle):
|
|
|
|
|
|
|
|
|
Nonvested balance at
December 31, 2005
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
105,156
|
|
|
|
29.93
|
|
Vested
|
|
|
(1,016
|
)
|
|
|
29.93
|
|
Forfeited
|
|
|
(6,544
|
)
|
|
|
29.93
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance at
December 31, 2006
|
|
|
97,596
|
|
|
$
|
29.93
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, there was $8,130 of total
unrecognized compensation costs related to RSAs which the
Company expects to recognize over a weighted average period of
1.66 years. The expense recognized over the service period
includes an estimate of awards that will be forfeited.
Previously, the Company recorded the effect of forfeitures as
they occurred. The cumulative effect of changing from recording
forfeitures related to restricted stock awards as they occurred
to estimating forfeitures during the service period was
immaterial. As of December 31, 2006, there was $312 of
total unrecognized compensation costs related to RSUs which the
Company expects to recognize over a weighted average period of
0.36 years. As of December 31, 2006, there was $16,621
of total unrecognized compensation costs related to LPUs which
the Company expects to recognize over a weighted average period
of 2.00 years. As of December 31, 2005, there were no
outstanding RSUs or LPUs.
Stock
Options
The Company has granted nonqualified and incentive stock options
to its officers, employees and directors under its stock option
plans. In connection with the plans, options to purchase common
stock of the Company are granted at option prices not less than
the fair market value of the common stock at the date of grant
and either vest immediately or ratably over a designated period,
generally one-third on each of the first three anniversaries of
the grant date. Compensation expense is recognized on a
straight-line basis, including an estimate for forfeitures, over
the vesting period.
The fair value of each option award is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Expected volatility
|
|
|
52.4
|
%
|
|
|
46.52
|
%
|
|
|
47.26
|
%
|
Expected term (in years)
|
|
|
6
|
|
|
|
4
|
|
|
|
4
|
|
Risk-free interest rate
|
|
|
4.64
|
%
|
|
|
4.24
|
%
|
|
|
2.83
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
For the year ended December 31, 2006, the Company utilized
the short-cut method to estimate the expected term
for stock options granted. Stock options granted prior to 2004
did not have similar vesting characteristics as those granted in
the most recent periods and generally vested at the date of
grant. The stock options granted after January 1, 2004
generally vest in thirds on each of the first three
anniversaries of the grant date. As a result, the data required
to estimate the post-vesting exercise behavior was not
sufficient to calculate a historical estimate. The short-cut
method allows the Company to estimate the expected term using
the average of the contractual term and the vesting period. The
expected volatility is determined based on the historical
volatility of King common stock over the expected term. The
risk-free rate is based on the U.S. Treasury rate for the
expected term at the date of grant.
F-40
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of option activity under the plans for 2006 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Term (Years)
|
|
|
Value
|
|
|
Outstanding options,
December 31, 2005,
|
|
|
7,073,966
|
|
|
$
|
18.83
|
|
|
|
7.65
|
|
|
$
|
8,106
|
|
Granted
|
|
|
362,965
|
|
|
|
19.27
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(477,728
|
)
|
|
|
15.61
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(532,788
|
)
|
|
|
24.07
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(140,288
|
)
|
|
|
16.01
|
|
|
|
|
|
|
|
|
|
Outstanding options,
December 31, 2006
|
|
|
6,286,127
|
|
|
$
|
18.72
|
|
|
|
6.79
|
|
|
$
|
5,453
|
|
Exercisable, December 31, 2006
|
|
|
4,082,076
|
|
|
$
|
19.94
|
|
|
|
5.96
|
|
|
$
|
4,345
|
|
Expected to vest,
December 31, 2006
|
|
|
2,034,339
|
|
|
$
|
16.47
|
|
|
|
8.32
|
|
|
$
|
1,023
|
|
As of December 31, 2006, there was $8,319 of total
unrecognized compensation costs related to stock options. These
costs are expected to be recognized over a weighted average
period of 1.13 years.
Cash received from stock option exercises for 2006 was $7,338.
The income tax benefits from stock option exercises totaled $412
for 2006.
During the year ended December 31, the following activity
occurred under the Companys plans which cover stock
options, RSAs and LPUs:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Total intrinsic value of stock
options exercised
|
|
$
|
1,220
|
|
|
$
|
372
|
|
Total fair value of RSAs vested
|
|
$
|
900
|
|
|
$
|
50
|
|
Total fair value of LPUs vested
|
|
$
|
111
|
|
|
$
|
|
|
As of December 31, 2006, an aggregate of
33,237,571 shares were available for future grant under the
Companys stock plans. Awards that expire or are cancelled
without delivery of shares generally become available for
issuance under the King Pharmaceuticals, Inc. Incentive Plan.
Review
of Historical Equity-Based Compensation Grants
In light of widespread coverage in the media and elsewhere
concerning the backdating of stock options and similar issues at
other public companies, the Audit Committee of the
Companys Board of Directors conducted a voluntary review
of the Companys practices with respect to granting
equity-based compensation. The Audit Committees review was
conducted with the assistance of outside counsel and has been
completed. The Audit Committee concluded that there was no fraud
or manipulation of financial results with the intent to mislead
investors, however, the review uncovered immaterial errors
associated with option grants. Management concurs with these
conclusions.
The Audit Committee found that for a grant of options made to
substantially all Company employees other than the Chief
Executive Officer during the fourth quarter of 2000, the Company
used an incorrect measurement date in preparing its financial
statements. The Company has accounted for this grant by
recognizing $3,082 in non-cash compensation expense based on the
difference in share price between the grant date and the correct
measurement date, which was twelve days later.
The Audit Committee also found that in late 2000 and early 2001
four newly hired employees received grants of options on
favorable dates within a brief window around their respective
dates of hire. These grants were made twenty-seven, eleven,
seven and three days from the employees date of hire,
respectively. The Company has accounted for these grants by
treating each employees date of hire as the measurement
date for the grant and
F-41
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
recognizing non-cash compensation expense based on the
difference in share price between the two dates. The Company has
recognized non-cash compensation expense associated with these
grants in the following amounts: (i) $148 for a grant to
former Vice Chairman Richard Williams; (ii) $221 for a
grant to former Chief Financial Officer James Lattanzi;
(iii) $3 for a grant to current Corporate Compliance
Officer Frederick Brouillette; and (iv) $18 for a grant to
a current employee who has never served as an executive officer
or director of the Company. With the exception of the options
granted to Mr. Williams, none of these options have been
exercised.
The Audit Committee also identified procedural flaws in numerous
additional grants of options to Company personnel. The Company
has recognized in the aggregate $116 in non-cash compensation
expense for these grants.
Based on the Audit Committees findings, the Company has
recognized aggregate non-cash compensation expense of $3,588
during 2006 to correct immaterial understatements of
compensation expense of: $3,166 in 2000, $304 in 2001, $111 in
2002, $1 in 2003, $2 in 2005 and $4 in 2006. The cumulative
charge was recorded in the third quarter of 2006 because the
amount of the stock option compensation expense attributable to
the prior periods was not material to any previously reported
historical period, was not material to the three- or nine-month
period ended September 30, 2006 and is not material to the
fiscal year ended December 31, 2006.
Preferred
Shares
The Company is authorized to issue 15 million shares of
blank-check preferred stock, the terms and
conditions of which will be determined by the Board of
Directors. As of December 31, 2006 and 2005, there were no
shares issued or outstanding.
Accumulated
Other Comprehensive Income
Accumulated other comprehensive income consists of the following
components:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Net unrealized (losses) gains on
marketable securities, net of tax
|
|
$
|
(438
|
)
|
|
$
|
4,629
|
|
Foreign currency translation
|
|
|
156
|
|
|
|
358
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(282
|
)
|
|
$
|
4,987
|
|
|
|
|
|
|
|
|
|
|
|
|
22.
|
Income
per Common Share
|
The basic and diluted income per common share was determined
based on the following share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Basic income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
242,196,414
|
|
|
|
241,751,128
|
|
|
|
241,475,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
242,196,414
|
|
|
|
241,751,128
|
|
|
|
241,475,058
|
|
Effect of stock options
|
|
|
304,004
|
|
|
|
152,252
|
|
|
|
|
|
Effect of dilutive share awards
|
|
|
298,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
242,798,993
|
|
|
|
241,903,380
|
|
|
|
241,475,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 2006, the weighted average shares
that were anti-dilutive, and therefore excluded from the
calculation of diluted income per share included options to
purchase 5,621,470 shares of common stock, 2,573 RSAs and
111,990 LPUs. The
11/4% Convertible
Senior Notes due April 1, 2026 could be converted into
common stock in the future, subject to certain contingencies
(See Note 13). These notes are anti-
F-42
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
dilutive because the conversion price of the notes was greater
than the average market price of King Pharmaceuticals, Inc.
common stock during 2006, and therefore are excluded from the
calculation of diluted income per common share.
For the year ended December 31, 2004, options to purchase
444,990 shares of common stock were not included in the
computation of diluted earnings (loss) per share because their
inclusion would have been anti-dilutive and would have reduced
the loss per share. In addition, the weighted average stock
options that were anti-dilutive at December 31, 2005 and
2004 were 5,469,722 and 5,895,970 shares, respectively. As
of December 31, 2005 and 2004, the Debentures could also be
converted into 6,877,990 shares of common stock in the
future, subject to certain contingencies outlined in the
indenture (See Note 13). Because the convertible debentures
were anti-dilutive, they were not included in the calculation of
diluted income per common share.
|
|
23.
|
Recently
Issued Accounting Standards
|
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements (SFAS No. 157). This
statement defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value
measurements. The statement is effective for financial
statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. The Company is in the process of evaluating the effect of
SFAS No. 157 on its financial statements and currently
plans to adopt this standard in the first quarter of 2008.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48), which clarifies the accounting
for uncertainty in tax positions by prescribing the recognition
threshold a tax position is required to meet before being
recognized in the financial statements. The provisions of
FIN 48 are effective for fiscal years beginning after
December 15, 2006. The Company is currently evaluating the
effect of FIN 48 on its financial statements and currently
plans to adopt this interpretation in the first quarter of 2007.
The Company believes the adoption of FIN 48 will not have a
material effect on its financial statements.
In November 2004, the Financial Accounting Standards Board
issued SFAS No. 151, Inventory Costs, an
amendment of Accounting Research Bulletin No. 43
(SFAS No. 151). SFAS No. 151 requires
certain production overhead costs to be allocated to inventory
based upon the normal capacity of the manufacturing facility.
When the Companys manufacturing facilities are operating
below their normal capacity, unfavorable variances cannot be
allocated to inventory and must be expensed in the period in
which they are incurred. Normal capacity is not defined as full
capacity by SFAS No. 151. SFAS No. 151
instead provides that normal capacity refers to a range of
production levels expected to be achieved over a number of
periods or seasons under normal circumstances. The Company
believes all of its operating facilities, except for the
Rochester, Michigan facility, are currently operating at levels
considered to be normal capacity as defined by
SFAS No. 151 as these plants have operated at their
current levels for a number of periods and are expected to
continue to operate within a range of this normal capacity in
the foreseeable future. The margins provided by branded
pharmaceutical products are such that they allow manufacturers
to operate facilities at lower volumes, or at volumes below
theoretical capacity. Additionally, lower capacity levels at
certain facilities are, at times, due to the complexity and high
regulatory standards associated with the pharmaceutical
manufacturing process. With respect to the Bristol, Tennessee
facility, the Company anticipates no abnormally higher or lower
production levels in the current year and, therefore, has
concluded that the projected level of production is within a
range of normal capacity, and the margins on the branded
pharmaceutical products produced at this facility will result in
an adequate return on the Companys investment.
Consequently, the Company believes that it is appropriate to use
the expected production level to allocate fixed production
overhead. The Rochester facility is currently operating at a
level below normal capacity primarily due to a decline in
contract manufacturing in recent years. The company-owned
products manufactured at this facility are not among the
Companys higher margin products. In 2003, the Company
began expensing, and continues to expense, a portion of the
fixed overhead
F-43
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
costs of this facility as period costs in accordance with
Accounting Research Bulletin No. 43. Accordingly, the
adoption of SFAS No. 151, as of January 1, 2006,
did not have an incremental effect on the Companys
financial statements.
|
|
24.
|
Restructuring
Activities
|
During 2006, the Company decided to proceed with the
implementation of steps under its plan to streamline
manufacturing activities in order to improve operating
efficiency and reduce costs, including the decision to transfer
the production of
Levoxyl®
from its St. Petersburg, Florida facility to its Bristol,
Tennessee facility by the end of 2008. As a result of these
steps, the Company expects to incur restructuring charges
totaling approximately $13,000 through the end of 2008, of which
approximately $11,000 is associated with accelerated
depreciation and approximately $2,000 is associated with
employee termination costs.
During 2005, the Company made the decision to reduce its work
force in order to improve efficiencies in operations.
Accordingly, the Company incurred a charge of $2,267 during the
year ended December 31, 2005. The Company had $1,509
accrued relating to these activities as of December 31,
2005.
During 2004 the Company incurred restructuring charges as a
result of separation agreements with several executives, the
relocation of the Companys sales and marketing operations
from Bristol, Tennessee to Princeton, New Jersey, the
termination of the womens health sales force, and the
decision to end principal operations of a small subsidiary of
Meridian Medical Technologies located in Northern Ireland.
A summary of the types of costs accrued and incurred are
summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
Balance at
|
|
|
Income
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Income
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
Statement
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Statement
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
Impact
|
|
|
Payments
|
|
|
Non-Cash
|
|
|
2005
|
|
|
Impact
|
|
|
Payments
|
|
|
Non-Cash
|
|
|
2006
|
|
|
Third quarter of 2006
action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,203
|
|
|
$
|
(1,040
|
)
|
|
$
|
|
|
|
$
|
2,163
|
|
Accelerated depreciation(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,958
|
|
|
|
|
|
|
|
(2,958
|
)
|
|
|
|
|
Fourth quarter of 2005
action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
|
|
|
|
|
2,267
|
|
|
|
(758
|
)
|
|
|
|
|
|
|
1,509
|
|
|
|
(8
|
)
|
|
|
(980
|
)
|
|
|
|
|
|
|
521
|
|
2004 action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee relocation
|
|
|
|
|
|
|
322
|
|
|
|
(322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility demolition costs
|
|
|
924
|
|
|
|
(924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination of lease
|
|
|
|
|
|
|
1,733
|
|
|
|
(1,733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
782
|
|
|
|
(282
|
)
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
924
|
|
|
$
|
4,180
|
|
|
$
|
(3,095
|
)
|
|
$
|
(500
|
)
|
|
$
|
1,509
|
|
|
$
|
6,153
|
|
|
$
|
(2,020
|
)
|
|
$
|
(2,958
|
)
|
|
$
|
2,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in depreciation and amortization on the Consolidated
Statements of Income (Loss). |
The restructuring charges in 2006 relate to the branded
pharmaceutical segment. The restructuring charges in 2005 of
$1,590, $2,516, and $74 relate to the branded pharmaceutical
segment, the Meridian Medical Technologies segment, and the
contract manufacturing segment, respectively. The accrued
employee separation payments as of December 31, 2006 are
expected to be paid by the end of 2008.
F-44
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
25.
|
Quarterly
Financial Information (unaudited)
|
The following table sets forth summary financial information for
the years ended December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
2006 By Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
484,235
|
|
|
$
|
499,645
|
|
|
$
|
491,706
|
|
|
$
|
512,914
|
|
Operating income
|
|
|
72,241
|
|
|
|
164,991
|
|
|
|
123,185
|
|
|
|
42,129
|
|
Net income
|
|
|
50,677
|
|
|
|
110,903
|
|
|
|
90,405
|
|
|
|
36,964
|
|
Basic income per common share(1)
|
|
$
|
0.21
|
|
|
$
|
0.46
|
|
|
$
|
0.37
|
|
|
$
|
0.15
|
|
Diluted income per common share(1)
|
|
$
|
0.21
|
|
|
$
|
0.46
|
|
|
$
|
0.37
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
2005 By Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
368,625
|
|
|
$
|
462,939
|
|
|
$
|
518,032
|
|
|
$
|
423,285
|
|
Operating income (loss)
|
|
|
111,553
|
|
|
|
28,835
|
|
|
|
187,347
|
|
|
|
(147,656
|
)
|
Net income (loss)
|
|
|
70,055
|
|
|
|
20,497
|
|
|
|
121,857
|
|
|
|
(94,576
|
)
|
Basic income (loss) per common
share(1)
|
|
$
|
0.29
|
|
|
$
|
0.08
|
|
|
$
|
0.50
|
|
|
$
|
(0.39
|
)
|
Diluted income (loss) per common
share(1)
|
|
$
|
0.29
|
|
|
$
|
0.08
|
|
|
$
|
0.50
|
|
|
$
|
(0.39
|
)
|
|
|
|
(1) |
|
Quarterly amounts may not total to annual amounts due to the
effect of rounding on a quarterly basis. |
|
|
26.
|
Discontinued
Operations
|
On March 30, 2004, the Companys Board of Directors
approved managements decision to market for divestiture
some of the Companys womens health products. On
November 22, 2004, the Company sold all of its rights in
Prefest®
for approximately $15,000. On December 23, 2004, the
Company sold all of its rights in
Nordette®
for approximately $12,000.
The
Prefest®
and
Nordette®
product rights had identifiable cash flows that were largely
independent of the cash flows of other groups of assets and
liabilities and are classified as discontinued operations in the
accompanying financial statements.
Prefest®
and
Nordette®
formerly were included in the Companys branded
pharmaceuticals segment. During the first and third quarters of
2004, the Company wrote down intangible assets by the amount of
$169,591 and $5,734, respectively, to reduce the carrying value
of the intangible assets associated with these products to their
estimated fair value less costs to sell. The Company determined
the fair value of these assets based on managements
discounted cash flow projections for the products less expected
selling costs.
Summarized financial information for the discontinued operations
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Total revenues
|
|
$
|
568
|
|
|
$
|
1,856
|
|
|
$
|
13,182
|
|
Operating income (loss), including
expected loss on disposal
|
|
|
572
|
|
|
|
1,876
|
|
|
|
(172,750
|
)
|
Net income (loss)
|
|
|
367
|
|
|
|
1,203
|
|
|
|
(109,666
|
)
|
F-45
KING
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
27.
|
Guarantor
Financial Statements
|
Each of the Companys subsidiaries, except Monarch
Pharmaceuticals Ireland Limited (the Guarantor
Subsidiaries), has guaranteed on a full, unconditional and
joint and several basis the Companys performance under the
$400,000 aggregate principal amount of the Notes and under the
$400,000 Senior Secured Revolving Credit Facility on a joint and
several basis. There are no restrictions under the
Companys financing arrangements on the ability of the
Guarantor Subsidiaries to distribute funds to the Company in the
form of cash dividends, loans or advances. The following
combined financial data provides information regarding the
financial position, results of operations and cash flows of the
Guarantor Subsidiaries (condensed consolidating financial data).
Separate financial statements and other disclosures concerning
the Guarantor Subsidiaries are not presented because management
has determined that such information would not be material to
the holders of the debt.
F-46
KING
PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Eliminating
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Eliminating
|
|
|
King
|
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Entries
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Entries
|
|
|
Consolidated
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
101,210
|
|
|
$
|
8,749
|
|
|
$
|
3,818
|
|
|
|
|
|
|
$
|
113,777
|
|
|
$
|
26,802
|
|
|
$
|
1,071
|
|
|
$
|
2,141
|
|
|
$
|
|
|
|
$
|
30,014
|
|
Investments in debt securities
|
|
|
890,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
890,185
|
|
|
|
494,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
494,663
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,400
|
|
Accounts receivable, net
|
|
|
3,056
|
|
|
|
260,353
|
|
|
|
2,058
|
|
|
|
|
|
|
|
265,467
|
|
|
|
1,221
|
|
|
|
221,854
|
|
|
|
506
|
|
|
|
|
|
|
|
223,581
|
|
Inventories
|
|
|
176,389
|
|
|
|
38,814
|
|
|
|
255
|
|
|
|
|
|
|
|
215,458
|
|
|
|
195,421
|
|
|
|
31,877
|
|
|
|
765
|
|
|
|
|
|
|
|
228,063
|
|
Deferred income tax assets
|
|
|
30,051
|
|
|
|
51,940
|
|
|
|
|
|
|
|
|
|
|
|
81,991
|
|
|
|
21,524
|
|
|
|
60,253
|
|
|
|
|
|
|
|
|
|
|
|
81,777
|
|
Prepaid expenses and other current
assets
|
|
|
99,678
|
|
|
|
6,891
|
|
|
|
26
|
|
|
|
|
|
|
|
106,595
|
|
|
|
50,724
|
|
|
|
8,566
|
|
|
|
1
|
|
|
|
|
|
|
|
59,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,300,569
|
|
|
|
366,747
|
|
|
|
6,157
|
|
|
|
|
|
|
|
1,673,473
|
|
|
|
920,755
|
|
|
|
323,621
|
|
|
|
3,413
|
|
|
|
|
|
|
|
1,247,789
|
|
Property, plant, and equipment, net
|
|
|
109,572
|
|
|
|
197,464
|
|
|
|
|
|
|
|
|
|
|
|
307,036
|
|
|
|
108,712
|
|
|
|
193,762
|
|
|
|
|
|
|
|
|
|
|
|
302,474
|
|
Goodwill
|
|
|
|
|
|
|
121,152
|
|
|
|
|
|
|
|
|
|
|
|
121,152
|
|
|
|
|
|
|
|
121,152
|
|
|
|
|
|
|
|
|
|
|
|
121,152
|
|
Intangible assets, net
|
|
|
|
|
|
|
848,425
|
|
|
|
2,966
|
|
|
|
|
|
|
|
851,391
|
|
|
|
44
|
|
|
|
963,944
|
|
|
|
3,206
|
|
|
|
|
|
|
|
967,194
|
|
Marketable securities
|
|
|
11,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,578
|
|
|
|
18,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,502
|
|
Other assets
|
|
|
40,142
|
|
|
|
53,205
|
|
|
|
|
|
|
|
|
|
|
|
93,347
|
|
|
|
30,225
|
|
|
|
46,874
|
|
|
|
|
|
|
|
|
|
|
|
77,099
|
|
Deferred income tax assets
|
|
|
(2,111
|
)
|
|
|
272,868
|
|
|
|
797
|
|
|
|
|
|
|
|
271,554
|
|
|
|
(9,483
|
)
|
|
|
239,452
|
|
|
|
1,063
|
|
|
|
|
|
|
|
231,032
|
|
Investment in subsidiaries
|
|
|
2,615,029
|
|
|
|
|
|
|
|
|
|
|
|
(2,615,029
|
)
|
|
|
|
|
|
|
2,299,835
|
|
|
|
|
|
|
|
|
|
|
|
(2,299,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,074,779
|
|
|
$
|
1,859,861
|
|
|
$
|
9,920
|
|
|
$
|
(2,615,029
|
)
|
|
$
|
3,329,531
|
|
|
$
|
3,368,590
|
|
|
$
|
1,888,805
|
|
|
$
|
7,682
|
|
|
$
|
(2,299,835
|
)
|
|
$
|
2,965,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
51,671
|
|
|
$
|
25,063
|
|
|
$
|
424
|
|
|
$
|
|
|
|
$
|
77,158
|
|
|
$
|
60,700
|
|
|
$
|
23,762
|
|
|
$
|
77
|
|
|
$
|
|
|
|
$
|
84,539
|
|
Accrued expenses
|
|
|
134,089
|
|
|
|
376,051
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
510,137
|
|
|
|
151,125
|
|
|
|
368,491
|
|
|
|
4
|
|
|
|
|
|
|
|
519,620
|
|
Income taxes payable
|
|
|
28,045
|
|
|
|
2,456
|
|
|
|
|
|
|
|
|
|
|
|
30,501
|
|
|
|
24,123
|
|
|
|
(1,701
|
)
|
|
|
(121
|
)
|
|
|
|
|
|
|
22,301
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
345,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
345,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
213,805
|
|
|
|
403,570
|
|
|
|
421
|
|
|
|
|
|
|
|
617,796
|
|
|
|
580,948
|
|
|
|
390,552
|
|
|
|
(40
|
)
|
|
|
|
|
|
|
971,460
|
|
Long-term debt
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
16,243
|
|
|
|
6,886
|
|
|
|
|
|
|
|
|
|
|
|
23,129
|
|
|
|
17,371
|
|
|
|
2,989
|
|
|
|
|
|
|
|
|
|
|
|
20,360
|
|
Intercompany payable (receivable)
|
|
|
1,156,125
|
|
|
|
(1,168,516
|
)
|
|
|
12,391
|
|
|
|
|
|
|
|
|
|
|
|
796,849
|
|
|
|
(808,256
|
)
|
|
|
11,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,786,173
|
|
|
|
(758,060
|
)
|
|
|
12,812
|
|
|
|
|
|
|
|
1,040,925
|
|
|
|
1,395,168
|
|
|
|
(414,715
|
)
|
|
|
11,367
|
|
|
|
|
|
|
|
991,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
2,288,606
|
|
|
|
2,617,921
|
|
|
|
(2,892
|
)
|
|
|
(2,615,029
|
)
|
|
|
2,288,606
|
|
|
|
1,973,422
|
|
|
|
2,303,520
|
|
|
|
(3,685
|
)
|
|
|
(2,299,835
|
)
|
|
|
1,973,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
|
4,074,779
|
|
|
$
|
1,859,861
|
|
|
$
|
9,920
|
|
|
$
|
(2,615,029
|
)
|
|
$
|
3,329,531
|
|
|
$
|
3,368,590
|
|
|
$
|
1,888,805
|
|
|
$
|
7,682
|
|
|
$
|
(2,299,835
|
)
|
|
$
|
2,965,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-47
KING
PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS INCOME
(LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
12/31/2006
|
|
|
Twelve Months Ended
12/31/2005
|
|
|
Twelve Months Ended
12/31/2004
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
King
|
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
431,105
|
|
|
$
|
1,903,630
|
|
|
$
|
1,478
|
|
|
$
|
(428,070
|
)
|
|
$
|
1,908,143
|
|
|
$
|
491,613
|
|
|
$
|
1,691,216
|
|
|
|
1,049
|
|
|
$
|
(489,125
|
)
|
|
$
|
1,694,753
|
|
|
$
|
374,833
|
|
|
$
|
1,222,515
|
|
|
$
|
2,030
|
|
|
$
|
(373,488
|
)
|
|
$
|
1,225,890
|
|
Royalty revenue
|
|
|
|
|
|
|
80,357
|
|
|
|
|
|
|
|
|
|
|
|
80,357
|
|
|
|
|
|
|
|
78,128
|
|
|
|
|
|
|
|
|
|
|
|
78,128
|
|
|
|
|
|
|
|
78,474
|
|
|
|
|
|
|
|
|
|
|
|
78,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
431,105
|
|
|
|
1,983,987
|
|
|
|
1,478
|
|
|
|
(428,070
|
)
|
|
|
1,988,500
|
|
|
|
491,613
|
|
|
|
1,769,344
|
|
|
|
1,049
|
|
|
|
(489,125
|
)
|
|
|
1,772,881
|
|
|
|
374,833
|
|
|
|
1,300,989
|
|
|
|
2,030
|
|
|
|
(373,488
|
)
|
|
|
1,304,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
155,472
|
|
|
|
691,399
|
|
|
|
1,007
|
|
|
|
(428,070
|
)
|
|
|
419,808
|
|
|
|
152,011
|
|
|
|
659,552
|
|
|
|
547
|
|
|
|
(489,125
|
)
|
|
|
322,985
|
|
|
|
135,430
|
|
|
|
590,388
|
|
|
|
608
|
|
|
|
(373,488
|
)
|
|
|
352,938
|
|
Selling, general and administrative
|
|
|
269,512
|
|
|
|
445,137
|
|
|
|
(684
|
)
|
|
|
|
|
|
|
713,965
|
|
|
|
218,455
|
|
|
|
416,328
|
|
|
|
1,700
|
|
|
|
|
|
|
|
636,483
|
|
|
|
264,024
|
|
|
|
330,434
|
|
|
|
983
|
|
|
|
|
|
|
|
595,441
|
|
Research and development
|
|
|
4,670
|
|
|
|
248,926
|
|
|
|
|
|
|
|
|
|
|
|
253,596
|
|
|
|
35,646
|
|
|
|
227,080
|
|
|
|
|
|
|
|
|
|
|
|
262,726
|
|
|
|
509
|
|
|
|
83,730
|
|
|
|
|
|
|
|
|
|
|
|
84,239
|
|
Depreciation and amortization
|
|
|
20,818
|
|
|
|
126,491
|
|
|
|
240
|
|
|
|
|
|
|
|
147,549
|
|
|
|
15,754
|
|
|
|
130,620
|
|
|
|
675
|
|
|
|
|
|
|
|
147,049
|
|
|
|
16,925
|
|
|
|
144,722
|
|
|
|
468
|
|
|
|
|
|
|
|
162,115
|
|
Intangible asset impairment
|
|
|
|
|
|
|
47,842
|
|
|
|
|
|
|
|
|
|
|
|
47,842
|
|
|
|
|
|
|
|
212,747
|
|
|
|
8,307
|
|
|
|
|
|
|
|
221,054
|
|
|
|
4,399
|
|
|
|
145,193
|
|
|
|
|
|
|
|
|
|
|
|
149,592
|
|
Restructuring charges
|
|
|
202
|
|
|
|
2,992
|
|
|
|
|
|
|
|
|
|
|
|
3,194
|
|
|
|
1,730
|
|
|
|
2,450
|
|
|
|
|
|
|
|
|
|
|
|
4,180
|
|
|
|
7,646
|
|
|
|
3,181
|
|
|
|
|
|
|
|
|
|
|
|
10,827
|
|
Gain on sale of products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(64
|
)
|
|
|
(1,611
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,675
|
)
|
|
|
(4,022
|
)
|
|
|
(5,502
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
450,674
|
|
|
|
1,562,787
|
|
|
|
563
|
|
|
|
(428,070
|
)
|
|
|
1,585,954
|
|
|
|
423,532
|
|
|
|
1,647,166
|
|
|
|
11,229
|
|
|
|
(489,125
|
)
|
|
|
1,592,802
|
|
|
|
424,911
|
|
|
|
1,292,146
|
|
|
|
2,059
|
|
|
|
(373,488
|
)
|
|
|
1,345,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(19,569
|
)
|
|
|
421,200
|
|
|
|
915
|
|
|
|
|
|
|
|
402,546
|
|
|
|
68,081
|
|
|
|
122,178
|
|
|
|
(10,180
|
)
|
|
|
|
|
|
|
180,079
|
|
|
|
(50,078
|
)
|
|
|
8,843
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
(41,264
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
31,911
|
|
|
|
239
|
|
|
|
2
|
|
|
|
|
|
|
|
32,152
|
|
|
|
17,659
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
|
18,175
|
|
|
|
5,101
|
|
|
|
873
|
|
|
|
|
|
|
|
|
|
|
|
5,974
|
|
Interest expense
|
|
|
(9,694
|
)
|
|
|
(163
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,857
|
)
|
|
|
(11,865
|
)
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
(11,931
|
)
|
|
|
(12,492
|
)
|
|
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
|
(12,588
|
)
|
Valuation charge
convertible notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,887
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,887
|
)
|
Loss on investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,182
|
)
|
|
|
(6,520
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,520
|
)
|
Gain on early extinguishment of debt
|
|
|
628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(650
|
)
|
|
|
(1,022
|
)
|
|
|
515
|
|
|
|
|
|
|
|
(1,157
|
)
|
|
|
(579
|
)
|
|
|
(1,016
|
)
|
|
|
(431
|
)
|
|
|
|
|
|
|
(2,026
|
)
|
|
|
(820
|
)
|
|
|
(82
|
)
|
|
|
153
|
|
|
|
|
|
|
|
(749
|
)
|
Equity in earnings (loss) of
subsidiaries
|
|
|
315,395
|
|
|
|
|
|
|
|
|
|
|
|
(315,395
|
)
|
|
|
|
|
|
|
113,679
|
|
|
|
|
|
|
|
|
|
|
|
(113,679
|
)
|
|
|
|
|
|
|
(84,284
|
)
|
|
|
|
|
|
|
|
|
|
|
84,284
|
|
|
|
|
|
Intercompany (expense) interest
income
|
|
|
(49,739
|
)
|
|
|
50,287
|
|
|
|
(548
|
)
|
|
|
|
|
|
|
|
|
|
|
(57,355
|
)
|
|
|
58,088
|
|
|
|
(733
|
)
|
|
|
|
|
|
|
|
|
|
|
(33,648
|
)
|
|
|
33,937
|
|
|
|
(289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses)
|
|
|
287,851
|
|
|
|
49,341
|
|
|
|
(31
|
)
|
|
|
(315,395
|
)
|
|
|
21,766
|
|
|
|
55,357
|
|
|
|
57,522
|
|
|
|
(1,164
|
)
|
|
|
(113,679
|
)
|
|
|
(1,964
|
)
|
|
|
(135,550
|
)
|
|
|
34,632
|
|
|
|
(136
|
)
|
|
|
84,284
|
|
|
|
(16,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes
|
|
|
268,282
|
|
|
|
470,541
|
|
|
|
884
|
|
|
|
(315,395
|
)
|
|
|
424,312
|
|
|
|
123,438
|
|
|
|
179,700
|
|
|
|
(11,344
|
)
|
|
|
(113,679
|
)
|
|
|
178,115
|
|
|
|
(185,628
|
)
|
|
|
43,475
|
|
|
|
(165
|
)
|
|
|
84,284
|
|
|
|
(58,034
|
)
|
Income tax (benefit) expense
|
|
|
(20,667
|
)
|
|
|
156,305
|
|
|
|
92
|
|
|
|
|
|
|
|
135,730
|
|
|
|
5,616
|
|
|
|
56,874
|
|
|
|
(1,005
|
)
|
|
|
|
|
|
|
61,485
|
|
|
|
(25,315
|
)
|
|
|
18,026
|
|
|
|
(123
|
)
|
|
|
|
|
|
|
(7,412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
288,949
|
|
|
|
314,236
|
|
|
|
792
|
|
|
|
(315,395
|
)
|
|
|
288,582
|
|
|
|
117,822
|
|
|
|
122,826
|
|
|
|
(10,339
|
)
|
|
|
(113,679
|
)
|
|
|
116,630
|
|
|
|
(160,313
|
)
|
|
|
25,449
|
|
|
|
(42
|
)
|
|
|
84,284
|
|
|
|
(50,622
|
)
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations
|
|
|
|
|
|
|
572
|
|
|
|
|
|
|
|
|
|
|
|
572
|
|
|
|
18
|
|
|
|
1,858
|
|
|
|
|
|
|
|
|
|
|
|
1,876
|
|
|
|
40
|
|
|
|
(172,790
|
)
|
|
|
|
|
|
|
|
|
|
|
(172,750
|
)
|
Income tax expense (benefit)
|
|
|
|
|
|
|
205
|
|
|
|
|
|
|
|
|
|
|
|
205
|
|
|
|
7
|
|
|
|
666
|
|
|
|
|
|
|
|
|
|
|
|
673
|
|
|
|
15
|
|
|
|
(63,099
|
)
|
|
|
|
|
|
|
|
|
|
|
(63,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) from
discontinued operations
|
|
|
|
|
|
|
367
|
|
|
|
|
|
|
|
|
|
|
|
367
|
|
|
|
11
|
|
|
|
1,192
|
|
|
|
|
|
|
|
|
|
|
|
1,203
|
|
|
|
25
|
|
|
|
(109,691
|
)
|
|
|
|
|
|
|
|
|
|
|
(109,666
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
288,949
|
|
|
$
|
314,603
|
|
|
$
|
792
|
|
|
|
(315,395
|
)
|
|
$
|
288,949
|
|
|
$
|
117,833
|
|
|
$
|
124,018
|
|
|
$
|
(10,339
|
)
|
|
$
|
(113,679
|
)
|
|
$
|
117,833
|
|
|
$
|
(160,288
|
)
|
|
$
|
(84,242
|
)
|
|
$
|
(42
|
)
|
|
$
|
84,284
|
|
|
$
|
(160,288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-48
KING
PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
King
|
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Cash flows (used in) provided by
operating activities of continuing operations
|
|
$
|
(20,771
|
)
|
|
$
|
485,704
|
|
|
$
|
694
|
|
|
$
|
|
|
|
$
|
465,627
|
|
|
$
|
147,781
|
|
|
$
|
372,517
|
|
|
$
|
(790
|
)
|
|
$
|
|
|
|
$
|
519,508
|
|
|
$
|
(108,888
|
)
|
|
$
|
371,205
|
|
|
$
|
(1,410
|
)
|
|
$
|
|
|
|
$
|
260,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities of continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of investments in debt
securities
|
|
|
(1,705,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,705,517
|
)
|
|
|
(1,175,159
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,175,159
|
)
|
|
|
(320,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(320,849
|
)
|
Proceeds from maturity and sale of
investments in debt securities
|
|
|
1,309,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,309,995
|
|
|
|
829,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
829,926
|
|
|
|
274,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
274,344
|
|
Transfer from/(to) restricted cash
|
|
|
128,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128,561
|
|
|
|
(75,211
|
)
|
|
|
1,582
|
|
|
|
|
|
|
|
|
|
|
|
(73,629
|
)
|
|
|
(1,459
|
)
|
|
|
(872
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,331
|
)
|
Purchases of property, plant and
equipment
|
|
|
(22,505
|
)
|
|
|
(23,311
|
)
|
|
|
|
|
|
|
|
|
|
|
(45,816
|
)
|
|
|
(11,749
|
)
|
|
|
(41,541
|
)
|
|
|
|
|
|
|
|
|
|
|
(53,290
|
)
|
|
|
(12,034
|
)
|
|
|
(43,105
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
(55,141
|
)
|
Acquisition of primary care
business of Elan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(36,000
|
)
|
Purchases of product rights
|
|
|
|
|
|
|
(25,795
|
)
|
|
|
|
|
|
|
|
|
|
|
(25,795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Palatin collaboration agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,000
|
)
|
|
|
(20,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,000
|
)
|
Purchases of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,705
|
)
|
|
|
(1,895
|
)
|
|
|
|
|
|
|
(18,600
|
)
|
|
|
|
|
|
|
(18,942
|
)
|
|
|
(3,258
|
)
|
|
|
|
|
|
|
(22,200
|
)
|
Proceeds from sale of marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arrow International Limited
Collaboration agreement
|
|
|
|
|
|
|
(60,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(60,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pain Therapeutic collaboration
agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(153,711
|
)
|
|
|
|
|
|
|
|
|
|
|
(153,711
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual cross-license agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan to Ligand
|
|
|
(37,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of intangible
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,715
|
|
|
|
(257
|
)
|
|
|
|
|
|
|
|
|
|
|
27,458
|
|
Other investing activities
|
|
|
6
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
668
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities of continuing operations
|
|
|
(327,210
|
)
|
|
|
(109,105
|
)
|
|
|
|
|
|
|
|
|
|
|
(436,315
|
)
|
|
|
(470,739
|
)
|
|
|
(210,373
|
)
|
|
|
(1,895
|
)
|
|
|
|
|
|
|
(683,007
|
)
|
|
|
(51,615
|
)
|
|
|
(99,196
|
)
|
|
|
(3,260
|
)
|
|
|
|
|
|
|
(154,071
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities of continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock
options, net
|
|
|
7,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,338
|
|
|
|
857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
857
|
|
|
|
4,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,677
|
|
Excess tax benefits from
stock-based compensation
|
|
|
484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term
debt
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on other long-term debt
|
|
|
(342,691
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(342,691
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(97
|
)
|
Debt issuance costs
|
|
|
(10,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
|
|
|
367,938
|
|
|
|
(368,921
|
)
|
|
|
983
|
|
|
|
|
|
|
|
|
|
|
|
184,452
|
|
|
|
(188,108
|
)
|
|
|
3,656
|
|
|
|
|
|
|
|
|
|
|
|
250,935
|
|
|
|
(254,980
|
)
|
|
|
4,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities of continuing operations
|
|
|
422,389
|
|
|
|
(368,921
|
)
|
|
|
983
|
|
|
|
|
|
|
|
54,451
|
|
|
|
185,309
|
|
|
|
(188,108
|
)
|
|
|
3,656
|
|
|
|
|
|
|
|
857
|
|
|
|
255,515
|
|
|
|
(254,980
|
)
|
|
|
4,045
|
|
|
|
|
|
|
|
4,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
operating activities of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,820
|
|
|
|
6,365
|
|
|
|
|
|
|
|
|
|
|
|
10,185
|
|
Net cash provided by (used in)
investing activities of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents
|
|
|
74,408
|
|
|
|
7,678
|
|
|
|
1,677
|
|
|
|
|
|
|
|
83,763
|
|
|
|
(137,649
|
)
|
|
|
(25,964
|
)
|
|
|
971
|
|
|
|
|
|
|
|
(162,642
|
)
|
|
|
126,759
|
|
|
|
23,394
|
|
|
|
(625
|
)
|
|
|
|
|
|
|
149,528
|
|
Cash and cash equivalents,
beginning of year
|
|
|
26,802
|
|
|
|
1,071
|
|
|
|
2,141
|
|
|
|
|
|
|
|
30,014
|
|
|
|
164,451
|
|
|
|
27,035
|
|
|
|
1,170
|
|
|
|
|
|
|
|
192,656
|
|
|
|
37,692
|
|
|
|
3,641
|
|
|
|
1,795
|
|
|
|
|
|
|
|
43,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
year
|
|
$
|
101,210
|
|
|
$
|
8,749
|
|
|
$
|
3,818
|
|
|
$
|
|
|
|
$
|
113,777
|
|
|
$
|
26,802
|
|
|
$
|
1,071
|
|
|
$
|
2,141
|
|
|
$
|
|
|
|
$
|
30,014
|
|
|
$
|
164,451
|
|
|
$
|
27,035
|
|
|
$
|
1,170
|
|
|
$
|
|
|
|
$
|
192,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized.
KING PHARMACEUTICALS, INC.
|
|
|
|
By:
|
/s/ BRIAN
A. MARKISON
|
Brian A. Markison
President and Chief Executive Officer
February 28, 2007
In accordance with the requirements of the Securities Exchange
Act, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
date indicated.
|
|
|
|
|
|
|
Signature
|
|
Capacity
|
|
Date
|
|
/s/ TED
G. WOOD
Ted
G. Wood
|
|
Non-Executive Chairman of the Board
|
|
February 28, 2007
|
|
|
|
|
|
/s/ BRIAN
A. MARKISON
Brian
A. Markison
|
|
President, Chief Executive Officer
and Director
|
|
February 28, 2007
|
|
|
|
|
|
/s/ JOSEPH
SQUICCIARINO
Joseph
Squicciarino
|
|
Chief Financial Officer (principal
financial and accounting officer)
|
|
February 28, 2007
|
|
|
|
|
|
/s/ EARNEST
W.
DEAVENPORT, JR.
Earnest
W. Deavenport, Jr.
|
|
Director
|
|
February 28, 2007
|
|
|
|
|
|
/s/ ELIZABETH
M. GREETHAM
Elizabeth
M. Greetham
|
|
Director
|
|
February 28, 2007
|
|
|
|
|
|
/s/ PHILIP
A. INCARNATI
Philip
A. Incarnati
|
|
Director
|
|
February 28, 2007
|
|
|
|
|
|
/s/ GREGORY
D. JORDAN
Gregory
D. Jordan
|
|
Director
|
|
February 28, 2007
|
|
|
|
|
|
/s/ R.
CHARLES MOYER
R.
Charles Moyer
|
|
Director
|
|
February 28, 2007
|
|
|
|
|
|
/s/ D.
GREG ROOKER
D.
Greg Rooker
|
|
Director
|
|
February 28, 2007
|
II-1
KING
PHARMACEUTICALS, INC.
Schedule II.
Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
|
Column C Additions
|
|
|
Column D
|
|
|
Column E
|
|
|
|
|
|
|
|
|
|
Charged
|
|
|
|
|
|
|
|
|
|
Balances at
|
|
|
Charged to
|
|
|
(Credited)
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Cost and
|
|
|
to Other
|
|
|
|
|
|
End of
|
|
Description
|
|
Period
|
|
|
Expenses
|
|
|
Accounts
|
|
|
Deductions(1)
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
Allowance for doubtful accounts,
deducted from accounts receivable in the balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006
|
|
|
12,280
|
|
|
|
(138
|
)
|
|
|
|
|
|
|
6,705
|
|
|
|
5,437
|
|
Year ended December 31, 2005
|
|
|
15,348
|
|
|
|
939
|
|
|
|
|
|
|
|
4,007
|
|
|
|
12,280
|
|
Year ended December 31, 2004
|
|
|
11,055
|
|
|
|
7,476
|
|
|
|
|
|
|
|
3,183
|
|
|
|
15,348
|
|
Valuation allowance for deferred
tax assets, deducted from deferred income tax assets in the
balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006
|
|
|
9,214
|
|
|
|
1,040
|
|
|
|
|
|
|
|
2,169
|
|
|
|
8,085
|
|
Year ended December 31, 2005
|
|
|
3,950
|
|
|
|
5,264
|
|
|
|
|
|
|
|
|
|
|
|
9,214
|
|
Year ended December 31, 2004
|
|
|
6,525
|
|
|
|
|
|
|
|
|
|
|
|
2,575
|
*
|
|
|
3,950
|
|
|
|
|
(1) |
|
Amounts represent write-offs of accounts. |
|
* |
|
Valuation account reduced and credited to income. |
S-1