King Pharmaceuticals, Inc.
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form
10-Q
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|
(Mark One)
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|
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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|
|
For the quarterly period ended
September 30, 2007
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OR
|
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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|
|
For the transition period
from to
|
Commission File
No. 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
|
(State or other jurisdiction
of
incorporation or organization)
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|
(I.R.S. Employer
Identification No.)
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|
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|
501 Fifth Street, Bristol, TN
|
|
37620
|
(Address of principal executive
offices)
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|
(Zip Code)
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(423)
989-8000
(Registrants telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a
non-accelerated
filer. (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
Number of shares outstanding of registrants common stock
as of November 7, 2007: 244,434,949
PART I
FINANCIAL INFORMATION
|
|
Item 1.
|
Financial
Statements
|
KING
PHARMACEUTICALS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
24,943
|
|
|
$
|
113,777
|
|
Investments in debt securities
|
|
|
1,051,876
|
|
|
|
890,185
|
|
Marketable securities
|
|
|
2,273
|
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts of
$4,970 and $5,437, respectively
|
|
|
264,805
|
|
|
|
263,939
|
|
Inventories
|
|
|
148,763
|
|
|
|
202,577
|
|
Deferred income tax assets
|
|
|
111,272
|
|
|
|
81,991
|
|
Income taxes receivable
|
|
|
4,817
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
33,016
|
|
|
|
106,595
|
|
Current assets held for sale
|
|
|
13,519
|
|
|
|
14,409
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,655,284
|
|
|
|
1,673,473
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
250,203
|
|
|
|
244,382
|
|
Intangible assets, net
|
|
|
832,326
|
|
|
|
790,313
|
|
Goodwill
|
|
|
129,145
|
|
|
|
121,152
|
|
Marketable securities
|
|
|
|
|
|
|
11,578
|
|
Deferred income tax assets
|
|
|
340,237
|
|
|
|
271,554
|
|
Other assets (includes restricted cash of $16,360 and $15,968,
respectively)
|
|
|
98,552
|
|
|
|
93,347
|
|
Assets held for sale
|
|
|
72,526
|
|
|
|
123,732
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,378,273
|
|
|
$
|
3,329,531
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
59,033
|
|
|
$
|
77,158
|
|
Accrued expenses
|
|
|
394,057
|
|
|
|
510,137
|
|
Income taxes payable
|
|
|
|
|
|
|
30,501
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
453,090
|
|
|
|
617,796
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
400,000
|
|
|
|
400,000
|
|
Other liabilities
|
|
|
66,635
|
|
|
|
23,129
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
919,725
|
|
|
|
1,040,925
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
2,458,548
|
|
|
|
2,288,606
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
3,378,273
|
|
|
$
|
3,329,531
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
3
KING
PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
524,812
|
|
|
$
|
472,570
|
|
|
$
|
1,542,848
|
|
|
$
|
1,415,729
|
|
Royalty revenue
|
|
|
20,042
|
|
|
|
19,136
|
|
|
|
60,762
|
|
|
|
59,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
544,854
|
|
|
|
491,706
|
|
|
|
1,603,610
|
|
|
|
1,475,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues, exclusive of depreciation, amortization and
impairments shown below
|
|
|
197,761
|
|
|
|
106,473
|
|
|
|
434,745
|
|
|
|
305,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative, exclusive of co-promotion
fees
|
|
|
136,286
|
|
|
|
107,300
|
|
|
|
384,324
|
|
|
|
319,480
|
|
Co-promotion fees
|
|
|
48,971
|
|
|
|
50,294
|
|
|
|
142,453
|
|
|
|
162,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative expense
|
|
|
185,257
|
|
|
|
157,594
|
|
|
|
526,777
|
|
|
|
482,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
34,889
|
|
|
|
38,419
|
|
|
|
104,515
|
|
|
|
102,931
|
|
Research and development-in process upon acquisition
|
|
|
200
|
|
|
|
25,000
|
|
|
|
3,300
|
|
|
|
110,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development
|
|
|
35,089
|
|
|
|
63,419
|
|
|
|
107,815
|
|
|
|
212,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
36,762
|
|
|
|
37,833
|
|
|
|
112,852
|
|
|
|
110,745
|
|
Asset impairments
|
|
|
147,838
|
|
|
|
|
|
|
|
222,648
|
|
|
|
279
|
|
Restructuring charges (Note 12)
|
|
|
20,274
|
|
|
|
3,202
|
|
|
|
20,734
|
|
|
|
3,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
622,981
|
|
|
|
368,521
|
|
|
|
1,425,571
|
|
|
|
1,115,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(78,127
|
)
|
|
|
123,185
|
|
|
|
178,039
|
|
|
|
360,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
10,678
|
|
|
|
8,489
|
|
|
|
28,461
|
|
|
|
22,842
|
|
Interest expense
|
|
|
(1,792
|
)
|
|
|
(1,894
|
)
|
|
|
(5,670
|
)
|
|
|
(7,925
|
)
|
Loss on investment
|
|
|
(10,453
|
)
|
|
|
|
|
|
|
(10,453
|
)
|
|
|
|
|
(Loss) gain on early extinguishment of debt
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
698
|
|
Other, net
|
|
|
(416
|
)
|
|
|
101
|
|
|
|
(681
|
)
|
|
|
(613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(1,983
|
)
|
|
|
6,685
|
|
|
|
11,657
|
|
|
|
15,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income taxes
|
|
|
(80,110
|
)
|
|
|
129,870
|
|
|
|
189,696
|
|
|
|
375,419
|
|
Income tax (benefit) expense
|
|
|
(39,583
|
)
|
|
|
40,020
|
|
|
|
49,310
|
|
|
|
123,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(40,527
|
)
|
|
|
89,850
|
|
|
|
140,386
|
|
|
|
251,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations (Note 16):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations
|
|
|
(16
|
)
|
|
|
865
|
|
|
|
(351
|
)
|
|
|
775
|
|
Income tax (benefit) expense
|
|
|
(5
|
)
|
|
|
310
|
|
|
|
(125
|
)
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (loss) income from discontinued operations, net
|
|
|
(11
|
)
|
|
|
555
|
|
|
|
(226
|
)
|
|
|
497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(40,538
|
)
|
|
$
|
90,405
|
|
|
$
|
140,160
|
|
|
$
|
251,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
(0.17
|
)
|
|
$
|
0.37
|
|
|
$
|
0.58
|
|
|
$
|
1.04
|
|
Total (loss) income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(0.17
|
)
|
|
$
|
0.37
|
|
|
$
|
0.58
|
|
|
$
|
1.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
(0.17
|
)
|
|
$
|
0.37
|
|
|
$
|
0.57
|
|
|
$
|
1.04
|
|
Total (loss) income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(0.17
|
)
|
|
$
|
0.37
|
|
|
$
|
0.57
|
|
|
$
|
1.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
4
KING
PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY
AND OTHER COMPREHENSIVE INCOME
(In thousands, except share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Unearned
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Balance at 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251,985
|
|
|
|
|
|
|
|
251,985
|
|
Net unrealized loss on marketable securities, net of tax of
$1,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,872
|
)
|
|
|
(3,872
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(317
|
)
|
|
|
(317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
247,796
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
18,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,774
|
|
Exercise of stock options
|
|
|
421,245
|
|
|
|
6,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,279
|
|
Issuance of share-based awards
|
|
|
199,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
|
243,113,666
|
|
|
$
|
1,238,535
|
|
|
$
|
|
|
|
$
|
1,006,938
|
|
|
$
|
798
|
|
|
$
|
2,246,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
243,151,223
|
|
|
$
|
1,244,986
|
|
|
$
|
|
|
|
$
|
1,043,902
|
|
|
$
|
(282
|
)
|
|
$
|
2,288,606
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140,160
|
|
|
|
|
|
|
|
140,160
|
|
Reclassification of unrealized losses on marketable securities
to earnings, net of tax of $377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
615
|
|
|
|
615
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,126
|
|
|
|
1,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141,901
|
|
Adoption of Financial Accounting Standards Board Interpretation
No. 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,523
|
)
|
|
|
|
|
|
|
(1,523
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
18,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,467
|
|
Exercise of stock options
|
|
|
701,120
|
|
|
|
11,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,097
|
|
Issuance of share-based awards
|
|
|
562,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
|
244,414,548
|
|
|
$
|
1,274,550
|
|
|
$
|
|
|
|
$
|
1,182,539
|
|
|
$
|
1,459
|
|
|
$
|
2,458,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
KING
PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Cash flows provided by operating activities
|
|
$
|
426,995
|
|
|
$
|
297,257
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Transfers (to) from restricted cash
|
|
|
(392
|
)
|
|
|
128,722
|
|
Purchases of investments in debt securities
|
|
|
(1,574,031
|
)
|
|
|
(1,170,272
|
)
|
Proceeds from maturities and sales of investments in debt
securities
|
|
|
1,412,340
|
|
|
|
885,390
|
|
Purchases of property, plant and equipment
|
|
|
(36,672
|
)
|
|
|
(31,220
|
)
|
Proceeds from sale of property and equipment
|
|
|
3
|
|
|
|
|
|
Acquisition of
Avinza®
|
|
|
(296,664
|
)
|
|
|
|
|
Loan repayment from Ligand
|
|
|
37,750
|
|
|
|
|
|
Purchases of product rights and intellectual property
|
|
|
(67,932
|
)
|
|
|
(59,886
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(525,598
|
)
|
|
|
(247,266
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options, net
|
|
|
10,609
|
|
|
|
6,844
|
|
Excess tax benefits from stock-based compensation
|
|
|
687
|
|
|
|
425
|
|
Proceeds from issuance of long-term debt
|
|
|
|
|
|
|
400,000
|
|
Payments on long-term debt
|
|
|
|
|
|
|
(338,434
|
)
|
Debt issuance costs
|
|
|
(1,527
|
)
|
|
|
(10,786
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
9,769
|
|
|
|
58,049
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(88,834
|
)
|
|
|
108,040
|
|
Cash and cash equivalents, beginning of period
|
|
|
113,777
|
|
|
|
30,014
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
24,943
|
|
|
$
|
138,054
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
6
KING
PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2007 and 2006
(Unaudited)
(In thousands, except share and per share data)
The accompanying unaudited interim condensed consolidated
financial statements of King Pharmaceuticals, Inc.
(King or the Company) were prepared by
the Company in accordance with the instructions to
Form 10-Q
and
Rule 10-01
of
Regulation S-X
and, accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of items of a normal recurring
nature) considered necessary for a fair presentation are
included. Operating results for the three and nine months ended
September 30, 2007 are not necessarily indicative of the
results that may be expected for the year ending
December 31, 2007. These unaudited interim condensed
consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes
thereto included in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2006. The year-end
condensed balance sheet was derived from the audited
consolidated financial statements but does not include all
disclosures required by generally accepted accounting principles.
These unaudited interim condensed consolidated financial
statements include the accounts of King and all of its
wholly-owned subsidiaries. All intercompany transactions and
balances have been eliminated in consolidation.
Certain amounts from the prior condensed consolidated financial
statements have been reclassified to conform to the current
presentation. For additional information, please see Note 6.
The basic and diluted income per common share was determined
using the following share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Basic income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
243,119,415
|
|
|
|
242,256,408
|
|
|
|
242,751,864
|
|
|
|
242,162,602
|
|
Diluted income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
243,119,415
|
|
|
|
242,256,408
|
|
|
|
242,751,864
|
|
|
|
242,162,602
|
|
Effect of stock options
|
|
|
|
|
|
|
279,433
|
|
|
|
519,086
|
|
|
|
313,234
|
|
Effect of dilutive share awards
|
|
|
|
|
|
|
261,789
|
|
|
|
871,350
|
|
|
|
235,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
243,119,415
|
|
|
|
242,797,630
|
|
|
|
244,142,300
|
|
|
|
242,711,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2007, the dilutive
effect of options to purchase 259,346 shares of common
stock and 827,200 share awards were not included in the
computation of diluted (loss) income per share because their
inclusion would have reduced the loss per share.
For the three months ended September 30, 2007, the weighted
average shares that were anti-dilutive, and therefore excluded
from the calculation of diluted income per share, included
options to purchase 3,630,018 shares of common stock,
471,820 restricted stock awards (RSAs) and 274,621
long-term performance units (LPUs). For the nine
months ended September 30, 2007, the weighted average
shares that were anti-dilutive, and therefore excluded from the
calculation of diluted income per share, included options to
purchase 2,418,942 shares of common stock, 191,857 RSAs,
and 478,546 LPUs. The
11/4% Convertible
Senior Notes due April 1, 2026 could be converted into the
Companys common stock in the future, subject to certain
contingencies. Shares of the Companys common stock
associated with this right of conversion were excluded
7
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
from the calculation of diluted income per share because these
notes are anti-dilutive since the conversion price of the notes
was greater than the average market price of the Companys
common stock during the quarter.
For the three months ended September 30, 2006, the weighted
average shares that were anti-dilutive, and therefore excluded
from the calculation of diluted income per share, included
options to purchase 5,694,787 shares of common stock and
1,111,690 LPUs. For the nine months ended September 30,
2006, the weighted average shares that were anti-dilutive, and
therefore excluded from the calculation of diluted income per
share included options to purchase 5,317,551 shares of
common stock, 2,341 RSAs and 708,255 LPUs. As of
September 30, 2006, the
23/4% Convertible
Debentures due November 15, 2021 could also convert into
84,868 shares of common stock in the future, subject to
certain contingencies outlined in the indenture. Since the
convertible debentures were anti-dilutive, they were not
included in the calculation of diluted income per common share.
The
11/4% Convertible
Senior Notes due April 1, 2026 could be converted into
common stock in the future, subject to certain contingencies.
Shares of the Companys common stock associated with this
right of conversion were excluded from the calculation of
diluted income per share because these notes were anti-dilutive
since the conversion price of the notes was greater than the
average market price of the Companys common stock during
the quarter.
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Raw materials
|
|
$
|
92,362
|
|
|
$
|
135,164
|
|
Work-in-process
|
|
|
26,513
|
|
|
|
17,885
|
|
Finished goods (including $6,338, and $6,813 of sample
inventory, respectively)
|
|
|
63,479
|
|
|
|
62,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182,354
|
|
|
|
215,444
|
|
Inventory valuation allowance
|
|
|
(33,591
|
)
|
|
|
(12,867
|
)
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
148,763
|
|
|
$
|
202,577
|
|
|
|
|
|
|
|
|
|
|
On September 11, 2007, the U.S. Circuit Court of Appeals for the
Federal Circuit (the Circuit Court) declared invalid
U.S. Patent No. 5,061,722 (the 722 Patent) that
covers the Companys
Altace®
product, overruling the decision of the U.S. District Court for
the Eastern District of Virginia (the District
Court), which had upheld the validity of the patent. The
Company has filed with the Circuit Court a petition for
rehearing and rehearing en banc, and Lupin Ltd.
(Lupin) filed its responsive brief on
November 7, 2007, but the Circuit Court has yet to issue a
decision regarding the petition. Invalidation of the 722
Patent will likely lead to generic versions of
Altace®
entering the market sooner than previously anticipated. The
entry of generic products into the market would likely cause the
Companys net sales of
Altace®
to decline significantly.
Following the Circuit Courts decision on
September 11, 2007, the Company undertook an analysis of
its potential effect on future net sales of
Altace®.
Based upon that analysis, the Company concluded that it has more
Altace®
raw material inventory than is required to meet anticipated
future demand for the product. Accordingly, during the third
quarter of 2007 the Company recorded charges in the amount of
(i) $17,274 for an inventory valuation allowance for a
portion of the
Altace®
raw material inventory on hand; (ii) $39,904 to write off
prepaid
Altace®
raw material inventory; and (iii) $24,794 for a portion of
the Companys estimated remaining minimum purchase
requirements for excess
Altace®
raw material. These charges are included in cost of revenues
exclusive of depreciation, amortization and impairments on the
Condensed Consolidated
8
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Statements of Operations. For additional information regarding
the intangible assets associated with
Altace®
and the Companys minimum purchase commitments for
Altace®
raw material, please see Notes 5 and 8.
Because the Companys analysis of the potential effect of
the Circuit Courts decision includes probability-weighted
estimated future demand for
Altace®,
the Company could incur additional material charges, in the near
term, if events, such as the failure of its petition for
rehearing, occur that cause the Company to reduce its
probability-weighted estimate of future demand for
Altace®.
These charges would be associated with raw material inventories
and minimum purchase requirements under the supply agreement to
purchase raw material inventory associated with
Altace®.
4. Acquisitions,
Dispositions, Co-Promotions and Alliances
On October 30, 2007, King Pharmaceuticals Research and
Development, Inc. (King Research and Development), a
wholly owned subsidiary of the Company, and Acura
Pharmaceuticals, Inc. (Acura) entered into a
License, Development and Commercialization Agreement to develop
and commercialize certain opioid analgesic products utilizing
Acuras proprietary
Aversion®
(abuse deterrent) Technology in the United States, Canada and
Mexico. The agreement provides King Research and Development an
exclusive license for
Acuroxtm
(oxycodone HCl, niacin and a unique combination of other
ingredients) tablets, formerly known as OxyADF, and another
undisclosed opioid product utilizing Acuras
Aversion®
Technology. In addition, the agreement provides King Research
and Development with an option to license all future opioid
analgesic products developed utilizing Acuras
Aversion®
Technology.
Under the terms of the agreement, King Research and Development
will make a non-refundable cash payment of $30,000 to Acura upon
the satisfaction of closing conditions and the effectiveness of
the agreement. King Research and Development will reimburse
Acura for all research and development expenses incurred
beginning from September 19, 2007 for
Acuroxtm
tablets and all research and development expenses related to
future products after exercise of its option to an exclusive
license for each future product. King Research and Development
may make additional non-refundable cash milestone payments to
Acura based on the successful achievement of certain clinical
and regulatory milestones for
Acuroxtm
tablets and for each other product developed under the
agreement. King Research and Development may also make an
additional $50,000 non-refundable cash milestone payment to
Acura when the aggregate net sales of all products developed
under the agreement exceeds $750,000. In addition, King Research
and Development will make royalty payments to Acura ranging from
5% to 25% based on the combined annual net sales of all products
developed under the agreement.
The agreement will become effective upon the expiration or
termination of the applicable waiting period under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976.
On October 1, 2007, the Company sold its Rochester,
Michigan sterile manufacturing facility, some of its legacy
products that are manufactured there, and the related contract
manufacturing business to JHP Pharmaceuticals, LLC,
(JHP) for $91,524, subject to final inventory
adjustments, less fees of $5,341. The Company retained its
Bicillin®
(sterile penicillin products) manufacturing facility which is
also located in Rochester, Michigan. For additional information,
please see Note 6.
On August 12, 2004, the Company entered into a
Collaborative Development and Marketing Agreement (the
Agreement) with Palatin Technologies, Inc.
(Palatin), 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, for $20,000
plus acquisition costs of $498. Pursuant to the terms of the
Agreement, Palatin granted the Company 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. The Company
agreed to pay potential milestone payments to or make
investments in Palatin of up to $100,000 upon achieving certain
development and regulatory approval targets, $10,000 of which
was paid in September 2005 for the purchase of Palatin common
stock and
9
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
warrants. In the event of regulatory approval and
commercialization of bremelanotide, the Company would also pay
potential milestone payments to Palatin of up to $130,000 upon
achieving specified annual North American net sales thresholds.
In August 2007, representatives of the U.S. Food and Drug
Administration (FDA) communicated serious concerns
about the lack of an acceptable benefit/risk ratio to support
the progression of the proposed bremelanotide program into Phase
3 studies for erectile dysfunction (ED). After
reviewing the data generated in the Phase 1 and 2 studies, the
FDA questioned the overall efficacy results and the clinical
benefit of this product in both the general and diabetic ED
populations, and cited blood pressure increases as its greatest
safety concern.
In light of the of the FDAs comments, and after
discussions with Palatin, on September 6, 2007, the Company
provided notice to Palatin that the Company is terminating the
Agreement. The termination becomes effective on December 6,
2007, which is 90 days after Palatins receipt of the
notice. The Company has no further obligation for payments
related to milestones but has various immaterial obligations
related to the wind-down of the collaboration.
The Company holds 5,675,461 shares of common stock of
Palatin as well as 719,894 warrants to purchase Palatin common
stock. For additional information, please see Note 13.
On May 18, 2007, the Company entered into a Product
Development Agreement with Mutual Pharmaceutical Company
(Mutual) and United Research Laboratories
(United) to jointly research and develop one or more
improved formulations of metaxalone. Under this agreement, the
Company seeks Mutuals expertise in developing improved
formulations of metaxalone, including certain improved
formulations Mutual developed prior to execution of this
agreement and access to Mutuals and Uniteds rights
in intellectual property pertaining to these formulations. The
success of this project depends on additional development
activities and FDA approval. The Company paid $3,100 to Mutual
for previously incurred development expenses, which was recorded
as in-process research and development in the branded
pharmaceutical segment. The estimated cost to complete the
project at the execution of the agreement was approximately
$5,000. In addition, the Company could be required to make
additional milestone payments of up to $10,000.
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
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, acquiring all the rights to
Avinza®
in the United States, its territories and Canada. Under the
terms of the asset purchase agreement the purchase price was
$289,732, consisting of $289,332 in cash consideration and $400
for the assumption of a short-term liability. Additionally, the
Company incurred acquisition costs of $6,760. Of the cash
payments made to Ligand, $15,000 was set aside in an escrow
account to fund potential liabilities Ligand could later owe the
Company, of which $7,500 was released to Ligand in the third
quarter of 2007.
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.
|
10
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Pursuant to the terms of the loan agreement with Ligand, the
Company forgave the interest on the loan and repaid Ligand the
interest at the time of closing the transaction to acquire
Avinza®.
Accordingly, the Company has not recognized interest income on
the related note receivable.
The allocation of the initial purchase price and acquisition
costs is as follows:
|
|
|
|
|
Intangible assets
|
|
$
|
285,700
|
|
Goodwill
|
|
|
7,992
|
|
Inventory
|
|
|
2,800
|
|
|
|
|
|
|
|
|
$
|
296,492
|
|
|
|
|
|
|
At the time of the acquisition, the intangible assets were
assigned useful lives of 10.75 years. The acquisition is
allocated to the branded pharmaceuticals segment. The goodwill
recognized in this transaction is expected to be fully
deductible for tax purposes. The Company financed the
acquisition using available cash on hand.
On January 9, 2007, the Company obtained an exclusive
license to certain hemostatic products owned by Vascular
Solutions, Inc. (Vascular Solutions), including
products which the Company markets as
Thrombi-PadTM
and
Thrombi-Gel®.
The license also includes a product the Company expects to
market as
Thrombi-PasteTM,
which is currently in development. Each of these products
includes the Companys
Thrombin-JMI®
topical hemostatic agent product as a component. Vascular
Solutions will manufacture the products for the Company. Upon
acquisition of the license, the Company made an initial payment
to Vascular Solutions of $6,000, a portion of which is
refundable in the event FDA approval for certain of these
products is not received. During the second quarter of 2007, the
Company made an additional milestone payment of $1,000. In
addition, the Company could make additional milestone payments
of up to a total of $1,000.
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 (Allerex). 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. As of September 30, 2007, the
Company has incurred a total of $4,656 for these
earn-out
payments. The aggregate of these payments will not exceed
$13,164.
The allocation of the initial purchase price and acquisition
costs 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
11
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 and the
first quarter and second quarters of 2007, the Company made
additional payments of $25,000 in each of the three quarters to
Arrow. 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 totaling
$110,000 as in-process research and development expense during
2006. This amount was expensed as in-process research and
development as the 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 tablet formulation of
ramipril in January 2006 (the Ramipril Application).
At the time of the acquisition, the success of the project was
dependent on additional development activities and FDA approval.
The estimated cost to complete the project at the execution of
the agreement was approximately $3,500. The FDA approved the
Ramipril Application on February 27, 2007. Arrow granted
the Company an exclusive option to acquire their entire right,
title and interest to the Ramipril Application or any future
filed Amended Ramipril Application for the amount of $5,000. In
April 2007, the Company exercised its option and paid $5,000 to
Arrow. As a result, the Company owns the entire right, title and
interest in and to the Ramipril Application. The Company expects
to launch the tablet formulation during the fourth quarter of
2007.
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 October 12, 2007, Cobalt sent the
Company
30-day
written notice of its intent to launch its generic ramipril
product, which product would not be supplied by the Company. The
Company responded on October 19, 2007, informing Cobalt
that the Company intends to vigorously enforce its rights under
the 722 and 856 patents to the full extent of the
law. For additional information, please see Note 8.
|
|
5.
|
Intangible
Assets and Goodwill
|
The following table reflects the components of intangible assets
as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Trademarks and product rights
|
|
$
|
911,721
|
|
|
$
|
385,612
|
|
|
$
|
1,056,991
|
|
|
$
|
337,046
|
|
Patents
|
|
|
538,183
|
|
|
|
232,259
|
|
|
|
272,833
|
|
|
|
202,873
|
|
Other intangibles
|
|
|
7,700
|
|
|
|
7,407
|
|
|
|
7,700
|
|
|
|
7,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
1,457,604
|
|
|
$
|
625,278
|
|
|
$
|
1,337,524
|
|
|
$
|
547,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the three months ended
September 30, 2007 and 2006 was $26,749 and $26,836,
respectively. Amortization expense for the nine months ended
September 30, 2007 and 2006 was $81,044 and $79,380,
respectively.
12
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On September 11, 2007, the Circuit Court declared invalid
the 722 Patent that covers the Companys
Altace®
product, overruling the decision of the District Court, which
had upheld the validity of the patent. The Company has filed
with the Circuit Court a petition for rehearing and rehearing
en banc, and Lupin filed its responsive brief on
November 7, 2007, but the Circuit Court has yet to issue a
decision regarding the petition. Invalidation of the 722
Patent will likely lead to generic versions of
Altace®
entering the market sooner than previously anticipated. The
entry of generic products into the market would likely cause the
Companys net sales of
Altace®
to decline significantly. For additional information, please see
Note 8.
Following the Circuit Courts decision on
September 11, 2007, the Company undertook an analysis of
its potential effect on future net sales of
Altace®.
Based upon that analysis, the Company reduced the estimated
remaining useful life of this product and forecasted net sales.
This decrease in estimated remaining useful life and forecasted
net sales reduced the probability-weighted estimated
undiscounted future cash flows associated with the
Altace®
intangible assets to a level below their carrying value.
Accordingly, the Company recorded an intangible asset impairment
charge of $146,444 during the third quarter of 2007 to reflect
the estimated fair value of these assets. The Company determined
the fair value of these assets based on probability-weighted
estimated discounted future cash flows. If the petition for
rehearing and rehearing en banc is unsuccessful, the
Companys current estimated probability-weighted cash flows
associated with the remaining assets would be further materially
adversely affected. In that case, the Company may have to
further reduce the estimated remaining useful life
and/or take
an additional charge against a portion or all of the value of
the remaining intangible assets.
During the second quarter of 2007, the Company made the decision
to no longer pursue the development of a new formulation of
Intal®
utilizing hydroflouroalkane as a propellant. As a result, the
Company lowered its future sales forecast for this product in
the second quarter of 2007 and decreased the estimated remaining
useful life of the product. This decrease reduced 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 $29,259 during the second quarter of 2007 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.
Altace®,
Intal®
and
Tilade®
are included in the Companys branded pharmaceuticals
reporting segment.
As of September 30, 2007, the net intangible assets
associated with
Synercid®
totaled approximately $78,743. The Company believes that these
intangible assets are not currently impaired based on estimated
undiscounted cash flows associated with these assets. However,
if the Companys current estimates regarding future cash
flows adversely change, 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 September 30, 2007 and December 31, 2006
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded
|
|
|
Meridian
|
|
|
|
|
|
|
Segment
|
|
|
Segment
|
|
|
Total
|
|
|
Goodwill at September 30, 2007
|
|
$
|
20,735
|
|
|
$
|
108,410
|
|
|
$
|
129,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill at December 31, 2006
|
|
$
|
12,742
|
|
|
$
|
108,410
|
|
|
$
|
121,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On July 14, 2007, the Company entered into an asset
purchase agreement with JHP, pursuant to which JHP acquired the
Companys Rochester, Michigan sterile manufacturing
facility, some of the Companys legacy products that are
manufactured there, and the related contract manufacturing
business. The Company
13
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
retained its
Bicillin®
(sterile penicillin products) manufacturing facility which is
also located in Rochester Michigan.
The companies closed the transaction on October 1, 2007.
JHP paid the Company $91,524, subject to final inventory
adjustments. In addition, the Company incurred fees of
approximately $5,341 related to the transaction. The companies
also entered into a manufacturing and supply agreement pursuant
to which JHP will provide certain fill and finish manufacturing
activities with respect to the Companys hemostatic product
Thrombin-JMI®.
As of September 30, 2007, the Companys Rochester,
Michigan sterile manufacturing facility and certain legacy
branded pharmaceutical products were classified as held for
sale. As a result, the Company recorded charges of $1,394 and
$45,551 in the third and second quarters of 2007, respectively,
based on the assets estimated fair value less cost to sell.
The assets classified as held for sale consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Accounts receivable, net
|
|
$
|
749
|
|
|
$
|
1,528
|
|
Inventories
|
|
|
12,770
|
|
|
|
12,881
|
|
|
|
|
|
|
|
|
|
|
Total current assets held for sale
|
|
$
|
13,519
|
|
|
$
|
14,409
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
61,370
|
|
|
$
|
62,654
|
|
Intangible assets
|
|
|
58,101
|
|
|
|
61,078
|
|
Allowance to reduce noncurrent assets to estimated fair value
less cost to sell
|
|
|
(46,945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets held for sale
|
|
$
|
72,526
|
|
|
$
|
123,732
|
|
|
|
|
|
|
|
|
|
|
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Convertible senior notes
|
|
$
|
400,000
|
|
|
$
|
400,000
|
|
Senior secured revolving credit facility(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
400,000
|
|
|
$
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On April 23, 2002, the Company established a $400,000
five-year Senior Secured Revolving Credit Facility which was
scheduled to mature in April 2007 (the 2002 Credit
Facility). On April 19, 2007, this facility was
terminated and replaced with a new $475,000 five-year Senior
Secured Revolving Credit Facility which matures in April 2012
(the 2007 Credit Facility). |
|
|
|
The 2007 Credit Facility is collateralized by a pledge of 100%
of the equity of most of the Companys domestic
subsidiaries and by a pledge of 65% of the equity of the
Companys foreign subsidiaries. The Companys
obligations under this facility are unconditionally guaranteed
on a senior basis by four of the Companys subsidiaries,
King Pharmaceuticals Research and Development, Inc., Monarch
Pharmaceuticals, Inc., Meridian Medical Technologies, Inc., and
Parkedale Pharmaceuticals, Inc. |
|
|
|
The 2007 Credit Facility accrues interest either, at the
Companys option, (a) at 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 0.5% (based on a leverage ratio), or
(b) at the applicable LIBOR rate plus |
14
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
an applicable spread ranging from 0.875% to 1.50% (based on a
leverage ratio). In addition, the lenders under the 2007 Credit
Facility are entitled to customary facility fees based on
(x) unused commitments under the facility and
(y) letters of credit outstanding. The facility provides
availability for the issuance of up to $30,000 in letters of
credit. The Company incurred $1,527 of deferred financing costs
in connection with the establishment of this facility, which the
Company will amortize over five years, the life of the facility.
This facility requires the Company to maintain a minimum net
worth of no less than $1,500,000 plus 50% of the Companys
consolidated net income for each fiscal quarter after
April 19, 2007, 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. |
|
|
8.
|
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 Research and
Development, is a defendant in approximately 90 multi-plaintiff
(approximately 1,400 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 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
15
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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 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,
fees and expenses, 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 Litigation
The Company and Parkedale Pharmaceuticals, Inc., a wholly-owned
subsidiary of the Company (Parkedale), were named as
defendants in lawsuits filed in California, Mississippi and
Illinois (Madison County), along with other pharmaceutical
companies. The first of these lawsuits 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 or sell thimerosal or 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 alleged taking the
Companys influenza vaccine.
All claims against the Company and Parkedale in the
childrens vaccine litigation have been voluntarily
dismissed without prejudice due, among other matters, to lack of
product identification. These claims were dismissed without the
payment of any settlement proceeds. Although these claims could
be filed again, the Company does not believe that re-filing is
likely.
Hormone
Replacement Therapy
Currently, the Company is named as a defendant by 22 plaintiffs
in lawsuits involving the manufacture and sale of hormone
replacement therapy drugs. The first of these lawsuits was filed
in July 2004. Numerous other 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
22 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 begun but is limited to document
discovery. No trial has occurred in the hormone replacement
therapy litigation against the Company or any other defendants
except Wyeth and Pfizer. The MDL trials against Wyeth have
resulted in verdicts for Wyeth. The Philadelphia trials have
resulted in one verdict for and several verdicts adverse to
Wyeth, all of which have been set aside based on post-trial
motions,
16
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
except for one plaintiffs verdict which is on appeal.
Wyeth recently lost a large verdict in Nevada but the status of
that verdict has not been fully determined. Pfizers only
trial, in Philadelphia, Pennsylvania, resulted in a
plaintiffs verdict. The Company does not expect to have
any trials set in the next year. 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.
The Company would have to assume defense of the lawsuits and be
responsible for damages, fees and expenses, if any, that are
awarded against it or for amounts in excess of the
Companys product liability coverage.
Average
Wholesale Price Litigation
In August 2004, the Company and Monarch Pharmaceuticals, Inc.
(Monarch), a wholly-owned subsidiary of the Company,
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 eight 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 except for the Erie, Oswego and Schenectady
cases, which were removed in October 2006 and remanded to
State Court in September 2007. The allegations in all of
these cases are virtually the same as the allegations in the New
York City case. A First Amended Consolidated Complaint was filed
for most of the New York counties. Motions to dismiss were
granted in part and denied in part for all defendants in all New
York City and County cases pending in the MDL. The Erie motion
to dismiss was granted in part and denied in part by the state
court before removal. Motions to dismiss were filed in
October 2007 in the Oswego and Schenectady 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 the 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. Briefing in the appeal to the Alabama
Supreme Court is complete. No oral argument date has been set.
In a separate appeal of a motion to sever denied by the Court,
the Alabama Supreme Court severed all defendants into
single-defendant cases. The Trial Court consolidated AstraZeneca
International, Novartis Pharmaceuticals and SmithKline Beecham
Corporation for trial set to begin on February 11, 2008.
The Company and Monarch have requested a stay pending their
appeal.
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. The
Mississippi case was remanded to State Court on
September 17, 2007. Discovery is proceeding in the Alabama
case and has begun in New York.
17
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Over half of the states have filed similar lawsuits but the
Company has not been named in any other case except Iowas,
which was recently filed. The Company has not been served with
the Iowa complaint. The relief sought in all of these state
cases is similar to the relief sought in the New York City
lawsuit. The Company does not expect any of its trials to be set
in the next year. 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.
Settlement
of Governmental Pricing Investigation
As previously reported, during the first quarter of 2006, the
Company paid approximately $129,268, comprising (i) all
amounts due under each of the settlement agreements resolving
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
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 asserted for the first time on appeal that the Company
should be responsible for making such a payment to this
individual. Oral argument of the appeal before the United States
Court of Appeals for the Third Circuit was heard on May 8,
2007. On July 16, 2007, the Court of Appeals affirmed the
District Courts decision in all respects, and denied the
relators assertions with respect to the Company. The
relator has exercised his limited rights to appeal the Court of
Appeals decision. The Company believes that the claim
against it is without merit and does not expect the result of
this appeal or any subsequent 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 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
entitled Securities and Derivative Litigation below.
The Settlement Agreements have been asserted as defenses to the
claims in the Average Wholesale Price litigation discussed above.
SEC
Investigation
As previously reported, the Securities and Exchange Commission
(the SEC) had also been conducting an investigation
relating to the Companys underpayments to governmental
programs and to the Companys previously disclosed errors
relating to reserves for product returns. On October 25,
2007, the Company received a letter from the Staff of the SEC
stating that the investigation has been completed, and no
enforcement action has been recommended to the SEC. The Staff
of the SEC notified the Company of its determination pursuant to
the final paragraph of Securities Act Release No. 5310.
Securities
and Derivative 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
18
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 were
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.
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 which has been fully
funded by the Companys insurance carriers on the
Companys behalf and placed into an escrow account
controlled by the Court.
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.
In June 2007, plaintiffs filed a motion to amend the complaint,
seeking to name as defendants additional current and former
officers and directors and the Companys independent
auditor and to add additional claims. Following negotiations
among the parties, this motion was granted in part, but it was
denied with respect to naming as defendants additional current
and former officers and directors of the Company. Trial is
scheduled to begin on September 22, 2008. The parties are
scheduled to engage in non-binding mediation in
December 2007.
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 and the second quarter of 2007,
the Company recorded an anticipated insurance recovery of legal
fees in the amount of $6,750 and $3,398, respectively, for the
class action and derivative suits described above. In November
of 2006 and July of 2007, 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
19
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$49,800, plus interest from the date of the decision. The
Company recorded approximately $45,100 in the fourth quarter of
2006 and had previously recorded $5,000 in 2004, related to this
arbitration. 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 the 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 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. Pursuant to the dismissal agreement, on
October 12, 2007, Cobalt sent the Company
30-day
written notice of its intent to launch its generic ramipril
product which product would not be supplied by the Company. The
Company responded on October 19, 2007, informing Cobalt
that the Company intends to vigorously enforce its rights under
the 722 and 856 patents to the full extent of the
law.
The Company has received a civil investigative demand
(CID) for information from the U.S. Federal
Trade Commission (FTC). The CID requires the Company
to provide information related to the Companys
collaboration with Arrow, the dismissal without prejudice of the
Companys patent infringement litigation against Cobalt
under the Hatch-Waxman Act of 1984 and other information. The
Company is cooperating with the FTC in this investigation.
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 provided 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 District Court granted King summary
judgment and found Lupin to infringe the 722 patent. On
June 14, 2006, during the trial, the District Court
dismissed Lupins unenforceability claims as a matter of
law, finding the 722 patent enforceable. On July 18,
2006, the District Court upheld the validity of the 722
patent. Lupin filed a notice of appeal on July 19, 2006.
All appellate briefing was completed as of March 19, 2007,
and the Circuit Court heard oral arguments on July 12,
2007. On September 11, 2007, the Circuit Court reversed the
decision of the
20
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
District Court and invalidated the Companys 722
patent. The decision applied the recent U.S. Supreme Court
decision in KSR International Co. v. Teleflex Inc.
to invalidate the patent on the basis of obviousness. The
Company has filed with the Circuit Court a petition for
rehearing and rehearing en banc. Lupin filed its
responsive brief on November 7, 2007. The Circuit Court has
not yet issued a decision regarding this petition.
Teva Pharmaceuticals USA (Teva USA) filed an
ANDA with the FDA seeking permission to market a generic version
of
Altace®.
On October 12, 2007, Teva USA informed the Company
that Teva USA had filed a Paragraph IV certification
challenging the validity and infringement of the
722 patent.
Dr. Reddys Laboratories, Ltd. and
Dr. Reddys Laboratories, Inc. (collectively,
Dr. Reddys) filed an ANDA with the FDA seeking
permission to market a generic version of
Altace®.
On October 28, 2007, Dr. Reddys informed the Company
that Dr. Reddys had filed a Paragraph IV certification
challenging the validity and infringement of the 722
Patent.
The Company intends to vigorously enforce its rights under the
722 and 856 patents. As of September 30, 2007,
the Company had net intangible assets related to
Altace®
of $59,375. If the Companys petition for rehearing and
rehearing en banc is unsuccessful and a generic version
of
Altace®
enters the market, the Company may have to write off a portion
or all of the remaining intangible assets associated with this
product, and the Companys business, financial condition,
results of operations and cash flows could otherwise be
materially adversely affected.
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 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
Skelaxin®
product.
Pursuant to the Hatch-Waxman Act, the filing of the suit against
CorePharma triggered 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. 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. The
30-month
stay of FDA approval for Eon Labs 800 mg product was
tolled by the Court and has not expired yet. The Court has
reserved judgment on the length of the tolling period. On
May 17, 2006, the District Court for the Eastern District
of Pennsylvania placed the Mutual case on the Civil Suspense
Calendar pending 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. On April 30, 2007, Eon Labs
400 mg case was dismissed without prejudice, although Eon
Labs claim for fees and expenses was severed and
consolidated with Eon Labs 800 mg case. The Court
also set a briefing schedule in the CorePharma case for the
Companys motion to dismiss for lack of case or controversy
and for a CorePharma motion for summary
21
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
judgment of non-infringement. The motions were fully briefed by
July 2007. On August 27, 2007, Eon also served a motion for
summary judgment on the issue of non-infringement. The Court set
a briefing schedule contingent on its decision in the CorePharma
case. The Court heard oral arguments on September 11, 2007
on these motions, but reserved judgment and has yet to issue any
decisions. 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. The Company 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 the Companys 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 the Companys
Citizen Petition. On November 24, 2006, the FDA approved
the revision to the
Skelaxin®
labeling. On February 13, 2007, the Company filed another
supplement to the Companys Citizen Petition to reflect FDA
approval of the revision to the
Skelaxin®
labeling. On May 2, 2007, Mutual filed comments in
connection with the Companys supplemental submission. On
July 27, 2007, Mutual filed another Citizen Petition in
which it seeks a determination that
Skelaxin®
labeling should be revised to reflect the previously submitted
data in its earlier submissions.
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 September 30, 2007,
the Company had net intangible assets related to
Skelaxin®
of $143,175. 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.
Actavis, Inc. (Actavis) filed an ANDA with the FDA,
seeking permission to market a generic version of
Avinza®.
U.S. Patent No. 6,066,339 (the 339 patent), a
composition of matter patent relating to
Avinza®
that is listed in the Orange Book that expires on
November 25, 2017. Actavis filed a paragraph IV
certification challenging the validity and infringement of the
339 patent, and the Company and Elan Pharma
International LTD, the owner of the 339 patent, filed suit
on October 18, 2007 in the United States District Court for
the District of New Jersey to enforce the rights under the
patent. Pursuant to the Hatch-Waxman Act, the filing of the
lawsuit against Actavis provided the Company with an automatic
stay of FDA approval of Actavis ANDA for up to
30 months (unless the patent is held invalid,
unenforceable, or not infringed) from no earlier than
September 4, 2007.
22
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company intends to vigorously enforce its rights under the
339 patent to the full extent of the law. As of
September 30, 2007, the Company had net intangible assets
related to
Avinza®
of $285,700. If a generic form of
Avinza®
enters the market, the Company may have to write off a portion
or all of these intangible assets, and the Companys
business, financial condition, results of operations and cash
flows could be otherwise materially adversely affected.
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 the Company 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. The Company 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 provided 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 action began on
February 12, 2007 and concluded on February 28, 2007.
Post-trial briefing concluded in June 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 (the 296
patent), a method-of-use patent with an expiration date of
March 2015, which is also listed in the Orange Book for
Adenoscan®.
Trial of the 296 patent occurred simultaneously with the
877 patent. Post-trial briefing for the 296 patent
trial followed the same schedule as the 877 patent trial.
On August 31, 2007, the parties entered into an agreement
to allow Sicor to launch their generic version of
Adenoscan®
pursuant to a license in September 2012, or earlier under
certain conditions. The parties also agreed to terminate both
litigations. The agreement was subject to a 45-day review by the
FTC and Department of Justice. That period ended
October 20, 2007. On October 22, 2007, the parties
submitted a stipulated entry of consent judgment to the Court,
and on October 29, 2007 the consent judgement was entered
and the cases were closed.
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 provided 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 has filed a motion for summary judgment to dispose of
the case, and Teva filed a cross-motion for summary judgment.
The Court granted the Companys motion and denied
Tevas cross-motion on August 3, 2007. On
August 14, 2007, judgment was entered declaring the
validity of the 538 patent and enjoining Teva from
entering the market prior to the expiration of the 538
patent. The parties entered into an agreement whereby the
Company agreed not to pursue attorneys fees and Teva
agreed not to appeal the decision.
23
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
Contingencies
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 for
Altace®
in the United States, and thereafter the parties must negotiate
in good faith the annual minimum purchase quantities. On
September 11, 2007, the Circuit Court declared invalid the
722 Patent that covers the Companys
Altace®
product, overruling the decision of the District Court, which
had upheld the validity of the patent. The Company has filed
with the Circuit Court a petition for rehearing and rehearing
en banc, and Lupin filed its responsive brief on
November 7, 2007, but the Circuit Court has yet to issue a
decision regarding the petition. Invalidation of the 722
Patent will likely lead to generic versions of
Altace®
entering the market sooner than previously anticipated. The
entry of generic products into the market would likely cause the
Companys net sales of
Altace®
to decline significantly. Following the Circuit Courts
decision on September 11, 2007, the Company undertook an
analysis of its potential effect on future net sales of
Altace®.
Based upon that analysis, the Company concluded that it has more
Altace®
raw material inventory than is required to meet anticipated
future demand for the product. As a result, the Company recorded
a charge of $24,794 for the Companys estimated remaining
minimum purchase requirements for excess
Altace®
raw material associated with this supply agreement. This charge
is included in cost of revenues, exclusive of depreciation,
amortization and impairments on the Condensed Consolidated
Statements of Operations. For additional information please see
Note 3.
Because the Companys analysis of the potential effect of
the Circuit Courts decision includes probability-weighted
estimated future demand for
Altace®,
the Company could incur additional material charges, in the near
term, if events, such as the failure of its petition for
rehearing, occur that cause the Company to reduce its
probability-weighted estimate of future demand for
Altace®.
These charges would be associated with minimum purchase
requirements under the supply agreement to purchase raw material
inventory associated with
Altace®.
The Company has supply agreements with two third parties to
produce metaxalone, the active ingredient in
Skelaxin®.
These supply agreements require the Company to purchase certain
minimum levels of mataxalone and expire in 2008 and 2010. If
sales of
Skelaxin®
are not consistent with current forecasts, the Company could
incur losses in connection with purchase commitments for
metaxalone, which could have a material adverse effect upon the
Companys results of operations and cash flows.
|
|
9.
|
Accounting
Developments
|
Effective January 1, 2007, the Company adopted Financial
Accounting Standards Board (FASB) Interpretation
No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 is an interpretation
of FASB Statement No. 109, Accounting for Income
Taxes, that seeks to reduce the variability in practice
associated with measurement and recognition of tax benefits.
FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and
measurement of a tax position that an entity takes or expects to
take in a tax return. Additionally, FIN 48 provides
guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure, and
transition. Under FIN 48, an entity may only recognize or
continue to recognize tax positions that meet a more
likely than not threshold. The Company recorded the
cumulative effect of applying FIN 48 of $1,523 as a
reduction to the opening balance of retained earnings. The total
net liability under FIN 48 as of January 1, 2007 was
$34,152. See Note 10, Income Taxes, for
additional information.
24
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 is planning to adopt this standard in
the first quarter of 2008.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities
(SFAS No. 159). This statement permits
entities to choose to measure many financial instruments and
certain other items at fair value. SFAS No. 159 also
establishes presentation and disclosure requirements designed to
facilitate comparisons between entities that choose different
measurement attributes for similar types of assets and
liabilities. The statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007.
The Company is in the process of evaluating the effect of
SFAS No. 159 on its financial statements and is
planning to adopt this standard in the first quarter of 2008.
In June 2007, the FASB ratified the consensus reached by the
Emerging Issues Task Force on Issue
No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities (Issue
07-3).
Issue 07-3
addresses nonrefundable advance payments for goods or services
that will be used or rendered for future research and
development activities and requires these payments be deferred
and capitalized. Under Issue
07-03,
expense will be recognized as the related goods are delivered or
the related services are performed. Issue
07-03 is
effective for financial statements issued for fiscal years
beginning after December 15, 2007 and is applied
prospectively for new contracts entered into on or after the
effective date. The Company is in the process of evaluating the
effect of Issue
07-3 on its
financial statements and is planning to adopt this standard in
the first quarter of 2008.
The Companys effective income tax rate varied from the
statutory rate for the three and nine months ended
September 30, 2007 primarily due to tax benefits related to
tax-exempt interest income, research and experimentation tax
credits and domestic production activities deductions, which
benefits were partially offset by state taxes. Additionally, the
2007 effective income tax rate benefited from the release of
reserves under FIN 48 as a result of the closing of the
federal statute of limitations for the 2003 tax year. The
Companys effective tax rate varied from the statutory rate
for the three and nine months ended September 30, 2006
primarily due to tax benefits related to charitable
contributions of inventory, tax-exempt interest income, and
domestic production activities deductions, which benefits were
partially offset by state taxes.
The Company adopted the provisions of FIN 48 on
January 1, 2007. As a result of the implementation of
FIN 48, the Company recorded a $1,523 increase to the net
liability for unrecognized tax positions, which was recorded as
a reduction to the opening balance of retained earnings as of
January 1, 2007. The total liability recorded under
FIN 48, as of January 1, 2007, was $34,152, net of
federal tax benefits, including interest and penalties of $3,147
and $2,702, respectively.
As of September 30, 2007, the total liability recorded
under FIN 48 was $35,229, net of federal tax benefits. The
total amount of unrecognized tax benefits as of
September 30, 2007, was $27,874, all of which would benefit
the effective tax rate if recognized. In accordance with its
accounting policy, the Company recognizes accrued interest and
penalties related to unrecognized tax benefits as a component of
tax expense. The Companys Condensed Consolidated Balance
Sheet as of September 30, 2007 includes interest and
penalties of $4,476 and $2,879, respectively.
25
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Included in the balance of unrecognized tax benefits at
September 30, 2007, was $4,225 related to tax positions for
which it is reasonably possible that the total amounts could
significantly change during the next twelve months. This amount
is comprised primarily of items related to expiring statutes.
As of September 30, 2007, the Company is subject to
U.S. Federal income tax examinations for the tax years 2004
through 2006, and to
non-U.S. income
tax examinations for the tax years of 2002 through 2006. In
addition, the Company is subject to state and local income tax
examinations for the tax years 2002 through 2006.
The Companys business is classified into five reportable
segments: branded pharmaceuticals, Meridian Medical Technologies
(Meridian), royalties, contract manufacturing and
other. Branded pharmaceuticals includes a variety of branded
prescription products that are separately categorized into four
therapeutic areas: 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 and
amortization) 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.
26
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following represents selected information for the
Companys reportable segments for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$
|
472,363
|
|
|
$
|
432,887
|
|
|
$
|
1,388,381
|
|
|
$
|
1,269,625
|
|
Meridian Medical Technologies
|
|
|
47,919
|
|
|
|
37,125
|
|
|
|
141,830
|
|
|
|
132,292
|
|
Royalties
|
|
|
20,042
|
|
|
|
19,136
|
|
|
|
60,762
|
|
|
|
59,857
|
|
Contract manufacturing
|
|
|
186,631
|
|
|
|
137,979
|
|
|
|
503,597
|
|
|
|
409,170
|
|
Other
|
|
|
2,496
|
|
|
|
|
|
|
|
3,945
|
|
|
|
|
|
Eliminations
|
|
|
(184,597
|
)
|
|
|
(135,421
|
)
|
|
|
(494,905
|
)
|
|
|
(395,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total net revenues
|
|
$
|
544,854
|
|
|
$
|
491,706
|
|
|
$
|
1,603,610
|
|
|
$
|
1,475,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$
|
298,590
|
|
|
$
|
349,662
|
|
|
$
|
1,031,975
|
|
|
$
|
1,045,306
|
|
Meridian Medical Technologies
|
|
|
28,750
|
|
|
|
19,801
|
|
|
|
83,473
|
|
|
|
71,965
|
|
Royalties
|
|
|
17,600
|
|
|
|
16,799
|
|
|
|
53,250
|
|
|
|
52,594
|
|
Contract manufacturing
|
|
|
(478
|
)
|
|
|
(1,029
|
)
|
|
|
(109
|
)
|
|
|
(204
|
)
|
Other
|
|
|
2,631
|
|
|
|
|
|
|
|
276
|
|
|
|
|
|
Other operating costs and expense
|
|
|
(425,220
|
)
|
|
|
(262,048
|
)
|
|
|
(990,826
|
)
|
|
|
(809,244
|
)
|
Other income (expense)
|
|
|
(1,983
|
)
|
|
|
6,685
|
|
|
|
11,657
|
|
|
|
15,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before tax
|
|
$
|
(80,110
|
)
|
|
$
|
129,870
|
|
|
$
|
189,696
|
|
|
$
|
375,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$
|
2,999,238
|
|
|
$
|
2,994,580
|
|
Meridian Medical Technologies
|
|
|
310,950
|
|
|
|
294,455
|
|
Royalties
|
|
|
57,571
|
|
|
|
21,626
|
|
Contract manufacturing
|
|
|
10,514
|
|
|
|
18,870
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total assets
|
|
$
|
3,378,273
|
|
|
$
|
3,329,531
|
|
|
|
|
|
|
|
|
|
|
27
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following represents branded pharmaceutical revenues by
therapeutic area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular/metabolic
|
|
$
|
205,770
|
|
|
$
|
198,962
|
|
|
$
|
605,061
|
|
|
$
|
603,968
|
|
Neuroscience
|
|
|
155,316
|
|
|
|
124,592
|
|
|
|
460,134
|
|
|
|
365,875
|
|
Hospital/acute care
|
|
|
95,195
|
|
|
|
93,241
|
|
|
|
278,187
|
|
|
|
257,652
|
|
Other
|
|
|
16,082
|
|
|
|
16,092
|
|
|
|
44,999
|
|
|
|
42,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated branded pharmaceutical revenues
|
|
$
|
472,363
|
|
|
$
|
432,887
|
|
|
$
|
1,388,381
|
|
|
$
|
1,269,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
Restructuring
Activities
|
On September 11, 2007, the Circuit Court declared invalid
the 722 Patent that covers the Companys
Altace®
product, overruling the decision of the District Court, which
had upheld the validity of the patent. The Company has filed
with the Circuit Court a petition for rehearing and rehearing
en banc, and Lupin filed its responsive brief on
November 7, 2007, but the Circuit Court has yet to issue a
decision regarding the petition. Invalidation of the 722
Patent will likely lead to generic versions of
Altace®
entering the market sooner than previously anticipated. The
entry of generic products into the market would likely cause the
Companys net sales of
Altace®
to decline significantly.
Following the Circuit Courts decision, the Company
developed a restructuring initiative designed to accelerate a
planned strategic shift emphasizing its focus in neuroscience,
hospital and acute care medicine. This initiative includes a
reduction in personnel, staff leverage, expense reductions and
additional controls over spending, reorganization of sales teams
and a realignment of research and development priorities.
The Company estimates that it will incur total costs of
approximately $70,000 associated with this initiative, including
approximately $67,000 in restructuring charges, $1,000 in
accelerated depreciation associated with general support assets
and approximately $2,000 for implementation costs of
reorganizing the sales teams.
The restructuring charges include employee termination costs
associated with a workforce reduction of approximately 530
employees, including 440 people in our sales force.
Restructuring charges also include contract termination costs,
including the termination of the promotion agreement for
Glumetzatm
discussed below, and other exit costs associated with this
initiative.
During the third quarter of 2007, the Company recorded employee
termination costs of approximately $15,655 and expects to incur
additional employee termination costs of approximately $20,000
in the fourth quarter of 2007. Additionally, the Company expects
to incur other exit costs of less than $2,000 in the fourth
quarter of 2007 associated with this restructuring initiative.
Substantially all of the employee termination costs and other
exit costs are expected to be paid by the end of the first
quarter of 2008.
On October 29, 2007, the Company and Depomed, Inc.
announced the termination of their promotion agreement for
Glumetzatm.
As a result, the Company will incur contract termination costs
and other fees of approximately $30,000 in the fourth quarter of
2007, which were paid in October 2007. Under the terms of the
termination agreement, the Company will fulfill its promotion
obligations through the end of 2007 and Depomed, Inc. will not
pay the Company a promotion fee for the fourth quarter of 2007.
28
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The implementation costs associated with reorganization of sales
teams is expected to be incurred in the fourth quarter of 2007
and will be reported in selling, general and administrative,
exclusive of co-promotion fees.
In July 2007, the Company entered into an asset purchase
agreement with JHP, pursuant to which JHP acquired the
Companys Rochester, Michigan sterile manufacturing
facility, some of the Companys legacy products that are
manufactured there, and the related contract manufacturing
business. As a result of this sale, the Company incurred $4,619
in the third quarter of 2007 for employee termination costs upon
notification of the sale to the approximately 300 affected
employees. The Company accrued employee separation payments
which are expected to be substantially paid during the fourth
quarter of 2007. This transaction closed on October 1,
2007. For more information, please see Note 4.
During 2006, the Company decided 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. The employee termination costs are
expected to be paid by the end of 2008.
The types of costs accrued and incurred are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
Balance at
|
|
|
Income
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
Statement
|
|
|
Cash
|
|
|
Non-Cash
|
|
|
September 30,
|
|
|
|
2006
|
|
|
Impact
|
|
|
Payments
|
|
|
Costs
|
|
|
2007
|
|
|
Third quarter of 2007 action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
$
|
|
|
|
$
|
20,274
|
|
|
$
|
|
|
|
$
|
(946
|
)
|
|
$
|
19,328
|
|
Accelerated depreciation(1)
|
|
|
|
|
|
|
638
|
|
|
|
|
|
|
|
(638
|
)
|
|
|
|
|
First quarter of 2007 action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
|
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
460
|
|
Third quarter of 2006 action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
|
2,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,163
|
|
Accelerated depreciation(1)
|
|
|
|
|
|
|
4,466
|
|
|
|
|
|
|
|
(4,466
|
)
|
|
|
|
|
Fourth quarter of 2005 action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation payments
|
|
|
521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,684
|
|
|
$
|
25,838
|
|
|
$
|
|
|
|
$
|
(6,050
|
)
|
|
$
|
22,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in depreciation and amortization on the Condensed
Consolidated Statements of Operations. |
The restructuring charges in 2007 primarily relate to the
branded pharmaceutical segment.
|
|
13.
|
Marketable
Securities
|
As of December 31, 2006, the Companys investment in
Palatin Technologies, Inc. (Palatin) common stock
had a cost basis of $12,242 and there were cumulative unrealized
holding losses of $664. During the third quarter 2007, the
Company determined that an other than temporary impairment had
occurred on this investment and recorded a charge of $9,972,
resulting in a cost basis of $2,270 as of September 30,
2007. The Company also recorded an other than temporary
impairment of $481 on its investment in warrants to purchase
Palatin common stock.
29
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14.
|
Stock-Based
Compensation
|
During the third quarter of 2007, under its Incentive Plan, the
Company granted to employees 158,500 RSAs, and 9,000
nonqualified stock options.
During the second quarter of 2007, under its Incentive Plan, the
Company granted to employees 175,600 RSAs, 5,400 LPUs with a
three year performance cycle and 17,500 nonqualified stock
options. In addition, the Company granted 41,069 Restricted
Stock Units (RSUs) to non-employee directors.
During the first quarter of 2007, under its Incentive Plan, the
Company granted to employees 179,210 RSAs, 655,840 LPUs with a
one year performance cycle, 158,610 LPUs with a three year
performance cycle and 352,510 nonqualified stock options.
The RSAs are grants of shares of common stock restricted from
sale or transfer for three years from grant date.
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 the date of the grant.
The 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. LPUs with a one-year
performance cycle, followed by a two-year restriction period,
will be earned based on 2007 operating targets. LPUs with a
three-year performance cycle will be earned based on
market-related performance targets over the years 2007 through
2009. 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 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 nonqualified stock options were granted at option prices
equal to the fair market value of the common stock at the date
of grant and vest approximately in one-third increments on each
of the first three anniversaries of the grant date.
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. Because actual returns related to sales
in prior periods were lower than the Companys original
estimates, it recorded a decrease in its reserve for returns in
each of the first quarter of 2007 and the first quarter of 2006.
During the first quarter of 2007, 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. The effect of the change in estimate on first quarter
2007 operating income was an increase of approximately $5,000.
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. The effect of the change in estimate on first quarter
2006 operating income was an increase of approximately $6,000.
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.
30
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
16.
|
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®
were formerly included in the Companys branded
pharmaceuticals segment.
Summarized financial information for the discontinued operations
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Total revenues
|
|
$
|
(16
|
)
|
|
$
|
865
|
|
|
$
|
(352
|
)
|
|
$
|
772
|
|
Operating income (loss)
|
|
|
(16
|
)
|
|
|
865
|
|
|
|
(351
|
)
|
|
|
775
|
|
Net income (loss)
|
|
$
|
(11
|
)
|
|
$
|
555
|
|
|
$
|
(226
|
)
|
|
$
|
497
|
|
Discontinued operations during 2007 and 2006 are primarily due
to changes in estimated reserves for returns and rebates.
|
|
17.
|
Guarantor
Financial Statements
|
On April 23, 2002, the Company established a $400,000
five-year Senior Secured Revolving Credit Facility which was
scheduled to mature in April 2007 (the 2002 Credit
Facility). On April 19, 2007, this facility was
terminated and replaced with a new $475,000 five-year Senior
Secured Revolving Credit Facility which matures in April 2012
(the 2007 Credit Facility).
Each of the Companys subsidiaries, except Monarch
Pharmaceuticals Ireland Limited (the Guarantor
Subsidiaries), 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
2002 Credit Facility on a joint and several basis.
Four of the Guarantor Subsidiaries, King Pharmaceuticals
Research and Development, Inc., Monarch Pharmaceuticals, Inc.,
Meridian Medical Technologies, Inc., and Parkedale
Pharmaceuticals, Inc., have guaranteed on a full, unconditional
and joint and several basis the Companys performance under
the 2007 Credit Facility.
There are no restrictions under the Companys current
financing arrangements, and there were no restrictions under the
2002 Credit Facility, 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 for the $400,000 aggregate principal amount of the
Notes and the 2002 Credit Facility (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.
31
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GUARANTOR
SUBSIDIARIES
CONDENSED
CONSOLIDATING BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Eliminating
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Eliminating
|
|
|
King
|
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Entries
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Entries
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,199
|
|
|
$
|
3,204
|
|
|
$
|
5,540
|
|
|
$
|
|
|
|
$
|
24,943
|
|
|
$
|
101,210
|
|
|
$
|
8,749
|
|
|
$
|
3,818
|
|
|
$
|
|
|
|
$
|
113,777
|
|
Investments in debt securities
|
|
|
1,051,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,051,876
|
|
|
|
890,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
890,185
|
|
Marketable securities
|
|
|
2,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
2,279
|
|
|
|
261,559
|
|
|
|
967
|
|
|
|
|
|
|
|
264,805
|
|
|
|
3,056
|
|
|
|
258,825
|
|
|
|
2,058
|
|
|
|
|
|
|
|
263,939
|
|
Inventories
|
|
|
112,574
|
|
|
|
35,842
|
|
|
|
347
|
|
|
|
|
|
|
|
148,763
|
|
|
|
176,389
|
|
|
|
25,933
|
|
|
|
255
|
|
|
|
|
|
|
|
202,577
|
|
Deferred income tax assets
|
|
|
48,167
|
|
|
|
63,105
|
|
|
|
|
|
|
|
|
|
|
|
111,272
|
|
|
|
30,051
|
|
|
|
51,940
|
|
|
|
|
|
|
|
|
|
|
|
81,991
|
|
Income taxes receivable
|
|
|
3,098
|
|
|
|
1,719
|
|
|
|
|
|
|
|
|
|
|
|
4,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
22,221
|
|
|
|
10,810
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
33,016
|
|
|
|
99,678
|
|
|
|
6,891
|
|
|
|
26
|
|
|
|
|
|
|
|
106,595
|
|
Current assets held for sale
|
|
|
|
|
|
|
13,519
|
|
|
|
|
|
|
|
|
|
|
|
13,519
|
|
|
|
|
|
|
|
14,409
|
|
|
|
|
|
|
|
|
|
|
|
14,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,258,687
|
|
|
|
389,758
|
|
|
|
6,839
|
|
|
|
|
|
|
|
1,655,284
|
|
|
|
1,300,569
|
|
|
|
366,747
|
|
|
|
6,157
|
|
|
|
|
|
|
|
1,673,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
121,963
|
|
|
|
128,240
|
|
|
|
|
|
|
|
|
|
|
|
250,203
|
|
|
|
109,572
|
|
|
|
134,810
|
|
|
|
|
|
|
|
|
|
|
|
244,382
|
|
Intangible assets, net
|
|
|
|
|
|
|
829,540
|
|
|
|
2,786
|
|
|
|
|
|
|
|
832,326
|
|
|
|
|
|
|
|
787,347
|
|
|
|
2,966
|
|
|
|
|
|
|
|
790,313
|
|
Goodwill
|
|
|
|
|
|
|
129,145
|
|
|
|
|
|
|
|
|
|
|
|
129,145
|
|
|
|
|
|
|
|
121,152
|
|
|
|
|
|
|
|
|
|
|
|
121,152
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,578
|
|
Deferred income tax assets
|
|
|
5,128
|
|
|
|
334,446
|
|
|
|
663
|
|
|
|
|
|
|
|
340,237
|
|
|
|
(2,111
|
)
|
|
|
272,868
|
|
|
|
797
|
|
|
|
|
|
|
|
271,554
|
|
Other assets
|
|
|
42,888
|
|
|
|
55,664
|
|
|
|
|
|
|
|
|
|
|
|
98,552
|
|
|
|
40,142
|
|
|
|
53,205
|
|
|
|
|
|
|
|
|
|
|
|
93,347
|
|
Assets held for sale
|
|
|
|
|
|
|
72,526
|
|
|
|
|
|
|
|
|
|
|
|
72,526
|
|
|
|
|
|
|
|
123,732
|
|
|
|
|
|
|
|
|
|
|
|
123,732
|
|
Investments in subsidiaries
|
|
|
1,632,071
|
|
|
|
|
|
|
|
|
|
|
|
(1,632,071
|
)
|
|
|
|
|
|
|
2,615,029
|
|
|
|
|
|
|
|
|
|
|
|
(2,615,029
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,060,737
|
|
|
$
|
1,939,319
|
|
|
$
|
10,288
|
|
|
$
|
(1,632,071
|
)
|
|
$
|
3,378,273
|
|
|
$
|
4,074,779
|
|
|
$
|
1,859,861
|
|
|
$
|
9,920
|
|
|
$
|
(2,615,029
|
)
|
|
$
|
3,329,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
44,430
|
|
|
$
|
14,274
|
|
|
$
|
329
|
|
|
$
|
|
|
|
$
|
59,033
|
|
|
$
|
51,671
|
|
|
$
|
25,063
|
|
|
$
|
424
|
|
|
$
|
|
|
|
$
|
77,158
|
|
Accrued expenses
|
|
|
67,633
|
|
|
|
326,411
|
|
|
|
13
|
|
|
|
|
|
|
|
394,057
|
|
|
|
134,089
|
|
|
|
376,051
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
510,137
|
|
Income taxes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,045
|
|
|
|
2,456
|
|
|
|
|
|
|
|
|
|
|
|
30,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
112,063
|
|
|
|
340,685
|
|
|
|
342
|
|
|
|
|
|
|
|
453,090
|
|
|
|
213,805
|
|
|
|
403,570
|
|
|
|
421
|
|
|
|
|
|
|
|
617,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
Other long-term liabilities
|
|
|
58,631
|
|
|
|
8,004
|
|
|
|
|
|
|
|
|
|
|
|
66,635
|
|
|
|
16,243
|
|
|
|
6,886
|
|
|
|
|
|
|
|
|
|
|
|
23,129
|
|
Intercompany payable (receivable)
|
|
|
31,495
|
|
|
|
(32,071
|
)
|
|
|
576
|
|
|
|
|
|
|
|
|
|
|
|
1,156,125
|
|
|
|
(1,168,516
|
)
|
|
|
12,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
602,189
|
|
|
|
316,618
|
|
|
|
918
|
|
|
|
|
|
|
|
919,725
|
|
|
|
1,786,173
|
|
|
|
(758,060
|
)
|
|
|
12,812
|
|
|
|
|
|
|
|
1,040,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
2,458,548
|
|
|
|
1,622,701
|
|
|
|
9,370
|
|
|
|
(1,632,071
|
)
|
|
|
2,458,548
|
|
|
|
2,288,606
|
|
|
|
2,617,921
|
|
|
|
(2,892
|
)
|
|
|
(2,615,029
|
)
|
|
|
2,288,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
3,060,737
|
|
|
$
|
1,939,319
|
|
|
$
|
10,288
|
|
|
$
|
(1,632,071
|
)
|
|
$
|
3,378,273
|
|
|
$
|
4,074,779
|
|
|
$
|
1,859,861
|
|
|
$
|
9,920
|
|
|
$
|
(2,615,029
|
)
|
|
$
|
3,329,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GUARANTOR
SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2007
|
|
|
Three Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Eliminating
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Eliminating
|
|
|
King
|
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Entries
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Entries
|
|
|
Consolidated
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
136,214
|
|
|
$
|
522,082
|
|
|
$
|
140
|
|
|
$
|
(133,624
|
)
|
|
$
|
524,812
|
|
|
$
|
106,996
|
|
|
$
|
472,276
|
|
|
$
|
(157
|
)
|
|
$
|
(106,545
|
)
|
|
$
|
472,570
|
|
Royalty revenue
|
|
|
|
|
|
|
20,042
|
|
|
|
|
|
|
|
|
|
|
|
20,042
|
|
|
|
|
|
|
|
19,136
|
|
|
|
|
|
|
|
|
|
|
|
19,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
136,214
|
|
|
|
542,124
|
|
|
|
140
|
|
|
|
(133,624
|
)
|
|
|
544,854
|
|
|
|
106,996
|
|
|
|
491,412
|
|
|
|
(157
|
)
|
|
|
(106,545
|
)
|
|
|
491,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
126,006
|
|
|
|
205,302
|
|
|
|
77
|
|
|
|
(133,624
|
)
|
|
|
197,761
|
|
|
|
36,358
|
|
|
|
176,660
|
|
|
|
|
|
|
|
(106,545
|
)
|
|
|
106,473
|
|
Selling, general and administrative
|
|
|
79,024
|
|
|
|
106,189
|
|
|
|
44
|
|
|
|
|
|
|
|
185,257
|
|
|
|
57,653
|
|
|
|
99,883
|
|
|
|
58
|
|
|
|
|
|
|
|
157,594
|
|
Research and development
|
|
|
1,265
|
|
|
|
33,824
|
|
|
|
|
|
|
|
|
|
|
|
35,089
|
|
|
|
181
|
|
|
|
63,238
|
|
|
|
|
|
|
|
|
|
|
|
63,419
|
|
Depreciation and amortization
|
|
|
4,873
|
|
|
|
31,829
|
|
|
|
60
|
|
|
|
|
|
|
|
36,762
|
|
|
|
5,395
|
|
|
|
32,378
|
|
|
|
60
|
|
|
|
|
|
|
|
37,833
|
|
Asset impairments
|
|
|
|
|
|
|
147,838
|
|
|
|
|
|
|
|
|
|
|
|
147,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
2,967
|
|
|
|
17,307
|
|
|
|
|
|
|
|
|
|
|
|
20,274
|
|
|
|
202
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
3,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
214,135
|
|
|
|
542,289
|
|
|
|
181
|
|
|
|
(133,624
|
)
|
|
|
622,981
|
|
|
|
99,789
|
|
|
|
375,159
|
|
|
|
118
|
|
|
|
(106,545
|
)
|
|
|
368,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(77,921
|
)
|
|
|
(165
|
)
|
|
|
(41
|
)
|
|
|
|
|
|
|
(78,127
|
)
|
|
|
7,207
|
|
|
|
116,253
|
|
|
|
(275
|
)
|
|
|
|
|
|
|
123,185
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
10,650
|
|
|
|
23
|
|
|
|
5
|
|
|
|
|
|
|
|
10,678
|
|
|
|
8,434
|
|
|
|
53
|
|
|
|
2
|
|
|
|
|
|
|
|
8,489
|
|
Interest expense
|
|
|
(1,781
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,792
|
)
|
|
|
(1,881
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,894
|
)
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
(Loss) on investment
|
|
|
(10,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(731
|
)
|
|
|
7
|
|
|
|
308
|
|
|
|
|
|
|
|
(416
|
)
|
|
|
5
|
|
|
|
68
|
|
|
|
28
|
|
|
|
|
|
|
|
101
|
|
Equity in earnings (loss) of subsidiaries
|
|
|
11,345
|
|
|
|
|
|
|
|
|
|
|
|
(11,345
|
)
|
|
|
|
|
|
|
100,267
|
|
|
|
|
|
|
|
|
|
|
|
(100,267
|
)
|
|
|
|
|
Intercompany interest income (expense)
|
|
|
5,523
|
|
|
|
(5,571
|
)
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
(10,533
|
)
|
|
|
10,646
|
|
|
|
(113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
14,553
|
|
|
|
(5,552
|
)
|
|
|
361
|
|
|
|
(11,345
|
)
|
|
|
(1,983
|
)
|
|
|
96,281
|
|
|
|
10,754
|
|
|
|
(83
|
)
|
|
|
(100,267
|
)
|
|
|
6,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income taxes
|
|
|
(63,368
|
)
|
|
|
(5,717
|
)
|
|
|
320
|
|
|
|
(11,345
|
)
|
|
|
(80,110
|
)
|
|
|
103,488
|
|
|
|
127,007
|
|
|
|
(358
|
)
|
|
|
(100,267
|
)
|
|
|
129,870
|
|
Income tax (benefit) expense
|
|
|
(22,830
|
)
|
|
|
(16,998
|
)
|
|
|
245
|
|
|
|
|
|
|
|
(39,583
|
)
|
|
|
13,083
|
|
|
|
27,106
|
|
|
|
(169
|
)
|
|
|
|
|
|
|
40,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(40,538
|
)
|
|
|
11,281
|
|
|
|
75
|
|
|
|
(11,345
|
)
|
|
|
(40,527
|
)
|
|
|
90,405
|
|
|
|
99,901
|
|
|
|
(189
|
)
|
|
|
(100,267
|
)
|
|
|
89,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
865
|
|
|
|
|
|
|
|
|
|
|
|
865
|
|
Income tax (benefit) expense
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (loss) income from discontinued operations, net
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
555
|
|
|
|
|
|
|
|
|
|
|
|
555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(40,538
|
)
|
|
$
|
11,270
|
|
|
$
|
75
|
|
|
$
|
(11,345
|
)
|
|
$
|
(40,538
|
)
|
|
$
|
90,405
|
|
|
$
|
100,456
|
|
|
$
|
(189
|
)
|
|
$
|
(100,267
|
)
|
|
$
|
90,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GUARANTOR
SUBSIDIARIES
CONDENSED
CONSOLIDATING STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2007
|
|
|
Nine Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
King
|
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
394,909
|
|
|
$
|
1,538,190
|
|
|
$
|
267
|
|
|
$
|
(390,518
|
)
|
|
$
|
1,542,848
|
|
|
$
|
317,821
|
|
|
$
|
1,413,603
|
|
|
$
|
1,254
|
|
|
$
|
(316,949
|
)
|
|
$
|
1,415,729
|
|
Royalty revenue
|
|
|
|
|
|
|
60,762
|
|
|
|
|
|
|
|
|
|
|
|
60,762
|
|
|
|
|
|
|
|
59,857
|
|
|
|
|
|
|
|
|
|
|
|
59,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
394,909
|
|
|
|
1,598,952
|
|
|
|
267
|
|
|
|
(390,518
|
)
|
|
|
1,603,610
|
|
|
|
317,821
|
|
|
|
1,473,460
|
|
|
|
1,254
|
|
|
|
(316,949
|
)
|
|
|
1,475,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
219,301
|
|
|
|
605,649
|
|
|
|
313
|
|
|
|
(390,518
|
)
|
|
|
434,745
|
|
|
|
119,801
|
|
|
|
502,262
|
|
|
|
811
|
|
|
|
(316,949
|
)
|
|
|
305,925
|
|
Selling, general and administrative
|
|
|
218,094
|
|
|
|
308,544
|
|
|
|
139
|
|
|
|
|
|
|
|
526,777
|
|
|
|
160,528
|
|
|
|
322,274
|
|
|
|
(707
|
)
|
|
|
|
|
|
|
482,095
|
|
Research and development
|
|
|
3,287
|
|
|
|
104,528
|
|
|
|
|
|
|
|
|
|
|
|
107,815
|
|
|
|
3,102
|
|
|
|
209,829
|
|
|
|
|
|
|
|
|
|
|
|
212,931
|
|
Depreciation and amortization
|
|
|
14,553
|
|
|
|
98,119
|
|
|
|
180
|
|
|
|
|
|
|
|
112,852
|
|
|
|
16,164
|
|
|
|
94,401
|
|
|
|
180
|
|
|
|
|
|
|
|
110,745
|
|
Asset impairments
|
|
|
|
|
|
|
222,648
|
|
|
|
|
|
|
|
|
|
|
|
222,648
|
|
|
|
|
|
|
|
279
|
|
|
|
|
|
|
|
|
|
|
|
279
|
|
Restructuring charges
|
|
|
3,427
|
|
|
|
17,307
|
|
|
|
|
|
|
|
|
|
|
|
20,734
|
|
|
|
202
|
|
|
|
2,992
|
|
|
|
|
|
|
|
|
|
|
|
3,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
458,662
|
|
|
|
1,356,795
|
|
|
|
632
|
|
|
|
(390,518
|
)
|
|
|
1,425,571
|
|
|
|
299,797
|
|
|
|
1,132,037
|
|
|
|
284
|
|
|
|
(316,949
|
)
|
|
|
1,115,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(63,753
|
)
|
|
|
242,157
|
|
|
|
(365
|
)
|
|
|
|
|
|
|
178,039
|
|
|
|
18,024
|
|
|
|
341,423
|
|
|
|
970
|
|
|
|
|
|
|
|
360,417
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
28,369
|
|
|
|
83
|
|
|
|
9
|
|
|
|
|
|
|
|
28,461
|
|
|
|
22,650
|
|
|
|
190
|
|
|
|
2
|
|
|
|
|
|
|
|
22,842
|
|
Interest expense
|
|
|
(5,633
|
)
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,670
|
)
|
|
|
(7,769
|
)
|
|
|
(156
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,925
|
)
|
Gain on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
698
|
|
(Loss) on investment
|
|
|
(10,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(1,115
|
)
|
|
|
|
|
|
|
434
|
|
|
|
|
|
|
|
(681
|
)
|
|
|
(225
|
)
|
|
|
(711
|
)
|
|
|
323
|
|
|
|
|
|
|
|
(613
|
)
|
Equity in earnings of subsidiaries
|
|
|
171,844
|
|
|
|
|
|
|
|
|
|
|
|
(171,844
|
)
|
|
|
|
|
|
|
266,175
|
|
|
|
|
|
|
|
|
|
|
|
(266,175
|
)
|
|
|
|
|
Intercompany dividend income
|
|
|
969,849
|
|
|
|
|
|
|
|
|
|
|
|
(969,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany interest (expense) income
|
|
|
(5,465
|
)
|
|
|
5,536
|
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
(36,226
|
)
|
|
|
36,643
|
|
|
|
(417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses)
|
|
|
1,147,396
|
|
|
|
5,582
|
|
|
|
372
|
|
|
|
(1,141,693
|
)
|
|
|
11,657
|
|
|
|
245,303
|
|
|
|
35,966
|
|
|
|
(92
|
)
|
|
|
(266,175
|
)
|
|
|
15,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
1,083,643
|
|
|
|
247,739
|
|
|
|
7
|
|
|
|
(1,141,693
|
)
|
|
|
189,696
|
|
|
|
263,327
|
|
|
|
377,389
|
|
|
|
878
|
|
|
|
(266,175
|
)
|
|
|
375,419
|
|
Income tax (benefit) expense
|
|
|
(26,366
|
)
|
|
|
75,541
|
|
|
|
135
|
|
|
|
|
|
|
|
49,310
|
|
|
|
11,342
|
|
|
|
112,325
|
|
|
|
264
|
|
|
|
|
|
|
|
123,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
1,110,009
|
|
|
|
172,198
|
|
|
|
(128
|
)
|
|
|
(1,141,693
|
)
|
|
|
140,386
|
|
|
|
251,985
|
|
|
|
265,064
|
|
|
|
614
|
|
|
|
(266,175
|
)
|
|
|
251,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations
|
|
|
|
|
|
|
(351
|
)
|
|
|
|
|
|
|
|
|
|
|
(351
|
)
|
|
|
|
|
|
|
775
|
|
|
|
|
|
|
|
|
|
|
|
775
|
|
Income tax (benefit) expense
|
|
|
|
|
|
|
(125
|
)
|
|
|
|
|
|
|
|
|
|
|
(125
|
)
|
|
|
|
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (loss) income from discontinued operations
|
|
|
|
|
|
|
(226
|
)
|
|
|
|
|
|
|
|
|
|
|
(226
|
)
|
|
|
|
|
|
|
497
|
|
|
|
|
|
|
|
|
|
|
|
497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,110,009
|
|
|
$
|
171,972
|
|
|
$
|
(128
|
)
|
|
$
|
(1,141,693
|
)
|
|
$
|
140,160
|
|
|
$
|
251,985
|
|
|
$
|
265,561
|
|
|
$
|
614
|
|
|
$
|
(266,175
|
)
|
|
$
|
251,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GUARANTOR
SUBSIDIARIES
CONDENSED
CONSOLIDATING STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2007
|
|
|
Nine Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
King
|
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Consolidated
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) operating activities
|
|
$
|
18,388
|
|
|
$
|
407,461
|
|
|
$
|
1,146
|
|
|
$
|
426,995
|
|
|
$
|
(39,643
|
)
|
|
$
|
336,660
|
|
|
$
|
240
|
|
|
$
|
297,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers (to) from restricted cash
|
|
|
(392
|
)
|
|
|
|
|
|
|
|
|
|
|
(392
|
)
|
|
|
128,722
|
|
|
|
|
|
|
|
|
|
|
|
128,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments in debt securities
|
|
|
(1,574,031
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,574,031
|
)
|
|
|
(1,170,272
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,170,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities and sales of investments in debt
securities
|
|
|
1,412,340
|
|
|
|
|
|
|
|
|
|
|
|
1,412,340
|
|
|
|
885,390
|
|
|
|
|
|
|
|
|
|
|
|
885,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(25,676
|
)
|
|
|
(10,996
|
)
|
|
|
|
|
|
|
(36,672
|
)
|
|
|
(17,512
|
)
|
|
|
(13,708
|
)
|
|
|
|
|
|
|
(31,220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of property and equipment
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of
Avinza®
|
|
|
(23
|
)
|
|
|
(296,641
|
)
|
|
|
|
|
|
|
(296,664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan repayment from Ligand
|
|
|
37,750
|
|
|
|
|
|
|
|
|
|
|
|
37,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of product rights and intellectual property
|
|
|
|
|
|
|
(67,932
|
)
|
|
|
|
|
|
|
(67,932
|
)
|
|
|
|
|
|
|
(59,886
|
)
|
|
|
|
|
|
|
(59,886
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(150,032
|
)
|
|
|
(375,566
|
)
|
|
|
|
|
|
|
(525,598
|
)
|
|
|
(173,672
|
)
|
|
|
(73,594
|
)
|
|
|
|
|
|
|
(247,266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options, net
|
|
|
10,609
|
|
|
|
|
|
|
|
|
|
|
|
10,609
|
|
|
|
6,844
|
|
|
|
|
|
|
|
|
|
|
|
6,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess tax benefit from stock-based compensation
|
|
|
687
|
|
|
|
|
|
|
|
|
|
|
|
687
|
|
|
|
425
|
|
|
|
|
|
|
|
|
|
|
|
425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(338,434
|
)
|
|
|
|
|
|
|
|
|
|
|
(338,434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt issuance costs
|
|
|
(1,527
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,527
|
)
|
|
|
(10,786
|
)
|
|
|
|
|
|
|
|
|
|
|
(10,786
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
|
|
|
36,864
|
|
|
|
(37,440
|
)
|
|
|
576
|
|
|
|
|
|
|
|
251,583
|
|
|
|
(252,648
|
)
|
|
|
1,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
46,633
|
|
|
|
(37,440
|
)
|
|
|
576
|
|
|
|
9,769
|
|
|
|
309,632
|
|
|
|
(252,648
|
)
|
|
|
1,065
|
|
|
|
58,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(85,011
|
)
|
|
|
(5,545
|
)
|
|
|
1,722
|
|
|
|
(88,834
|
)
|
|
|
96,317
|
|
|
|
10,418
|
|
|
|
1,305
|
|
|
|
108,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
101,210
|
|
|
|
8,749
|
|
|
|
3,818
|
|
|
|
113,777
|
|
|
|
26,802
|
|
|
|
1,071
|
|
|
|
2,141
|
|
|
|
30,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
16,199
|
|
|
$
|
3,204
|
|
|
$
|
5,540
|
|
|
$
|
24,943
|
|
|
$
|
123,119
|
|
|
$
|
11,489
|
|
|
$
|
3,446
|
|
|
$
|
138,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following combined financial data provides information
regarding the financial position, results of operations and cash
flows of the Guarantor Subsidiaries for the 2007 Credit Facility
(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.
35
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GUARANTOR
SUBSIDIARIES
CONDENSED
CONSOLIDATING BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Eliminating
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Eliminating
|
|
|
King
|
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Entries
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Entries
|
|
|
Consolidated
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,199
|
|
|
$
|
3,208
|
|
|
$
|
5,536
|
|
|
$
|
|
|
|
$
|
24,943
|
|
|
$
|
101,210
|
|
|
$
|
8,801
|
|
|
$
|
3,766
|
|
|
$
|
|
|
|
$
|
113,777
|
|
Investment in Debt Securities
|
|
|
1,051,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,051,876
|
|
|
|
890,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
890,185
|
|
Marketable securities
|
|
|
2,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
2,279
|
|
|
|
261,559
|
|
|
|
967
|
|
|
|
|
|
|
|
264,805
|
|
|
|
3,056
|
|
|
|
258,825
|
|
|
|
2,058
|
|
|
|
|
|
|
|
263,939
|
|
Inventories
|
|
|
112,574
|
|
|
|
23,081
|
|
|
|
13,108
|
|
|
|
|
|
|
|
148,763
|
|
|
|
176,389
|
|
|
|
16,942
|
|
|
|
9,246
|
|
|
|
|
|
|
|
202,577
|
|
Deferred income tax assets
|
|
|
48,167
|
|
|
|
62,532
|
|
|
|
573
|
|
|
|
|
|
|
|
111,272
|
|
|
|
30,051
|
|
|
|
51,518
|
|
|
|
422
|
|
|
|
|
|
|
|
81,991
|
|
Income taxes receivable
|
|
|
3,098
|
|
|
|
1,538
|
|
|
|
181
|
|
|
|
|
|
|
|
4,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
22,221
|
|
|
|
10,811
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
33,016
|
|
|
|
99,678
|
|
|
|
6,578
|
|
|
|
339
|
|
|
|
|
|
|
|
106,595
|
|
Current assets held for sale
|
|
|
|
|
|
|
13,519
|
|
|
|
|
|
|
|
|
|
|
|
13,519
|
|
|
|
|
|
|
|
14,409
|
|
|
|
|
|
|
|
|
|
|
|
14,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,258,687
|
|
|
|
376,248
|
|
|
|
20,349
|
|
|
|
|
|
|
|
1,655,284
|
|
|
|
1,300,569
|
|
|
|
357,073
|
|
|
|
15,831
|
|
|
|
|
|
|
|
1,673,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
121,963
|
|
|
|
84,132
|
|
|
|
44,108
|
|
|
|
|
|
|
|
250,203
|
|
|
|
109,572
|
|
|
|
86,595
|
|
|
|
48,215
|
|
|
|
|
|
|
|
244,382
|
|
Intangible assets, net
|
|
|
|
|
|
|
829,248
|
|
|
|
3,078
|
|
|
|
|
|
|
|
832,326
|
|
|
|
|
|
|
|
787,029
|
|
|
|
3,284
|
|
|
|
|
|
|
|
790,313
|
|
Goodwill
|
|
|
|
|
|
|
128,483
|
|
|
|
662
|
|
|
|
|
|
|
|
129,145
|
|
|
|
|
|
|
|
120,490
|
|
|
|
662
|
|
|
|
|
|
|
|
121,152
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,578
|
|
Deferred income tax assets
|
|
|
5,128
|
|
|
|
336,265
|
|
|
|
(1,156
|
)
|
|
|
|
|
|
|
340,237
|
|
|
|
(2,111
|
)
|
|
|
274,992
|
|
|
|
(1,327
|
)
|
|
|
|
|
|
|
271,554
|
|
Other assets
|
|
|
42,888
|
|
|
|
55,664
|
|
|
|
|
|
|
|
|
|
|
|
98,552
|
|
|
|
40,142
|
|
|
|
53,161
|
|
|
|
44
|
|
|
|
|
|
|
|
93,347
|
|
Assets held for sale
|
|
|
|
|
|
|
72,526
|
|
|
|
|
|
|
|
|
|
|
|
72,526
|
|
|
|
|
|
|
|
123,732
|
|
|
|
|
|
|
|
|
|
|
|
123,732
|
|
Investments in subsidiaries
|
|
|
1,632,071
|
|
|
|
|
|
|
|
|
|
|
|
(1,632,071
|
)
|
|
|
|
|
|
|
2,615,029
|
|
|
|
|
|
|
|
|
|
|
|
(2,615,029
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,060,737
|
|
|
$
|
1,882,566
|
|
|
$
|
67,041
|
|
|
$
|
(1,632,071
|
)
|
|
$
|
3,378,273
|
|
|
$
|
4,074,779
|
|
|
$
|
1,803,072
|
|
|
$
|
66,709
|
|
|
$
|
(2,615,029
|
)
|
|
$
|
3,329,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
44,430
|
|
|
$
|
12,416
|
|
|
$
|
2,187
|
|
|
$
|
|
|
|
$
|
59,033
|
|
|
$
|
51,671
|
|
|
$
|
22,836
|
|
|
$
|
2,651
|
|
|
$
|
|
|
|
$
|
77,158
|
|
Accrued expenses
|
|
|
67,633
|
|
|
|
324,292
|
|
|
|
2,132
|
|
|
|
|
|
|
|
394,057
|
|
|
|
134,089
|
|
|
|
373,886
|
|
|
|
2,162
|
|
|
|
|
|
|
|
510,137
|
|
Income taxes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,045
|
|
|
|
2,507
|
|
|
|
(51
|
)
|
|
|
|
|
|
|
30,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
112,063
|
|
|
|
336,708
|
|
|
|
4,319
|
|
|
|
|
|
|
|
453,090
|
|
|
|
213,805
|
|
|
|
399,229
|
|
|
|
4,762
|
|
|
|
|
|
|
|
617,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
Other long-term liabilities
|
|
|
58,631
|
|
|
|
6,021
|
|
|
|
1,983
|
|
|
|
|
|
|
|
66,635
|
|
|
|
16,243
|
|
|
|
4,675
|
|
|
|
2,211
|
|
|
|
|
|
|
|
23,129
|
|
Intercompany (receivable) payable
|
|
|
31,495
|
|
|
|
(29,357
|
)
|
|
|
(2,138
|
)
|
|
|
|
|
|
|
|
|
|
|
1,156,125
|
|
|
|
(725,304
|
)
|
|
|
(430,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
602,189
|
|
|
|
313,372
|
|
|
|
4,164
|
|
|
|
|
|
|
|
919,725
|
|
|
|
1,786,173
|
|
|
|
(321,400
|
)
|
|
|
(423,848
|
)
|
|
|
|
|
|
|
1,040,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
2,458,548
|
|
|
|
1,569,194
|
|
|
|
62,877
|
|
|
|
(1,632,071
|
)
|
|
|
2,458,548
|
|
|
|
2,288,606
|
|
|
|
2,124,472
|
|
|
|
490,557
|
|
|
|
(2,615,029
|
)
|
|
|
2,288,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
3,060,737
|
|
|
$
|
1,882,566
|
|
|
$
|
67,041
|
|
|
$
|
(1,632,071
|
)
|
|
$
|
3,378,273
|
|
|
$
|
4,074,779
|
|
|
$
|
1,803,072
|
|
|
$
|
66,709
|
|
|
$
|
(2,615,029
|
)
|
|
$
|
3,329,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GUARANTOR
SUBSIDIARIES
CONDENSED
CONSOLIDATING STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2007
|
|
|
Three Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Eliminating
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Eliminating
|
|
|
King
|
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Entries
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Entries
|
|
|
Consolidated
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
136,214
|
|
|
$
|
522,716
|
|
|
$
|
10,712
|
|
|
$
|
(144,830
|
)
|
|
$
|
524,812
|
|
|
$
|
106,996
|
|
|
$
|
474,381
|
|
|
$
|
14,845
|
|
|
$
|
(123,652
|
)
|
|
$
|
472,570
|
|
Royalty revenue
|
|
|
|
|
|
|
20,042
|
|
|
|
|
|
|
|
|
|
|
|
20,042
|
|
|
|
|
|
|
|
19,136
|
|
|
|
|
|
|
|
|
|
|
|
19,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
136,214
|
|
|
|
542,758
|
|
|
|
10,712
|
|
|
|
(144,830
|
)
|
|
|
544,854
|
|
|
|
106,996
|
|
|
|
493,517
|
|
|
|
14,845
|
|
|
|
(123,652
|
)
|
|
|
491,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
126,006
|
|
|
|
208,383
|
|
|
|
8,202
|
|
|
|
(144,830
|
)
|
|
|
197,761
|
|
|
|
36,358
|
|
|
|
182,704
|
|
|
|
11,063
|
|
|
|
(123,652
|
)
|
|
|
106,473
|
|
Selling, general and administrative
|
|
|
79,024
|
|
|
|
106,156
|
|
|
|
77
|
|
|
|
|
|
|
|
185,257
|
|
|
|
57,653
|
|
|
|
99,764
|
|
|
|
177
|
|
|
|
|
|
|
|
157,594
|
|
Research and development
|
|
|
1,265
|
|
|
|
33,747
|
|
|
|
77
|
|
|
|
|
|
|
|
35,089
|
|
|
|
181
|
|
|
|
63,238
|
|
|
|
|
|
|
|
|
|
|
|
63,419
|
|
Depreciation and amortization
|
|
|
4,873
|
|
|
|
30,236
|
|
|
|
1,653
|
|
|
|
|
|
|
|
36,762
|
|
|
|
5,395
|
|
|
|
30,848
|
|
|
|
1,590
|
|
|
|
|
|
|
|
37,833
|
|
Asset impairments
|
|
|
|
|
|
|
147,838
|
|
|
|
|
|
|
|
|
|
|
|
147,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
2,967
|
|
|
|
17,320
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
20,274
|
|
|
|
202
|
|
|
|
837
|
|
|
|
2,163
|
|
|
|
|
|
|
|
3,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
214,135
|
|
|
|
543,680
|
|
|
|
9,996
|
|
|
|
(144,830
|
)
|
|
|
622,981
|
|
|
|
99,789
|
|
|
|
377,391
|
|
|
|
14,993
|
|
|
|
(123,652
|
)
|
|
|
368,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(77,921
|
)
|
|
|
(922
|
)
|
|
|
716
|
|
|
|
|
|
|
|
(78,127
|
)
|
|
|
7,207
|
|
|
|
116,126
|
|
|
|
(148
|
)
|
|
|
|
|
|
|
123,185
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
10,650
|
|
|
|
23
|
|
|
|
5
|
|
|
|
|
|
|
|
10,678
|
|
|
|
8,434
|
|
|
|
53
|
|
|
|
2
|
|
|
|
|
|
|
|
8,489
|
|
Interest expense
|
|
|
(1,781
|
)
|
|
|
(10
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1,792
|
)
|
|
|
(1,881
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,894
|
)
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
(Loss) on investment
|
|
|
(10,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(731
|
)
|
|
|
8
|
|
|
|
307
|
|
|
|
|
|
|
|
(416
|
)
|
|
|
5
|
|
|
|
68
|
|
|
|
28
|
|
|
|
|
|
|
|
101
|
|
Equity in earnings (loss) of subsidiaries
|
|
|
11,345
|
|
|
|
|
|
|
|
|
|
|
|
(11,345
|
)
|
|
|
|
|
|
|
100,267
|
|
|
|
|
|
|
|
|
|
|
|
(100,267
|
)
|
|
|
|
|
Intercompany interest (expense) income
|
|
|
5,523
|
|
|
|
(3,781
|
)
|
|
|
(1,742
|
)
|
|
|
|
|
|
|
|
|
|
|
(10,533
|
)
|
|
|
6,329
|
|
|
|
4,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
14,553
|
|
|
|
(3,760
|
)
|
|
|
(1,431
|
)
|
|
|
(11,345
|
)
|
|
|
(1,983
|
)
|
|
|
96,281
|
|
|
|
6,437
|
|
|
|
4,234
|
|
|
|
(100,267
|
)
|
|
|
6,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income taxes
|
|
|
(63,368
|
)
|
|
|
(4,682
|
)
|
|
|
(715
|
)
|
|
|
(11,345
|
)
|
|
|
(80,110
|
)
|
|
|
103,488
|
|
|
|
122,563
|
|
|
|
4,086
|
|
|
|
(100,267
|
)
|
|
|
129,870
|
|
Income tax (benefit) expense
|
|
|
(22,830
|
)
|
|
|
(16,470
|
)
|
|
|
(283
|
)
|
|
|
|
|
|
|
(39,583
|
)
|
|
|
13,083
|
|
|
|
32,518
|
|
|
|
(5,581
|
)
|
|
|
|
|
|
|
40,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(40,538
|
)
|
|
|
11,788
|
|
|
|
(432
|
)
|
|
|
(11,345
|
)
|
|
|
(40,527
|
)
|
|
|
90,405
|
|
|
|
90,045
|
|
|
|
9,667
|
|
|
|
(100,267
|
)
|
|
|
89,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
865
|
|
|
|
|
|
|
|
|
|
|
|
865
|
|
Income tax (benefit) expense
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (loss) income from discontinued operations, net
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
555
|
|
|
|
|
|
|
|
|
|
|
|
555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(40,538
|
)
|
|
$
|
11,777
|
|
|
$
|
(432
|
)
|
|
$
|
(11,345
|
)
|
|
$
|
(40,538
|
)
|
|
$
|
90,405
|
|
|
$
|
90,600
|
|
|
$
|
9,667
|
|
|
$
|
(100,267
|
)
|
|
$
|
90,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GUARANTOR
SUBSIDIARIES
CONDENSED
CONSOLIDATING STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2007
|
|
|
Nine Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
King
|
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
394,909
|
|
|
$
|
1,541,653
|
|
|
$
|
36,068
|
|
|
$
|
(429,782
|
)
|
|
$
|
1,542,848
|
|
|
$
|
317,821
|
|
|
$
|
1,417,937
|
|
|
$
|
38,212
|
|
|
$
|
(358,241
|
)
|
|
$
|
1,415,729
|
|
Royalty revenue
|
|
|
|
|
|
|
60,762
|
|
|
|
|
|
|
|
|
|
|
|
60,762
|
|
|
|
|
|
|
|
59,857
|
|
|
|
|
|
|
|
|
|
|
|
59,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
394,909
|
|
|
|
1,602,415
|
|
|
|
36,068
|
|
|
|
(429,782
|
)
|
|
|
1,603,610
|
|
|
|
317,821
|
|
|
|
1,477,794
|
|
|
|
38,212
|
|
|
|
(358,241
|
)
|
|
|
1,475,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
219,301
|
|
|
|
616,029
|
|
|
|
29,197
|
|
|
|
(429,782
|
)
|
|
|
434,745
|
|
|
|
119,801
|
|
|
|
517,483
|
|
|
|
26,882
|
|
|
|
(358,241
|
)
|
|
|
305,925
|
|
Selling, general and administrative
|
|
|
218,094
|
|
|
|
308,484
|
|
|
|
199
|
|
|
|
|
|
|
|
526,777
|
|
|
|
160,528
|
|
|
|
321,926
|
|
|
|
(359
|
)
|
|
|
|
|
|
|
482,095
|
|
Research and development
|
|
|
3,287
|
|
|
|
104,342
|
|
|
|
186
|
|
|
|
|
|
|
|
107,815
|
|
|
|
3,102
|
|
|
|
209,829
|
|
|
|
|
|
|
|
|
|
|
|
212,931
|
|
Depreciation and amortization
|
|
|
14,553
|
|
|
|
93,471
|
|
|
|
4,828
|
|
|
|
|
|
|
|
112,852
|
|
|
|
16,164
|
|
|
|
90,995
|
|
|
|
3,586
|
|
|
|
|
|
|
|
110,745
|
|
Asset impairments
|
|
|
|
|
|
|
222,648
|
|
|
|
|
|
|
|
|
|
|
|
222,648
|
|
|
|
|
|
|
|
279
|
|
|
|
|
|
|
|
|
|
|
|
279
|
|
Restructuring charges
|
|
|
3,427
|
|
|
|
17,320
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
20,734
|
|
|
|
202
|
|
|
|
837
|
|
|
|
2,155
|
|
|
|
|
|
|
|
3,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
458,662
|
|
|
|
1,362,294
|
|
|
|
34,397
|
|
|
|
(429,782
|
)
|
|
|
1,425,571
|
|
|
|
299,797
|
|
|
|
1,141,349
|
|
|
|
32,264
|
|
|
|
(358,241
|
)
|
|
|
1,115,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(63,753
|
)
|
|
|
240,121
|
|
|
|
1,671
|
|
|
|
|
|
|
|
178,039
|
|
|
|
18,024
|
|
|
|
336,445
|
|
|
|
5,948
|
|
|
|
|
|
|
|
360,417
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
28,369
|
|
|
|
83
|
|
|
|
9
|
|
|
|
|
|
|
|
28,461
|
|
|
|
22,650
|
|
|
|
190
|
|
|
|
2
|
|
|
|
|
|
|
|
22,842
|
|
Interest expense
|
|
|
(5,633
|
)
|
|
|
(36
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
(5,670
|
)
|
|
|
(7,769
|
)
|
|
|
(156
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,925
|
)
|
Gain on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
698
|
|
(Loss) on investment
|
|
|
(10,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(1,115
|
)
|
|
|
6
|
|
|
|
428
|
|
|
|
|
|
|
|
(681
|
)
|
|
|
(225
|
)
|
|
|
(700
|
)
|
|
|
312
|
|
|
|
|
|
|
|
(613
|
)
|
Equity in earnings of subsidiaries
|
|
|
269,348
|
|
|
|
|
|
|
|
|
|
|
|
(269,348
|
)
|
|
|
|
|
|
|
266,175
|
|
|
|
|
|
|
|
|
|
|
|
(266,175
|
)
|
|
|
|
|
Intercompany dividend income
|
|
|
969,849
|
|
|
|
97,504
|
|
|
|
|
|
|
|
(1,067,353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany interest (expense) income
|
|
|
(5,465
|
)
|
|
|
2,752
|
|
|
|
2,713
|
|
|
|
|
|
|
|
|
|
|
|
(36,226
|
)
|
|
|
20,839
|
|
|
|
15,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
1,244,900
|
|
|
|
100,309
|
|
|
|
3,149
|
|
|
|
(1,336,701
|
)
|
|
|
11,657
|
|
|
|
245,303
|
|
|
|
20,173
|
|
|
|
15,701
|
|
|
|
(266,175
|
)
|
|
|
15,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
1,181,147
|
|
|
|
340,430
|
|
|
|
4,820
|
|
|
|
(1,336,701
|
)
|
|
|
189,696
|
|
|
|
263,327
|
|
|
|
356,618
|
|
|
|
21,649
|
|
|
|
(266,175
|
)
|
|
|
375,419
|
|
Income tax (benefit) expense
|
|
|
(26,366
|
)
|
|
|
73,996
|
|
|
|
1,680
|
|
|
|
|
|
|
|
49,310
|
|
|
|
11,342
|
|
|
|
117,737
|
|
|
|
(5,148
|
)
|
|
|
|
|
|
|
123,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
1,207,513
|
|
|
|
266,434
|
|
|
|
3,140
|
|
|
|
(1,336,701
|
)
|
|
|
140,386
|
|
|
|
251,985
|
|
|
|
238,881
|
|
|
|
26,797
|
|
|
|
(266,175
|
)
|
|
|
251,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
|
|
|
|
(351
|
)
|
|
|
|
|
|
|
|
|
|
|
(351
|
)
|
|
|
|
|
|
|
775
|
|
|
|
|
|
|
|
|
|
|
|
775
|
|
Income tax expense
|
|
|
|
|
|
|
(125
|
)
|
|
|
|
|
|
|
|
|
|
|
(125
|
)
|
|
|
|
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from discontinued operations
|
|
|
|
|
|
|
(226
|
)
|
|
|
|
|
|
|
|
|
|
|
(226
|
)
|
|
|
|
|
|
|
497
|
|
|
|
|
|
|
|
|
|
|
|
497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,207,513
|
|
|
$
|
266,208
|
|
|
$
|
3,140
|
|
|
$
|
(1,336,701
|
)
|
|
$
|
140,160
|
|
|
$
|
251,985
|
|
|
$
|
239,378
|
|
|
$
|
26,797
|
|
|
$
|
(266,175
|
)
|
|
$
|
251,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
KING
PHARMACEUTICALS, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GUARANTOR
SUBSIDIARIES
CONDENSED
CONSOLIDATING STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2007
|
|
|
Nine Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
King
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
King
|
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Consolidated
|
|
|
King
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Consolidated
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Cash flows provided by (used in) operating activities
|
|
$
|
18,388
|
|
|
$
|
403,682
|
|
|
$
|
4,925
|
|
|
$
|
426,995
|
|
|
$
|
(39,643
|
)
|
|
$
|
307,504
|
|
|
$
|
29,396
|
|
|
$
|
297,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers from (to) restricted cash
|
|
|
(392
|
)
|
|
|
|
|
|
|
|
|
|
|
(392
|
)
|
|
|
128,722
|
|
|
|
|
|
|
|
|
|
|
|
128,722
|
|
Purchases of investments in debt securities
|
|
|
(1,574,031
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,574,031
|
)
|
|
|
(1,170,272
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,170,272
|
)
|
Proceeds from maturities and sales of investments in debt
securities
|
|
|
1,412,340
|
|
|
|
|
|
|
|
|
|
|
|
1,412,340
|
|
|
|
885,390
|
|
|
|
|
|
|
|
|
|
|
|
885,390
|
|
Purchases of property, plant and equipment
|
|
|
(25,676
|
)
|
|
|
(10,362
|
)
|
|
|
(634
|
)
|
|
|
(36,672
|
)
|
|
|
(17,512
|
)
|
|
|
(10,206
|
)
|
|
|
(3,502
|
)
|
|
|
(31,220
|
)
|
Proceeds from sale of property and equipment
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of
Avinza®
|
|
|
(23
|
)
|
|
|
(296,641
|
)
|
|
|
|
|
|
|
(296,664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan repayment from Ligand
|
|
|
37,750
|
|
|
|
|
|
|
|
|
|
|
|
37,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of product rights and intellectual property
|
|
|
|
|
|
|
(67,932
|
)
|
|
|
|
|
|
|
(67,932
|
)
|
|
|
|
|
|
|
(59,886
|
)
|
|
|
|
|
|
|
(59,886
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(150,032
|
)
|
|
|
(374,932
|
)
|
|
|
(634
|
)
|
|
|
(525,598
|
)
|
|
|
(173,672
|
)
|
|
|
(70,092
|
)
|
|
|
(3,502
|
)
|
|
|
(247,266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options, net
|
|
|
10,609
|
|
|
|
|
|
|
|
|
|
|
|
10,609
|
|
|
|
6,844
|
|
|
|
|
|
|
|
|
|
|
|
6,844
|
|
Excess tax benefit from stock-based compensation
|
|
|
687
|
|
|
|
|
|
|
|
|
|
|
|
687
|
|
|
|
425
|
|
|
|
|
|
|
|
|
|
|
|
425
|
|
Proceeds from issuance of long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
Payments on long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(338,434
|
)
|
|
|
|
|
|
|
|
|
|
|
(338,434
|
)
|
Debt issuance costs
|
|
|
(1,527
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,527
|
)
|
|
|
(10,786
|
)
|
|
|
|
|
|
|
|
|
|
|
(10,786
|
)
|
Intercompany
|
|
|
36,864
|
|
|
|
(34,343
|
)
|
|
|
(2,521
|
)
|
|
|
|
|
|
|
251,583
|
|
|
|
(226,800
|
)
|
|
|
(24,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
46,633
|
|
|
|
(34,343
|
)
|
|
|
(2,521
|
)
|
|
|
9,769
|
|
|
|
309,632
|
|
|
|
(226,800
|
)
|
|
|
(24,783
|
)
|
|
|
58,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(85,011
|
)
|
|
|
(5,593
|
)
|
|
|
1,770
|
|
|
|
(88,834
|
)
|
|
|
96,317
|
|
|
|
10,612
|
|
|
|
1,111
|
|
|
|
108,040
|
|
Cash and cash equivalents, beginning of period
|
|
|
101,210
|
|
|
|
8,801
|
|
|
|
3,766
|
|
|
|
113,777
|
|
|
|
26,802
|
|
|
|
1,172
|
|
|
|
2,040
|
|
|
|
30,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
16,199
|
|
|
$
|
3,208
|
|
|
$
|
5,536
|
|
|
$
|
24,943
|
|
|
$
|
123,119
|
|
|
$
|
11,784
|
|
|
$
|
3,151
|
|
|
$
|
138,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion contains certain forward-looking
statements that reflect managements current views of
future events and operations. This discussion should be read in
conjunction with the following: (a) Risk
Factors set out below and in our Annual Report on
Form 10-K
for the year ended December 31, 2006, which are
supplemented by the discussion which follows; (b) our
audited consolidated financial statements and related notes
which are included in our Annual Report on
Form 10-K
for the year ended December 31, 2006; and (c) our
unaudited consolidated financial statements and related notes
which are included in this report on
Form 10-Q.
Please see the sections entitled Risk Factors and
A Warning About Forward-Looking Statements 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.
On October 18, 2007, we announced a restructuring
initiative designed to accelerate a planned strategic shift
emphasizing our focus in neuroscience, hospital and acute care
medicine. We believe each of these areas has significant market
potential and our organization is aligned accordingly.
We work to achieve growth:
|
|
|
|
|
by maximizing the potential of our currently marketed products
through sales and marketing and prudent product life-cycle
management,
|
|
|
|
through the successful development of new branded pharmaceutical
products,
|
|
|
|
through the acquisition or in-licensing of novel branded
pharmaceutical products in various stages of development, and of
technologies that have significant market potential, that
complement our key therapeutic areas, and
|
|
|
|
through mergers and 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.
|
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.
Recent
Developments
Avinza®
On September 6, 2006, we entered into a definitive asset
purchase agreement and related agreements with Ligand
Pharmaceuticals Incorporated (Ligand) to acquire
rights to
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, acquiring all the rights to
Avinza®
in the United States, its territories and Canada. The
addition of
Avinza®
complements our other opioid products that we have in
development and our currently marketed product,
Skelaxin®,
a muscle relaxant. For additional information, please see
Note 4, Acquisitions, Dispositions, Co-Promotions and
Alliances, in Item 1, Financial
Statements.
40
Thrombin-JMI®
On January 9, 2007, we obtained an exclusive license to
certain of Vascular Solutions, Inc.s (Vascular
Solutions) hemostatic products, including products which
we 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 our
Thrombin-JMI®
product as a component. Vascular Solutions will manufacture for
us the products covered by the license. With the addition of
these products, we have the opportunity to offer physicians a
wider variety of means to administer
Thrombin-JMI®.
For additional information, please see Note 4,
Acquisitions, Dispositions, Co-Promotions and
Alliances, in Item 1, Financial
Statements.
Altace®/Diuretic
Combination
During the second quarter of 2007, we completed our
Phase III clinical trial program evaluating the combination
of
Altace®
with a hydrochlorothiazide diuretic, an investigational drug
product we are developing. The clinical trial program for this
drug met its primary and secondary endpoints. The clinical trial
data demonstrated the efficacy and tolerability benefits of
Altace®
20mg, the maximum approved dose, and the benefits of 20mg of
Altace®
combined with a diuretic for patients who require an
antihypertensive agent as well as a diuretic. In light of the
circumstances discussed in the section entitled
Altace®
below, we are reevaluating our plans with respect to this
investigational drug product.
Thrombin-JMI®
Epistaxis Kit
In June 2007, the FDA approved our
Thrombin-JMI®
Epistaxis Kit, a new intranasal spray delivery device for
Thrombin-JMI®
for use to aid in stopping epistaxes (nosebleeds). The kit
offers healthcare professionals in the emergency department and
trauma center a convenient new option to achieve fast, active
hemostasis during epistaxes. We began marketing the
Thrombin-JMI®
Epistaxis Kit in the United States in the third quarter of this
year, further expanding our portfolio of
Thrombin-JMI®
products.
Remoxytm
In July 2007, we, together with our partner Pain Therapeutics,
announced the completion of patient enrollment in the pivotal
Phase III clinical trial for
RemoxyTM,
an investigational product for moderate to severe pain.
RemoxysTM
sustained release formulation has the potential to reduce the
improper and often intentional accelerated release of oxycodone
through crushing, heating, or dissolution in alcohol that is
reported with respect to other long acting opioids. Results from
this trial are expected in the fourth quarter of 2007, after the
last patient completes the three-month treatment period.
Bremelanotide
On August 12, 2004, we entered into a Collaborative
Development and Marketing Agreement (the Agreement)
with Palatin Technologies, Inc. (Palatin), 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 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.
In August 2007, representatives of the U.S. Food and Drug
Administration (the FDA) communicated serious
concerns about the lack of an acceptable benefit/risk ratio to
support the progression of the proposed bremelanotide program
into Phase 3 studies for erectile dysfunction (ED). After
reviewing the data generated in the Phase 1 and 2 studies, the
FDA questioned the overall efficacy results and the clinical
benefit of this product in both the general and diabetic ED
populations, and cited blood pressure increases as its greatest
safety concern.
In light of the of the FDAs comments, and after
discussions with Palatin, on September 6, 2007, we provided
notice to Palatin that we are terminating the Agreement. The
termination becomes effective on
41
December 6, 2007, which is 90 days after
Palatins receipt of the notice. We have no further
obligation for payments related to milestones but have various
immaterial obligations related to the wind-down of the
collaboration.
Altace®
On September 11, 2007, the U.S. Circuit Court of
Appeals for the Federal Circuit (the Circuit Court)
declared invalid U.S. Patent No. 5,061,722 (the
722 Patent) that covers our
Altace®
product, overruling the decision of the U.S. District Court
for the Eastern District of Virginia (the District
Court), which had upheld the validity of the patent. We
filed with the Circuit Court a petition for rehearing and
rehearing en banc, and Lupin Ltd. (Lupin)
filed its responsive brief on November 7, 2007, but the
Circuit Court has yet to issue a decision regarding the
petition. Invalidation of the 722 Patent will likely lead
to generic versions of
Altace®
entering the market sooner than previously anticipated. The
entry of generic products into the market would likely cause our
net sales of
Altace®
to decline significantly.
Following the Circuit Courts decision, our senior
management team conducted an extensive examination of our
Company and developed a restructuring initiative designed to
accelerate a planned strategic shift emphasizing our focus in
neuroscience, hospital and acute care medicine. This initiative
includes a reduction in personnel, staff leverage, expense
reductions and additional controls over spending, reorganization
of sales teams and a realignment of research and development
priorities.
Pursuant to this initiative, we will terminate approximately 20%
of our current workforce. These reductions will be effective in
late December 2007. We anticipate that we will incur total costs
of approximately $70.0 million, which includes
approximately $30.0 million related to the termination of our
promotion agreement with Depomed, Inc. for
Glumetzatm.
Rochester,
Michigan Sterile Manufacturing Facility
On October 1, 2007, we sold our Rochester, Michigan sterile
manufacturing facility, some of our legacy products that are
manufactured there, and the related contract manufacturing
business to JHP Pharmaceuticals, LLC (JHP)
for $91.5 million, less selling costs of $5.3 million.
The companies also entered into a manufacturing and supply
agreement pursuant to which JHP will provide certain filling and
finishing manufacturing activities with respect to
Thrombin-JMI®.
The redeployment of our investments in the assets subject to
this transaction should enable us to bolster our ongoing
business development and research and development initiatives,
which we believe are more likely to contribute to our potential
for long-term growth.
License,
Development and Commercialization Agreement with Acura
Pharmaceuticals, Inc.
On October 30, 2007, King Pharmaceuticals Research and
Development, Inc. (King Research and
Development), our wholly owned subsidiary, entered into a
License, Development and Commercialization Agreement with Acura
Pharmaceuticals, Inc. (Acura) to develop and
commercialize certain opioid analgesic products utilizing
Acuras proprietary
Aversion®
(abuse deterrent) Technology in the United States, Canada and
Mexico. The agreement provides us with an exclusive license for
Acuroxtm
(oxycodone HCl, niacin and a unique combination of other
ingredients) tablets, formerly known as OxyADF, and another
undisclosed opioid product utilizing Acuras
Aversion®
Technology. In addition, the agreement provides us with an
option to license all future opioid analgesic products developed
utilizing Acuras
Aversion®
Technology.
42
RESULTS
OF OPERATIONS
Three
and Nine Months Ended September 30, 2007 and
2006
The following table summarizes total revenues and cost of
revenues by operating segment, excluding intercompany
transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
For the Nine
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branded pharmaceuticals
|
|
$
|
472,363
|
|
|
$
|
432,887
|
|
|
$
|
1,388,381
|
|
|
$
|
1,269,625
|
|
Meridian Medical Technologies
|
|
|
47,919
|
|
|
|
37,125
|
|
|
|
141,830
|
|
|
|
132,292
|
|
Royalties
|
|
|
20,042
|
|
|
|
19,136
|
|
|
|
60,762
|
|
|
|
59,857
|
|
Contract manufacturing
|
|
|
2,034
|
|
|
|
2,558
|
|
|
|
8,692
|
|
|
|
13,812
|
|
Other
|
|
|
2,496
|
|
|
|
|
|
|
|
3,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
544,854
|
|
|
$
|
491,706
|
|
|
$
|
1,603,610
|
|
|
$
|
1,475,586
|
|
Cost of Revenues, exclusive of depreciation, amortization and
impairments Branded pharmaceuticals
|
|
$
|
173,773
|
|
|
$
|
83,225
|
|
|
$
|
356,406
|
|
|
$
|
224,319
|
|
Meridian Medical Technologies
|
|
|
19,169
|
|
|
|
17,324
|
|
|
|
58,357
|
|
|
|
60,327
|
|
Royalties
|
|
|
2,442
|
|
|
|
2,337
|
|
|
|
7,512
|
|
|
|
7,263
|
|
Contract manufacturing
|
|
|
2,512
|
|
|
|
3,587
|
|
|
|
8,801
|
|
|
|
14,016
|
|
Other
|
|
|
(135
|
)
|
|
|
|
|
|
|
3,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
197,761
|
|
|
$
|
106,473
|
|
|
$
|
434,745
|
|
|
$
|
305,925
|
|
The following table summarizes our gross to net sales deductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Gross Sales
|
|
$
|
673,111
|
|
|
$
|
607,543
|
|
|
$
|
1,975,373
|
|
|
$
|
1,831,972
|
|
Commercial Rebates
|
|
|
48,902
|
|
|
|
47,306
|
|
|
|
142,965
|
|
|
|
144,350
|
|
Medicaid Rebates
|
|
|
8,323
|
|
|
|
2,882
|
|
|
|
29,219
|
|
|
|
21,194
|
|
Medicare Part D Rebates
|
|
|
14,334
|
|
|
|
15,586
|
|
|
|
43,970
|
|
|
|
41,456
|
|
Chargebacks
|
|
|
26,200
|
|
|
|
24,193
|
|
|
|
72,427
|
|
|
|
76,440
|
|
Returns
|
|
|
5,900
|
|
|
|
2,511
|
|
|
|
11,136
|
|
|
|
10,053
|
|
Trade Discounts/Other
|
|
|
24,614
|
|
|
|
22,494
|
|
|
|
72,398
|
|
|
|
62,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
544,838
|
|
|
|
492,571
|
|
|
|
1,603,258
|
|
|
|
1,476,358
|
|
Discontinued Operations
|
|
|
(16
|
)
|
|
|
865
|
|
|
|
(352
|
)
|
|
|
772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
544,854
|
|
|
$
|
491,706
|
|
|
$
|
1,603,610
|
|
|
$
|
1,475,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross sales were higher in the third quarter of 2007 compared to
the third quarter of 2006 and in the first nine months of 2007
compared to the first nine months of 2006 primarily due to the
acquisition of
Avinza®
on February 26, 2007 and price increases on various
products.
During January 2006, the Medicare Prescription Drug Improvement
and Modernization Act became effective, which 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
43
require us to pay rebates based on contractual pricing and
actual utilization under the plans. Initial enrollment in the
Medicare Part D Program was open through the middle of the
second quarter of 2006.
The following tables provide the activity and ending balances
for our significant gross to net sales categories:
Accrual
for Rebates, including Administrative Fees (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Balance at January 1, net of prepaid amounts
|
|
$
|
53,765
|
|
|
$
|
126,240
|
|
Current provision related to sales made in current period
|
|
|
72,088
|
|
|
|
79,690
|
|
Current provision related to sales made in prior periods
|
|
|
534
|
|
|
|
(3,532
|
)
|
Rebates paid
|
|
|
(67,255
|
)
|
|
|
(115,999
|
)
|
|
|
|
|
|
|
|
|
|
Balance at March 31, net of prepaid amounts
|
|
$
|
59,132
|
|
|
$
|
86,399
|
|
|
|
|
|
|
|
|
|
|
Current provision related to sales made in current period
|
|
|
72,822
|
|
|
|
69,912
|
|
Current provision related to sales made in prior periods
|
|
|
(849
|
)
|
|
|
(4,844
|
)
|
Rebates paid
|
|
|
(72,924
|
)
|
|
|
(82,158
|
)
|
|
|
|
|
|
|
|
|
|
Balance at June 30, net of prepaid amounts
|
|
$
|
58,181
|
|
|
$
|
69,309
|
|
|
|
|
|
|
|
|
|
|
Current provision related to sales made in current period
|
|
|
73,760
|
|
|
|
76,684
|
|
Current provision related to sales made in prior periods
|
|
|
(2,201
|
)
|
|
|
(10,910
|
)
|
Rebates paid
|
|
|
(74,672
|
)
|
|
|
(76,460
|
)
|
|
|
|
|
|
|
|
|
|
Balance at September 30, net of prepaid amounts
|
|
$
|
55,068
|
|
|
$
|
58,623
|
|
|
|
|
|
|
|
|
|
|
Rebates include commercial rebates and Medicaid and Medicare
rebates.
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 settlement, please see Settlement of
Governmental Pricing Investigation included in
Note 8, Commitments and Contingencies, in
Item 1, Financial Statements. 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 delayed 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 8, Commitments and Contingencies, in
Item 1, Financial Statements. In the third
quarter and first nine months of 2006, the utilization of
overpayments reduced our rebate payments by $3.4 million
and $23.2 million, respectively. In the third quarter and
first nine months of 2007, the utilization of overpayments
reduced our rebate payments by approximately $1.6 million
and $5.5 million, respectively. The utilization of the
overpayments has therefore reduced Rebates paid in
the table above.
During the third quarter of 2006, we reduced our 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.
44
Accrual for Returns (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Balance at January 1
|
|
$
|
42,001
|
|
|
$
|
50,902
|
|
Current provision
|
|
|
(1,254
|
)
|
|
|
(702
|
)
|
Actual returns
|
|
|
(6,295
|
)
|
|
|
(7,692
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance at March 31
|
|
$
|
34,452
|
|
|
$
|
42,508
|
|
|
|
|
|
|
|
|
|
|
Current provision
|
|
|
6,490
|
|
|
|
8,244
|
|
Actual returns
|
|
|
(4,767
|
)
|
|
|
(4,410
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance at June 30
|
|
$
|
36,175
|
|
|
$
|
46,342
|
|
|
|
|
|
|
|
|
|
|
Current provision
|
|
|
5,900
|
|
|
|
2,511
|
|
Actual returns
|
|
|
(4,713
|
)
|
|
|
(6,760
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance at September 30
|
|
$
|
37,362
|
|
|
$
|
42,093
|
|
|
|
|
|
|
|
|
|
|
Our calculation for product 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 inventory levels of our products. Because actual
returns related to sales in prior periods were lower than our
original estimates, we recorded a decrease in our reserve for
returns in each of the first quarter of 2007 and the first
quarter of 2006. During the first quarter of 2007, 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 effect of the change in estimate on
first quarter 2007 operating income was an increase of
approximately $5.0 million. During the first quarter of
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 effect of the
change in estimate on first quarter 2006 operating income was an
increase of approximately $6.0 million. The Accrual
for Returns table above reflects these adjustments as a
reduction in the current provision.
Accrual
for Chargebacks (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Balance at January 1
|
|
$
|
13,939
|
|
|
$
|
13,153
|
|
Current provision
|
|
|
23,645
|
|
|
|
29,390
|
|
Actual chargebacks
|
|
|
(26,557
|
)
|
|
|
(25,972
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance at March 31
|
|
$
|
11,027
|
|
|
$
|
16,571
|
|
|
|
|
|
|
|
|
|
|
Current provision
|
|
|
22,582
|
|
|
|
22,857
|
|
Actual chargebacks
|
|
|
(22,962
|
)
|
|
|
(25,402
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance at June 30
|
|
$
|
10,647
|
|
|
$
|
14,026
|
|
|
|
|
|
|
|
|
|
|
Current provision
|
|
|
26,200
|
|
|
|
24,193
|
|
Actual chargebacks
|
|
|
(25,289
|
)
|
|
|
(25,278
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance at September 30
|
|
$
|
11,558
|
|
|
$
|
12,941
|
|
|
|
|
|
|
|
|
|
|
45
Branded
Pharmaceuticals Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
Change
|
|
|
For the Nine Months
|
|
|
Change
|
|
|
|
Ended September 30,
|
|
|
2007 vs. 2006
|
|
|
Ended September 30,
|
|
|
2007 vs. 2006
|
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Branded Pharmaceutical revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Altace®
|
|
$
|
168,524
|
|
|
$
|
158,914
|
|
|
$
|
9,610
|
|
|
|
6.0
|
%
|
|
$
|
488,440
|
|
|
$
|
471,604
|
|
|
$
|
16,836
|
|
|
|
3.6
|
%
|
Skelaxin®
|
|
|
105,653
|
|
|
|
105,933
|
|
|
|
(280
|
)
|
|
|
(<1
|
)
|
|
|
325,778
|
|
|
|
302,037
|
|
|
|
23,741
|
|
|
|
7.9
|
|
Thrombin-JMI®
|
|
|
68,968
|
|
|
|
70,029
|
|
|
|
(1,061
|
)
|
|
|
(1.5
|
)
|
|
|
198,099
|
|
|
|
190,133
|
|
|
|
7,966
|
|
|
|
4.2
|
|
Avinza®
|
|
|
31,802
|
|
|
|
|
|
|
|
31,802
|
|
|
|
|
|
|
|
76,051
|
|
|
|
|
|
|
|
76,051
|
|
|
|
|
|
Levoxyl®
|
|
|
20,596
|
|
|
|
24,644
|
|
|
|
(4,048
|
)
|
|
|
(16.4
|
)
|
|
|
68,237
|
|
|
|
84,726
|
|
|
|
(16,489
|
)
|
|
|
(19.5
|
)
|
Sonata®
|
|
|
17,862
|
|
|
|
18,660
|
|
|
|
(798
|
)
|
|
|
(4.3
|
)
|
|
|
58,305
|
|
|
|
63,838
|
|
|
|
(5,533
|
)
|
|
|
(8.7
|
)
|
Other
|
|
|
58,958
|
|
|
|
54,707
|
|
|
|
4,251
|
|
|
|
7.8
|
|
|
|
173,471
|
|
|
|
157,287
|
|
|
|
16,184
|
|
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
472,363
|
|
|
|
432,887
|
|
|
|
39,476
|
|
|
|
9.1
|
|
|
|
1,388,381
|
|
|
|
1,269,625
|
|
|
|
118,756
|
|
|
|
9.4
|
|
Cost of revenues, exclusive of depreciation, amortization and
impairments
|
|
|
173,773
|
|
|
|
83,225
|
|
|
|
90,548
|
|
|
|
>100.0
|
|
|
|
356,406
|
|
|
|
224,319
|
|
|
|
132,087
|
|
|
|
58.9
|
|
Net sales from branded pharmaceutical products were higher in
the third quarter of 2007 than in the third quarter of 2006 and
in the first nine months of 2007 compared to the first nine
months of 2006 primarily due to the acquisition of
Avinza®
on February 26, 2007 and price increases on various
products. Based on inventory data provided to us by our
customers, we believe that wholesale inventory levels of our key
products,
Altace®,
Skelaxin®,
Thrombin-JMI®,
Avinza®,
Levoxyl®,
and
Sonata®
remain at normalized levels as of September 30, 2007. We
estimate that wholesale and retail inventories of our products
as of September 30, 2007 represent gross sales of
approximately $165.0 million to $175.0 million.
Sales
of Key Products
Altace®
Net sales of
Altace®
increased in the third quarter and first nine months of 2007
from the third quarter and first nine months of 2006 primarily
due to price increases taken in the fourth quarter of 2006 and
the third quarter of 2007, which were offset by a decrease in
prescriptions. Total prescriptions for
Altace®
decreased approximately 8.0% and 6.6% in the third quarter of
2007 and the first nine months of 2007, respectively, compared
to the same periods of the prior year according to IMS America,
Ltd. (IMS) monthly prescription data.
Because of potential generic competition, the challenges
associated with our anticipated launch of the ramipril tablet
formulation in the fourth quarter of 2007 and the ongoing
reduction of a portion of our sales force dedicated to
cardiovascular/metabolic products, sales of
Altace®
will likely decline significantly in future periods.
For a discussion regarding the development of an Altace tablet
formulation, please see Note 4, Acquisitions,
Dispositions, Co-Promotions and Alliances in Item 1,
Financial Statements. For a discussion regarding the
risk of potential generic competition for
Altace®,
please see Note 8, Commitments and
Contingencies in Item 1, Financial
Statements.
Skelaxin®
Net sales of
Skelaxin®
in the third quarter and in the first nine months of 2007
benefited from a price increase taken in the fourth quarter of
2006. During the third quarter of 2006, net sales of
Skelaxin®
benefited from a reduction in the rebate reserve for a
government pricing program for military dependents and retirees
as described above. During the first nine months of 2007, net
sales of
Skelaxin®
benefited from a favorable change in estimate during the first
quarter of 2007 in the products reserve for returns as
discussed above. Total prescriptions for
Skelaxin®
decreased approximately 1.6% and 0.7% in the third quarter of
2007 and the
46
first nine months of 2007, respectively, compared to the same
periods of the prior year, according to IMS monthly prescription
data. We do not anticipate
Skelaxin®
net sales will increase at the same rate experienced in the
first nine months of 2007.
For a discussion regarding the risk of potential generic
competition for
Skelaxin®,
please see Note 8, Commitments and
Contingencies, in Item 1, Financial
Statements.
Thrombin-JMI®
Net sales of
Thrombin-JMI®
increased in the first nine months of 2007 compared to the first
nine months of 2006 primarily due to a price increase taken in
the fourth quarter of 2006. We believe
Thrombin-JMI®
net sales in 2007 may not continue to increase at the rate
experienced in the first nine months of 2007. There is a
significant possibility that competing products could enter the
market in late 2007 or in 2008. It is possible that net sales of
Thrombin-JMI®
would decrease following the entry of one or more competing
products.
Avinza®
The Company acquired all rights to
Avinza®
in the United States, its territories and Canada on
February 26, 2007. Net sales of
Avinza®
in the first nine months of 2007 reflect sales occurring from
February 26, 2007 through September 30, 2007. Total
prescriptions for
Avinza®
decreased approximately 17.5% in the third quarter of 2007 and
the first nine months of 2007 compared to the same periods of
the prior year according to IMS monthly prescription data.
For a discussion regarding the risk of potential generic
competition for
Avinza®,
please see Note 8, Commitments and
Contingencies, in Item 1, Financial
Statements.
Levoxyl®
Net sales of
Levoxyl®
decreased in the third quarter of 2007 and first nine months of
2007 compared to the same periods in the prior year primarily
due to a decrease in prescriptions in 2007 as a result of
generic competition. Total prescriptions for
Levoxyl®
were approximately 13.3% and 12.9% lower in the third quarter of
2007 and the first nine months of 2007, respectively, compared
to the same periods of the prior year according to IMS monthly
prescription data.
During the first nine months of 2006, net sales of
Levoxyl®
benefited from a favorable change in estimate during the first
quarter of 2006 of approximately $7.0 million in the
products reserve for Medicaid rebates as a result of the
recent government pricing investigation settlement. This benefit
was substantially offset by increases in Medicaid rebate
reserves for other products as a result of the settlement.
Sonata®
Net sales of
Sonata®
were lower in the third quarter of 2007 than in the third
quarter of 2006 primarily due to a decrease in prescriptions
partially offset by a price increase taken in the fourth quarter
of 2006. Total prescriptions for
Sonata®
decreased approximately 23.8% and 19.0% in the third quarter of
2007 and the first nine months of 2007, respectively, compared
to the same periods of the prior year according to IMS monthly
prescription data. The decrease in prescriptions during 2007 was
primarily due to new competitors that entered the market in 2005
and a decrease in promotional efforts.
Net sales of
Sonata®
were lower in the first nine months of 2007 than in the first
nine months of 2006 primarily due to a decrease in prescriptions
and an increase in returns, partially offset by a price increase
taken in the fourth quarter of 2006.
For a discussion regarding the risk of potential generic
competition for
Sonata®,
please see Note 8, Commitments and
Contingencies, in Item 1, Financial
Statements.
47
Other
Net sales of other branded pharmaceutical products were higher
in the third quarter of 2007 compared to the third quarter of
2006 primarily due to price increases which were partially
offset by decreases in prescriptions.
Net sales of other branded pharmaceutical products were higher
in the first nine months of 2007 compared to the first nine
months of 2006 primarily due to an increase in net sales of
Bicillin®
and price increases which were partially offset by decreases in
prescriptions. We completed construction of facilities to
produce
Bicillin®
at our Rochester, Michigan location, began commercial production
in the fourth quarter of 2006, and replenished wholesale
inventories of the product during the first quarter of 2007.
Most of our other branded pharmaceutical products are not
promoted through our sales force and prescriptions for many of
these products are declining. As discussed above, we completed
the sale of several of our other branded pharmaceutical products
to JHP on October 1, 2007. Considering all of these
factors, we anticipate net sales of other branded pharmaceutical
products will significantly decrease in the fourth quarter
of 2007.
Cost
of Revenues
Cost of revenues from branded pharmaceutical products increased
in the third quarter and first nine months of 2007 from the
third quarter and first nine months of 2006 primarily due to an
increase in royalties associated with
Skelaxin®
and
Avinza®.
Cost of revenues from branded pharmaceutical products could
increase in the fourth quarter of 2007 due to the expected
launch of the
Altace®
tablet formulation, which has a significantly higher cost than
the current formulation.
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.
Cost of revenues from branded pharmaceutical products includes
the following special items:
|
|
|
|
|
A termination of a contract that resulted in a charge of
$3.8 million in the first nine months of 2007.
|
|
|
|
An inventory valuation allowance of $17.3 million for raw
material inventory associated with
Altace®
and a charge of $39.9 million for the write-down of prepaid raw
material inventory associated with
Altace®
in the third quarter of 2007. For additional information, please
see Note, 3, Inventories, in Item 1,
Financial Statements.
|
|
|
|
A charge of $24.6 million primarily associated with minimum
purchase requirements under a supply agreement to purchase raw
material inventory associated with
Altace®
in the third quarter of 2007. For additional information, please
see Note, 3, Inventories, in Item 1,
Financial Statements.
|
Meridian
Medical Technologies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
Change
|
|
|
For the Nine
|
|
|
Change
|
|
|
|
September 30,
|
|
|
2007 vs. 2006
|
|
|
Months Ended September 30,
|
|
|
2007 vs. 2006
|
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Meridian Medical Technologies revenue
|
|
$
|
47,919
|
|
|
$
|
37,125
|
|
|
$
|
10,794
|
|
|
|
29.1
|
%
|
|
$
|
141,830
|
|
|
$
|
132,292
|
|
|
$
|
9,538
|
|
|
|
7.2
|
%
|
Cost of revenues, exclusive of depreciation, amortization and
impairments
|
|
|
19,169
|
|
|
|
17,324
|
|
|
|
1,845
|
|
|
|
10.6
|
|
|
|
58,357
|
|
|
|
60,327
|
|
|
|
(1,970
|
)
|
|
|
(3.3
|
)
|
48
Revenues from Meridian Medical Technologies increased in the
third quarter of 2007 compared to the third quarter of 2006
primarily due to an increase in unit sales of
Epipen®
to Dey, L.P. and a price increase taken in the first quarter of
2007. Revenues from Meridian Medical Technologies increased in
the first nine months of 2007 compared to the first nine months
of 2006 primarily due to a price increase taken in the first
quarter of 2007, and an increase in 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 worldwide, except for
Canada where it is marketed, distributed and sold by us.
Revenues from Meridian Medical Technologies fluctuate based on
the buying patterns of Dey, L.P. and government customers. Total
prescriptions for
Epipen®
in the United States increased approximately 11.2% and 7.6%
during the third quarter of 2007 and the first nine months of
2007, respectively, compared to the same periods of the prior
year according to IMS monthly prescription data.
Cost of revenues from Meridian Medical Technologies increased in
the third quarter of 2007 primarily due to higher unit sales.
Cost of revenues from Meridian Medical Technologies decreased in
the first nine months of 2007 primarily due to cost savings
derived from efficiencies in the production process.
Royalties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
|
|
|
|
|
|
|
|
|
|
Months Ended
|
|
|
Change
|
|
|
For the Nine
|
|
|
Change
|
|
|
|
September 30,
|
|
|
2007 vs. 2006
|
|
|
Months Ended September 30,
|
|
|
2007 vs. 2006
|
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Royalty revenue
|
|
$
|
20,042
|
|
|
$
|
19,136
|
|
|
$
|
906
|
|
|
|
4.7
|
%
|
|
$
|
60,762
|
|
|
$
|
59,857
|
|
|
$
|
905
|
|
|
|
1.5
|
%
|
Cost of revenues, exclusive of depreciation, amortization and
impairments
|
|
|
2,442
|
|
|
|
2,337
|
|
|
|
105
|
|
|
|
4.5
|
|
|
|
7,512
|
|
|
|
7,263
|
|
|
|
249
|
|
|
|
3.4
|
|
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 future periods. For a discussion
regarding the potential risk of generic competition for
Adenoscan®,
please see Note 8, Commitments and
Contingencies, in Item 1, Financial
Statements.
Contract
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
Change
|
|
|
For the Nine
|
|
|
Change
|
|
|
|
September 30,
|
|
|
2007 vs. 2006
|
|
|
Months Ended September 30,
|
|
|
2007 vs. 2006
|
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Contract manufacturing revenue
|
|
$
|
2,034
|
|
|
$
|
2,558
|
|
|
$
|
(524
|
)
|
|
|
(20.5
|
)%
|
|
$
|
8,692
|
|
|
$
|
13,812
|
|
|
$
|
(5,120
|
)
|
|
|
(37.1
|
)%
|
Cost of revenues, exclusive of depreciation, amortization and
impairments
|
|
|
2,512
|
|
|
|
3,587
|
|
|
|
(1,075
|
)
|
|
|
(30.0
|
)
|
|
|
8,801
|
|
|
|
14,016
|
|
|
|
(5,215
|
)
|
|
|
(37.2
|
)
|
Revenues and cost of revenues from contract manufacturing
decreased in the third quarter and first nine months of 2007
compared to the third quarter and first nine months of 2006 due
to a lower volume of units manufactured for third parties. As
discussed above, we completed the sale of substantially all of
our contract manufacturing business to JHP on October 1,
2007. Therefore, we anticipate a significant decrease in
contract manufacturing revenue in the fourth quarter of 2007.
49
Operating
Costs and Expenses
The following table summarizes total operating costs and
expenses, excluding intercompany transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
Change
|
|
|
For the Nine Months
|
|
|
Change
|
|
|
|
Ended September 30,
|
|
|
2007 vs. 2006
|
|
|
Ended September 30,
|
|
|
2007 vs. 2006
|
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Cost of revenues, exclusive of depreciation, amortization and
impairments as shown below
|
|
$
|
197,761
|
|
|
$
|
106,473
|
|
|
$
|
91,288
|
|
|
|
85.7
|
%
|
|
$
|
434,745
|
|
|
$
|
305,925
|
|
|
$
|
128,820
|
|
|
|
42.1
|
%
|
Selling, general and administrative
|
|
|
185,257
|
|
|
|
157,594
|
|
|
|
27,663
|
|
|
|
17.6
|
|
|
|
526,777
|
|
|
|
482,095
|
|
|
|
44,682
|
|
|
|
9.3
|
|
Research and development
|
|
|
35,089
|
|
|
|
63,419
|
|
|
|
(28,330
|
)
|
|
|
(44.7
|
)
|
|
|
107,815
|
|
|
|
212,931
|
|
|
|
(105,116
|
)
|
|
|
(49.4
|
)
|
Depreciation and amortization
|
|
|
36,762
|
|
|
|
37,833
|
|
|
|
(1,071
|
)
|
|
|
(2.8
|
)
|
|
|
112,852
|
|
|
|
110,745
|
|
|
|
2,107
|
|
|
|
1.9
|
|
Asset impairments
|
|
|
147,838
|
|
|
|
|
|
|
|
147,838
|
|
|
|
|
|
|
|
222,648
|
|
|
|
279
|
|
|
|
222,369
|
|
|
|
>100
|
|
Restructuring charges
|
|
|
20,274
|
|
|
|
3,202
|
|
|
|
17,072
|
|
|
|
>100
|
|
|
|
20,734
|
|
|
|
3,194
|
|
|
|
17,540
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
$
|
622,981
|
|
|
$
|
368,521
|
|
|
$
|
254,460
|
|
|
|
69.0
|
%
|
|
$
|
1,425,571
|
|
|
$
|
1,115,169
|
|
|
$
|
310,402
|
|
|
|
27.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
Change
|
|
|
For the Nine
|
|
|
Change
|
|
|
|
Ended September 30,
|
|
|
2007 vs. 2006
|
|
|
Months Ended September 30,
|
|
|
2007 vs. 2006
|
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Selling, general and administrative, exclusive of co-promotion
fees
|
|
$
|
136,286
|
|
|
$
|
107,300
|
|
|
$
|
28,986
|
|
|
|
27.0
|
%
|
|
$
|
384,324
|
|
|
$
|
319,480
|
|
|
$
|
64,844
|
|
|
|
20.3
|
%
|
Co-promotion fees
|
|
|
48,971
|
|
|
|
50,294
|
|
|
|
(1,323
|
)
|
|
|
(2.6
|
)
|
|
|
142,453
|
|
|
|
162,615
|
|
|
|
(20,162
|
)
|
|
|
(12.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative
|
|
$
|
185,257
|
|
|
$
|
157,594
|
|
|
$
|
27,663
|
|
|
|
17.6
|
%
|
|
$
|
526,777
|
|
|
$
|
482,095
|
|
|
$
|
44,682
|
|
|
|
9.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total revenues, total selling, general, and
administrative expenses were 34.0% and 32.1% in the third
quarter of 2007 and the third quarter of 2006, respectively. As
a percentage of total revenues, total selling, general, and
administrative expenses were 32.8% and 32.7% the first nine
months of 2007 and the first nine months of 2006, respectively.
Total selling, general and administrative expenses increased in
the third quarter of 2007 compared to the third quarter of 2006
primarily due to an increase in operating expenses associated
with sales and marketing. The increases in sales and marketing
expenses are driven by an increase in the size of our sales
force and marketing costs primarily associated with
Altace®
and
Avinza®.
Selling, general and administrative expenses, exclusive of
co-promotion fees, are expected to decline in the fourth quarter
of 2007 as a result of the restructuring charges we expect to
incur in the fourth quarter of 2007. For the full year 2008, we
expect selling, general and administrative expenses, exclusive
of co-promotion fees, to decline by approximately
$75.0 million to $90.0 million compared to full year
2007.
Total selling, general and administrative expenses increased in
the first nine months of 2007 compared to the first nine months
of 2006 primarily due to an increase in operating expenses
associated with sales and marketing for the reasons discussed
above, partially offset by a decrease in co-promotion fees we
pay to Wyeth under our co-promotion agreement. The co-promotion
fee decreased due to a lower co-promotion fee average rate
during 2007 as a result of the Amended Co-Promotion Agreement.
For additional discussion regarding the Amended Co-Promotion
Agreement, please see General within the
Liquidity and Capital Resources section below. For a
discussion regarding net sales of
Altace®,
please see the section entitled
Altace®
within the Sales of Key Products section above.
50
Selling, general and administrative expense includes special
items including charges of $1.2 million and
$0.7 million in the third quarter of 2007 and the first
nine months of 2007, respectively, and a benefit of
$5.5 million and $1.0 million in the third quarter of
2006 and the first nine months of 2006, respectively, primarily
due to professional fees related to the now-completed
investigations of our company by the HHS/OIG and the SEC, and
ongoing private plaintiff securities litigation. During the
second quarter of 2007 and the third quarter of 2006, we
recorded anticipated recoveries of legal fees in the amount of
$3.4 million and $6.8 million, respectively, related
to the securities litigation. In July of 2007 and November of
2006, we received payment for the recovery of these legal fees.
For additional information, please see Note 8,
Commitments and Contingencies, in Item 1,
Financial Statements.
Research
and Development Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
|
|
|
For the Nine
|
|
|
|
|
|
|
Months Ended
|
|
|
Change
|
|
|
Months Ended
|
|
|
Change
|
|
|
|
September 30,
|
|
|
2007 vs. 2006
|
|
|
September 30,
|
|
|
2007 vs. 2006
|
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
34,889
|
|
|
$
|
38,419
|
|
|
$
|
(3,530
|
)
|
|
|
(9.2
|
)%
|
|
$
|
104,515
|
|
|
$
|
102,931
|
|
|
$
|
1,584
|
|
|
|
1.5
|
%
|
Research and development in process upon acquisition
|
|
|
200
|
|
|
|
25,000
|
|
|
|
(24,800
|
)
|
|
|
(99.2
|
)
|
|
|
3,300
|
|
|
|
110,000
|
|
|
|
(106,700
|
)
|
|
|
(97.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development
|
|
$
|
35,089
|
|
|
$
|
63,419
|
|
|
$
|
(28,330
|
)
|
|
|
(44.7
|
)%
|
|
$
|
107,815
|
|
|
$
|
212,931
|
|
|
$
|
(105,116
|
)
|
|
|
(49.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. Additionally, research and development
expense has continued to increase as we have added 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.
Research and development in-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. In the first nine months of 2007,
special items included a charge equaling $3.1 million for a
payment to Mutual Pharmaceutical Company (Mutual) to
jointly research and develop one or more improved formulations
of metaxalone. During the third quarter of 2006 and first nine
months of 2006, special items included charges of
$25.0 million and $110.0 million, respectively, 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 the agreement with Mutual, we seek Mutuals expertise
in developing improved formulations of metaxalone, including
improved formulations Mutual developed prior to execution of
this agreement and access to the Mutuals and United
Research Laboratories rights in intellectual property
pertaining to these formulations. The success of this project
depends on additional development activities and FDA approval.
The estimated cost to complete the project at the execution of
the agreement was approximately $5.0 million. In addition,
we could be required to make additional milestone payments of up
to $10.0 million.
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 tablet 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
51
$3.5 million. The FDA approved the NDA for the tablet
formulation of ramipril on February 27, 2007. We expect to
launch the tablet formulation of ramipril during the fourth
quarter of 2007.
Depreciation
and Amortization Expense
Depreciation and amortization expense decreased in the third
quarter of 2007 compared to the third quarter of 2006 primarily
due to the property, plant and equipment, and intangible assets
related to the sale of our Rochester, Michigan sterile
manufacturing facility. On June 30, 2007, these assets were
classified as held for sale, and accordingly the depreciation
and amortization was discontinued as of that date. This decrease
was partially offset by increased amortization related to
Avinza®
Depreciation and amortization expense increased in the first
nine months of 2007 compared to the first nine months of 2006
primarily due to increased amortization expense related to
Avinza®.
On February 26, 2007, we completed our acquisition of
Avinza®
and began amortizing the associated intangible assets as of that
date.
For additional information relating to the acquisition of
Avinza®,
please see Note 4, Acquisitions, Dispositions,
Co-Promotions
and Alliances, in Item 1, Financial
Statements. For additional information relating to the
sale of the Rochester, Michigan facility, please see
Note 6, Assets Held for Sale, in Item 1,
Financial Statements.
Depreciation and amortization expense in the third quarter and
the first nine months of 2007 includes a special item consisting
of a $2.1 million and $5.1 million charge,
respectively, 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 in the third quarter and first nine months
of 2006 includes a charge of $1.5 million associated with
accelerated depreciation of these assets.
Other
Operating Expenses
In addition to the special items described above, we incurred
other special items affecting operating costs and expenses.
These other special items included the following:
|
|
|
|
|
An intangible asset impairment charge of $146.4 million in
the third quarter of 2007 related to our
Altace®
product. On September 11, 2007 the Circuit Court declared
invalid the 722 patent that covers our
Altace®
product. Following the Circuit Courts decision, we reduced
the estimated useful life of this product and forecasted net
sales which reduced the probability-weighted estimated
undiscounted future cash flows associated with
Altace®
intangible assets to a level below their carrying value. We
determined the fair value of these assets based on
probability-weighted estimated discounted future cash flows.
|
|
|
|
An intangible asset impairment charge of $29.3 million in
the second quarter of 2007 and $0.3 million in the second
quarter of 2006. The intangible asset impairment charge in the
second quarter of 2007 was primarily related to our decision to
no longer pursue the development of a new formulation of
Intal®
utilizing hydroflouroalkane as a propellant.
|
|
|
|
A charge of $45.6 million in the second quarter of 2007 and
a charge of $1.4 million in the third quarter of 2007
related to the write-down of our Rochester, Michigan sterile
manufacturing facility and certain legacy branded pharmaceutical
products which we have classified as held for sale. On
October 1, 2007, we closed the asset purchase agreement
with JHP, pursuant to which JHP acquired our Rochester, Michigan
sterile manufacturing facility, some of our legacy products that
are manufactured there, and the related contract manufacturing
business. For additional information, please see Note 6,
Assets Held for Sale, in Item 1,
Financial Statements, and Recent
Developments, in Item 2, Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
|
|
|
Restructuring charges in the amount of $20.3 million in the
third quarter of 2007 primarily due to our restructuring
initiative designed to accelerate a planned strategic shift
emphasizing our focus in
|
52
neuroscience, hospital and acute care medicine and separation
payments associated with the sale of the Rochester, Michigan
sterile manufacturing facility discussed above.
|
|
|
|
|
Restructuring charges of $0.5 million in the first quarter of
2007 and $3.2 million in the third quarter of 2006
associated with separation payments primarily due to our
decision to transfer the production of
Levoxyl®
from our St. Petersburg, Florida facility to the Bristol,
Tennessee facility by the end of 2008.
|
As of September 30, 2007, the net intangible assets
associated with
Synercid®
totaled approximately $78.7 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 adversely change,
we may have to reduce the estimated remaining useful life
and/or write
off a portion or all of these intangible assets.
In addition, certain manufacturers of generic products have
challenged patents on
Altace®,
Skelaxin®
and
Avinza®.
For additional information, please see Note 8,
Commitments and Contingencies, in Item I,
Financial Statements. If generic versions of
Altace®,
Skelaxin®
or
Avinza®
enter the market, we may have to write-off a portion or all of
the intangible assets associated with these products.
Non-Operating
Items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Interest income
|
|
$
|
10,678
|
|
|
$
|
8,489
|
|
|
$
|
28,461
|
|
|
$
|
22,842
|
|
Interest expense
|
|
|
(1,792
|
)
|
|
|
(1,894
|
)
|
|
|
(5,670
|
)
|
|
|
(7,925
|
)
|
Gain (loss) on investment
|
|
|
(10,453
|
)
|
|
|
|
|
|
|
(10,453
|
)
|
|
|
|
|
(Loss) gain on early extinguishment of debt
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
698
|
|
Other, net
|
|
|
(416
|
)
|
|
|
101
|
|
|
|
(681
|
)
|
|
|
(613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(1,983
|
)
|
|
|
6,685
|
|
|
|
11,657
|
|
|
|
15,002
|
|
Income tax (benefit) expense
|
|
|
(39,853
|
)
|
|
|
40,020
|
|
|
|
49,310
|
|
|
|
123,931
|
|
Discontinued operations
|
|
|
(11
|
)
|
|
|
555
|
|
|
|
(226
|
)
|
|
|
497
|
|
Interest income increased during the first nine months of 2007
compared to the first nine months of 2006 primarily due to an
increase in interest rates and a higher average balance of cash,
cash equivalents and investments in debt securities in 2007
compared to 2006.
Special items affecting other income included the following:
|
|
|
|
|
A loss of $10.5 million in third quarter and first nine
months of 2007 related to our investment in Palatin. For
additional information, please see Note 13,
Marketable Securities in Item I,
Financial Statements.
|
|
|
|
A gain of $0.7 million during the first nine months of 2006
resulting from the early retirement of our
23/4% Convertible
Debentures due November 15, 2021.
|
Income
Tax (Benefit) Expense
During the third quarter of 2007 the effective tax rate on our
loss from continuing operations was 49.4%, and during the first
nine months of 2007, our effective income tax rate on our income
from continuing operations was 26.0%.
These rates differ from the statutory rate of 35% primarily due
to tax benefits relating to tax-exempt interest income, research
and experimentation tax credits, and domestic production
activities deductions, which benefits were partially offset by
state taxes. Additionally, the 2007 rate benefited from the
release of reserves under FIN 48 as a result of the closing
of the federal statute of limitations for the 2003 tax year.
During the third quarter of 2006 and the first nine months of
2006, our effective income tax rate for continuing operations
was 30.8% and 33.0%, respectively. These rates differ from the
statutory rate of 35% primarily due to tax
53
benefits related to charitable contributions of inventory,
tax-exempt interest income and domestic production activities
deductions, which benefits were partially offset by state taxes.
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. We cannot assure you that
funds will be available to us when needed on favorable terms, or
at all.
On April 23, 2002, we established a $400.0 million
five-year Senior Secured Revolving Credit Facility which was
scheduled to mature in April 2007. On April 19, 2007, this
facility was terminated and replaced with a new
$475.0 million five-year Senior Secured Revolving Credit
Facility which matures in April 2012.
On October 30, 2007, our wholly-owned subsidiary, King
Research and Development, entered into a License, Development
and Commercialization Agreement with Acura to develop and
commercialize certain opioid analgesic products utilizing
Acuras proprietary
Aversion®
(abuse deterrent) Technology in the United States, Canada and
Mexico. The agreement provides us with an exclusive license for
Acuroxtm
(oxycodone HCl, niacin and a unique combination of other
ingredients) tablets, formerly known as OxyADF, and another
undisclosed opioid product utilizing Acuras
Aversion®
Technology. In addition, the agreement provides us with an
option to license all future opioid analgesic products developed
utilizing Acuras
Aversion®
Technology.
Under the terms of the agreement, we will make a non-refundable
cash payment of $30.0 million to Acura upon the
satisfaction of closing conditions and the effectiveness of the
agreement. We will reimburse Acura for all research and
development expenses incurred beginning from September 19,
2007 for
Acuroxtm
tablets and all research and development expenses related to
future products after the exercise of our option to an exclusive
license for each future product. We may make additional
non-refundable cash milestone payments to Acura based on the
successful achievement of certain clinical and regulatory
milestones for
Acuroxtm
tablets and for each other product developed under the
agreement. We may also make an additional $50.0 million
non-refundable cash milestone payment to Acura when the
aggregate net sales of all products developed under the
agreement exceeds $750.0 million. In addition, we will make
royalty payments to Acura ranging from 5% to 25% based on the
combined annual net sales of all products developed under the
agreement.
The agreement will become effective upon the expiration or
termination of the applicable waiting period under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976.
On September 11, 2007, the Circuit Court declared invalid
the 722 Patent that covers our
Altace®
product. We filed with the Circuit Court a petition for
rehearing and rehearing en banc, and Lupin filed its
responsive brief on November 7, 2007, but the Circuit Court
has yet to issue a decision regarding the petition. Invalidation
of the 722 Patent will likely lead to generic versions of
Altace®
entering the market sooner than previously anticipated. The
entry of generic products into the market would likely cause our
net sales of
Altace®
to decline significantly.
Following the Circuit Courts decision, our senior
management team conducted an extensive examination of our
Company and developed a restructuring initiative designed to
accelerate a planned strategic shift emphasizing our focus in
neuroscience, hospital and acute care medicine. This initiative
includes a reduction in personnel, staff leverage, expense
reductions and additional controls over spending, reorganization
of sales teams and a realignment of research and development
priorities.
54
We estimate that we will incur total costs of approximately
$70.0 million, including approximately $66.4 million
of cash payments in connection with this initiative. This
includes the contract termination payment paid to Depomed, Inc.
in October of 2007 of approximately $30.0 million, as
discussed below. The remaining cash payments are expected to be
completed during the fourth quarter of 2007 and first quarter of
2008. For additional information, please see Note 12,
Restructuring Activities, in Item 1
Financial Statements.
On October 1, 2007, we sold our Rochester, Michigan sterile
manufacturing facility, some of our legacy products that are
manufactured there, and the related contract manufacturing
business to JHP Pharmaceuticals, LLC, (JHP) for
$91.5 million, subject to final inventory adjustments, less
fees of $5.3 million. We retained our Bicillin (sterile
penicillin products) manufacturing facility which is also
located in Rochester, Michigan. For additional information,
please see Note 6 Assets Held For Sale, in
Item 1, Financial Statements.
On May 18, 2007, we entered into a Product Development
Agreement with Mutual Pharmaceutical Company
(Mutual) and United Research Laboratories
(United) to jointly research and develop one or more
improved formulations of metaxalone. Under this agreement, the
Company seeks Mutuals expertise in developing improved
formulations of metaxalone, including certain improved
formulations Mutual developed prior to execution of this
agreement and access to Mutuals and Uniteds rights
in intellectual property pertaining to such formulations. We
paid $3.1 million to Mutual for development expenses, and
this was recorded as in-process research and development. We
could be required to make additional milestone payments of up to
$10.0 million.
On September 6, 2006, we entered into a definitive asset
purchase agreement and related agreements with Ligand
Pharmaceuticals Incorporated (Ligand) to acquire
rights to
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 the acquisition of
Avinza®
on February 26, 2007, acquiring all the rights to
Avinza®
in the United States, its territories and Canada. Under the
terms of the asset purchase agreement the purchase price was
$289.7 million, consisting of $289.3 million in cash
consideration and $0.4 million for the assumption of a
short-term liability. Additionally, we incurred acquisition
costs of $6.8 million. Of the cash payments made to Ligand,
$15.0 million was set aside in an escrow account to fund
potential liabilities that Ligand could later owe us, of which
$7.5 million was released to Ligand in the third quarter of
2007.
As part of the transaction, we have agreed to pay Ligand an
ongoing royalty and assume payment of Ligands royalty
obligations to 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
$250.0 million, plus 15% of net sales greater than
$250.0 million.
|
In connection with the transaction, on October 12, 2006, we
entered into a loan agreement with Ligand for the amount of
$37.8 million. 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. Pursuant to the terms of the loan agreement
with Ligand, we forgave the interest on the loan and repaid
Ligand the interest at the time of closing the transaction to
acquire
Avinza®.
Accordingly, we have not recognized interest income on the note
receivable.
On January 9, 2007, we obtained an exclusive license to
certain hemostatic products owned by Vascular Solutions, Inc.
(Vascular Solutions), including products which we
market as
Thrombi-PadTM
and
Thrombi-Gel®.
The license also includes a product we expect to market as
Thrombi-PasteTM,
which is currently in development. Each of these products
includes our
Thrombin-JMI®
topical hemostatic agent as a component. Vascular Solutions will
manufacture and supply the products for us. Upon execution of
the agreements, we
55
made an initial payment to Vascular Solutions of
$6.0 million, a portion of which is refundable in the event
FDA approval for certain of these products is not received.
During the second quarter of 2007, we made an additional
milestone payment of $1.0 million. In addition, we could
make additional milestone payments of up to $1.0 million in
cash.
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 with Wyeth regarding
Altace®.
Effective January 1, 2007, we assumed full responsibility
for selling and marketing
Altace®.
For all of 2006, the Wyeth sales force promoted 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 October 29, 2007, we announced the termination of the
co-exclusive agreement to promote
GlumetzaTM.
We paid Depomed approximately $30.0 million, and Depomed
will not be required to pay us a promotion fee for the fourth
quarter of 2007. We will fulfill our promotion obligations
through the end of 2007.
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 (Allerex). 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 amount 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
56
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 granted us an exclusive option to
acquire their entire right, title and interest to the Ramipril
Application or any future filed Amended Ramipril Application for
the amount of $5.0 million. In April 2007, we exercised
this option and paid $5.0 million to Arrow. As a result, we
own the entire right, title and interest in and to the Ramipril
Application. 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
and the first and second quarters of 2007, we made additional
payments of $25.0 million in each of the three quarters to
Arrow. 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.
On February 12, 2006, 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.
On October 12, 2007, Cobalt sent us 30-day written notice
of its intent to launch its generic ramipril product, which
product would not be supplied by us. We responded on
October 19, 2007, informing Cobalt that we intend to
vigorously enforce our rights under the 722 and 856
patents to the full extent of the law. For additional
information, please see Note 8, Commitments and
Contingencies, in Item 1, Financial
Statements.
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, 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 opioid painkillers.
RemoxyTM
is an investigational drug in late-stage clinical development by
Pain Therapeutics for the treatment of moderate-to-severe
chronic pain. Importantly,
RemoxysTM
sustained release formulation has the potential to reduce the
improper and often intentional accelerated release of oxycodone
through crushing, heating, or dissolution in alcohol that is
reported with respect to other long-acting opioids. 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 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, under the terms of the agreement,
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.
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
57
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
As previously reported, during the first quarter of 2006, we
paid approximately $129.3 million, comprising (i) all
amounts due under the settlement agreements resolving 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 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 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 asserted
for the first time on appeal that we should be responsible for
making such a payment to this individual. Oral argument of the
appeal before the United States Court of Appeals for the Third
Circuit was heard on May 8, 2007. On July 16, 2007,
the Court of Appeals affirmed the District Courts decision
in all respects, and denied the relators assertions with
respect to us. The relator has exercised his limited rights to
appeal the Court of Appeals decision. We believe that the
claim against us is without merit and we do not expect the
result of this appeal or any subsequent 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 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 and Derivative 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
(the SEC) had also been conducting an investigation
relating to our underpayments to governmental programs and to
our previously disclosed errors relating to reserves for product
returns. On October 25, 2007, we received a letter from the
Staff of the SEC stating that the investigation has been
completed, and no enforcement action has been recommended to the
SEC. The Staff of the SEC notified us of its determination
pursuant to the final paragraph of Securities Act Release No.
5310.
Securities
and Derivative Litigation
As previously reported, on July 31, 2006 the parties
entered into a stipulation of settlement and a supplemental
agreement (together, the Settlement Agreement) to
resolve the federal securities litigation related to our
underpayments of rebates owed to Medicaid and other governmental
pricing programs and certain other matters. 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, which has been fully funded by our
insurance carriers on our behalf and placed into an escrow
account controlled by the court. For additional information
about this settlement, please see Note 8, Commitments
and Contingencies, in Item I, 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
58
and directors, with respect to the same events at issue in the
federal securities litigation described above. These cases have
been consolidated. In June 2007, plaintiffs filed a motion to
amend the complaint, seeking to name as defendants additional
current and former officers and directors and our independent
auditors and to add additional claims. Following negotiations
among the parties, this motion was granted in part, but it was
denied with respect to naming as defendants additional current
and former officers and directors. Trial is scheduled to begin
on September 22, 2008. The parties are scheduled to engage
in non-binding mediation in December 2007.
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 and the second quarter of 2007,
we recorded an anticipated insurance recovery of legal fees in
the amount of $6.8 million and $3.4 million,
respectively, for the class action and derivative suits
described above. In November of 2006 and July of 2007, 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®,
Avinza®,
Sonata®
and
Adenoscan®.
For additional information, please see Note 8,
Commitments and Contingencies, in Item I,
Financial Statements. If a generic version of
Altace®,
Skelaxin®,
Avinza®,
Sonata®
or
Adenoscan®
enters the market, our business, financial condition, results of
operations and cash flows could be materially adversely affected.
Cash
Flows
Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net cash provided by operating activities
|
|
$
|
426,995
|
|
|
$
|
297,257
|
|
Our net cash from operations was higher in 2007 than in 2006
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. Our net cash flows from operations in
2007 includes the effect of a $50.1 million payment we made
as a result of a binding arbitration proceeding with Elan in
2006.
59
The following table summarizes the changes in operating assets
and liabilities and deferred taxes that occurred during the nine
months ending September 30, 2007 and 2006 and the resulting
cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Accounts receivable, net of allowance
|
|
$
|
(397
|
)
|
|
$
|
(31,015
|
)
|
Inventories
|
|
|
38,457
|
|
|
|
41,293
|
|
Prepaid expenses and other current assets
|
|
|
(37,047
|
)
|
|
|
(43,567
|
)
|
Accounts payable
|
|
|
(17,689
|
)
|
|
|
(5,552
|
)
|
Accrued expenses and other liabilities
|
|
|
(26,753
|
)
|
|
|
(114,547
|
)
|
Income taxes payable
|
|
|
8,691
|
|
|
|
(1,537
|
)
|
Deferred revenue
|
|
|
(3,510
|
)
|
|
|
(5,716
|
)
|
Other assets
|
|
|
(5,433
|
)
|
|
|
(20,256
|
)
|
Deferred taxes
|
|
|
(98,540
|
)
|
|
|
(13,853
|
)
|
|
|
|
|
|
|
|
|
|
Total changes in operating assets and liabilities and deferred
taxes
|
|
$
|
(142,221
|
)
|
|
$
|
(194,750
|
)
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net cash used in investing activities
|
|
$
|
(525,598
|
)
|
|
$
|
(247,266
|
)
|
Investing activities in 2007 include the acquisition of
Avinza®
for $296.7 million, purchases of product rights and
intellectual property for $68.0 million and net purchases
of investments in debt securities of $161.7 million.
Capital expenditures during 2007 totaled $36.7 million,
which included property, plant and equipment purchases, building
improvements for facility upgrades and 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. These payments were partially offset by the
collection of the loan to Ligand in the amount of
$37.8 million.
Investing activities in 2006 primarily relate to our net
proceeds from sales of investments in debt securities of
$284.9 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 $59.9 million for
patent rights and technology licenses under our agreements with
Arrow and certain of its affiliates and our acquisition from
Allerex Laboratory LTD of the exclusive right to market
Epipen®
in Canada. Capital expenditures during 2006 totaled
$31.2 million, which included property, plant and equipment
purchases, building improvements for facility upgrades and 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.
We anticipate capital expenditures, including capital lease
obligations, for the year ending December 31, 2007 of
approximately $50.0 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.
60
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net cash provided by financing activities
|
|
$
|
9,769
|
|
|
$
|
58,049
|
|
During 2006, we issued $400.0 million of
11/4% Convertible
Senior Notes due April 1, 2026 and repurchased almost all
of our outstanding
23/4% Convertible
Debentures due November 15, 2021 for $338.4 million.
Certain
Indebtedness and Other Matters
During the first quarter of 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.
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 May 16, 2006, the
interest rate on the Debentures reset to 3.5%. 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.
In April 2002, we established a $400.0 million five-year
senior secured revolving credit facility that was scheduled to
mature in April 2007. On April 19, 2007, this facility was
terminated and replaced with a new $475.0 million five-year
Senior Secured Revolving Credit Facility which is scheduled to
mature in April 2012 (the 2007 Credit Facility). As
of September 30, 2007 up to $474.0 million is
available to us under the 2007 Credit Facility.
The 2007 Credit Facility is collateralized by a pledge of 100%
of the equity of most of our domestic subsidiaries and by a
pledge of 65% of the equity of our foreign subsidiaries. Our
obligations under this facility are unconditionally guaranteed
on a senior basis by four of our subsidiaries, King
Pharmaceuticals Research and Development, Inc., Monarch
Pharmaceuticals, Inc., Meridian Medical Technologies, Inc., and
Parkedale Pharmaceuticals, Inc. The 2007 Credit Facility accrues
interest at either, at our option, (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 0.5% (based on a leverage
ratio) or (b) the applicable LIBOR rate plus an applicable
spread ranging from 0.875% to 1.50% (based on a leverage ratio).
In addition, the lenders under the 2007 Credit Facility are
entitled to customary facility fees based on (x) unused
commitments under the facility and (y) letters of credit
outstanding. The facility provides availability for the issuance
of up to $30.0 million in letters of credit. We incurred
$1.5 million of deferred financing costs in connection with
the establishment of this facility, which we will amortize over
five years, the life of the facility. This facility requires us
to maintain a minimum net worth of no less than
$1.5 billion plus 50% of our consolidated net income for
each fiscal quarter after April 19, 2007, excluding any
fiscal quarter for which consolidated income is negative; an
EBITDA (earnings before interest, taxes, depreciation and
amortization) to interest expense
61
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. As of September 30,
2007, we were in compliance with these covenants. As of
September 30, 2007, we had $1.0 million outstanding
for letters of credit.
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
September 30, 2007, 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. We have passed some price increases
along to our customers.
Recently
Issued Accounting Standards
Effective January 1, 2007, we adopted Financial Accounting
Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 is an interpretation of
FASB Statement No. 109, Accounting for Income Taxes,
and it seeks to reduce the variability in practice associated
with measurement and recognition of tax benefits. FIN 48
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position that an entity takes or expects to take in a tax
return. Additionally, FIN 48 provides guidance on
de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. Under
FIN 48, an entity may only recognize or continue to
recognize tax positions that meet a more likely than
not threshold. We recorded the cumulative effect of
applying FIN 48 of $1.5 million as a reduction to the
opening balance of retained earnings as of January 1, 2007.
The total net liability under FIN 48 as of January 1,
2007 was $34.2 million. See Note 10, Income
Taxes, in Part I, Financial Statements,
for additional information.
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. 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 February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities
(SFAS No. 159). This statement permits
entities to choose to measure many financial instruments and
certain other items at fair value. SFAS No. 159 also
establishes presentation and disclosure requirements designed to
facilitate comparisons between entities that choose different
measurement attributes for similar types of assets and
liabilities. The statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007.
We are in the process of evaluating the effect of
SFAS No. 159 on our financial statements and are
planning to adopt this standard in the first quarter of 2008.
In June 2007, the FASB ratified the consensus reached by the
Emerging Issues Task Force on Issue
No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities (Issue
07-3).
Issue 07-3
addresses nonrefundable advance payments for goods or services
that will be used or rendered for future research and
development activities and requires these payments be deferred
and capitalized. Under Issue
07-03,
expense will be recognized as the related goods are delivered or
the related services are performed. Issue
07-03 is
effective for financial statements issued for fiscal years
beginning after December 15, 2007 and is applied
prospectively for new contracts entered into on or after the
effective date. We are in the process of evaluating the effect
of Issue
07-3 on our
financial statements and are planning to adopt this standard in
the first quarter of 2008.
62
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 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 other rebates, returns and chargebacks, allowances
for doubtful accounts and estimates used in applying the revenue
recognition policy and accounting for the 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 from 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
63
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.
The gross carrying amount and accumulated amortization of our
trademarks and product rights as of September 30, 2007 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Branded
|
|
|
|
|
|
|
|
|
|
|
|
|
Altace®
|
|
$
|
156,744
|
|
|
$
|
97,369
|
|
|
$
|
59,375
|
|
Other Cardiovascular/metabolic
|
|
|
80,569
|
|
|
|
49,787
|
|
|
|
30,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular/metabolic
|
|
|
237,313
|
|
|
|
147,156
|
|
|
|
90,157
|
|
Intal®
|
|
|
34,033
|
|
|
|
26,737
|
|
|
|
7,296
|
|
Other Hospital/acute care
|
|
|
170,242
|
|
|
|
56,440
|
|
|
|
113,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital/acute care
|
|
|
204,275
|
|
|
|
83,177
|
|
|
|
121,098
|
|
Skelaxin®
|
|
|
203,015
|
|
|
|
59,840
|
|
|
|
143,175
|
|
Sonata®
|
|
|
23,146
|
|
|
|
23,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neuroscience
|
|
|
226,161
|
|
|
|
82,986
|
|
|
|
143,175
|
|
Other
|
|
|
66,643
|
|
|
|
39,691
|
|
|
|
26,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Branded
|
|
|
734,392
|
|
|
|
353,010
|
|
|
|
381,382
|
|
Meridian Medical Technologies
|
|
|
174,859
|
|
|
|
30,446
|
|
|
|
144,413
|
|
Royalties
|
|
|
2,470
|
|
|
|
2,156
|
|
|
|
314
|
|
Contract manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
All other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trademarks and product rights
|
|
$
|
911,721
|
|
|
$
|
385,612
|
|
|
$
|
526,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts for impairments and amortization expense and the
amortization period used for the three months ended
September 30, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30, 2007
|
|
|
|
|
|
September 30, 2006
|
|
|
|
|
|
|
Amortization
|
|
|
Life
|
|
|
|
|
|
Amortization
|
|
|
|
Impairments
|
|
|
Expense
|
|
|
(Years)
|
|
|
Impairments
|
|
|
Expense
|
|
|
|
(In thousands)
|
|
|
|
|
|
(In thousands)
|
|
|
Branded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Altace®
(1)
|
|
$
|
124,406
|
|
|
$
|
4,084
|
|
|
|
10
|
|
|
$
|
|
|
|
$
|
3,677
|
|
Other Cardiovascular/metabolic
|
|
|
|
|
|
|
851
|
|
|
|
|
|
|
|
|
|
|
|
1,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular/metabolic
|
|
|
124,406
|
|
|
|
4,935
|
|
|
|
|
|
|
|
|
|
|
|
5,498
|
|
Intal®
|
|
|
|
|
|
|
1,459
|
|
|
|
6
|
|
|
|
|
|
|
|
1,903
|
|
Other Hospital/acute care
|
|
|
|
|
|
|
2,572
|
|
|
|
|
|
|
|
|
|
|
|
3,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital/acute care
|
|
|
|
|
|
|
4,031
|
|
|
|
|
|
|
|
|
|
|
|
5,098
|
|
Skelaxin®
|
|
|
|
|
|
|
3,887
|
|
|
|
13.5
|
|
|
|
|
|
|
|
3,887
|
|
Other
|
|
|
|
|
|
|
605
|
|
|
|
|
|
|
|
|
|
|
|
774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Branded
|
|
|
124,406
|
|
|
|
13,458
|
|
|
|
|
|
|
|
|
|
|
|
15,257
|
|
Meridian Medical Technologies
|
|
|
|
|
|
|
2,012
|
|
|
|
|
|
|
|
|
|
|
|
1,933
|
|
Royalties
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Contract manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trademarks and product rights
|
|
$
|
124,406
|
|
|
$
|
15,480
|
|
|
|
|
|
|
|
|
|
|
$
|
17,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
The amounts for impairments and amortization expense and the
amortization period used for the nine months ended
September 30, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2007
|
|
|
|
|
|
September 30, 2006
|
|
|
|
|
|
|
Amortization
|
|
|
Life
|
|
|
|
|
|
Amortization
|
|
|
|
Impairments
|
|
|
Expense
|
|
|
(Years)
|
|
|
Impairments
|
|
|
Expense
|
|
|
|
(In thousands)
|
|
|
|
|
|
(In thousands)
|
|
|
Branded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Altace®(1)
|
|
$
|
124,406
|
|
|
$
|
12,146
|
|
|
|
10
|
|
|
$
|
|
|
|
$
|
11,032
|
|
Other Cardiovascular/metabolic
|
|
|
|
|
|
|
4,449
|
|
|
|
|
|
|
|
|
|
|
|
5,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular/metabolic
|
|
|
124,406
|
|
|
|
16,595
|
|
|
|
|
|
|
|
|
|
|
|
16,494
|
|
Intal®
|
|
|
27,693
|
|
|
|
4,263
|
|
|
|
6
|
|
|
|
|
|
|
|
5,708
|
|
Other Hospital/acute care
|
|
|
1,566
|
|
|
|
8,238
|
|
|
|
|
|
|
|
279
|
|
|
|
9,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital/acute care
|
|
|
29,259
|
|
|
|
12,501
|
|
|
|
|
|
|
|
279
|
|
|
|
15,264
|
|
Skelaxin®
|
|
|
|
|
|
|
11,661
|
|
|
|
13.5
|
|
|
|
|
|
|
|
11,661
|
|
Other
|
|
|
|
|
|
|
1,816
|
|
|
|
|
|
|
|
|
|
|
|
2,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Branded
|
|
|
153,665
|
|
|
|
42,573
|
|
|
|
|
|
|
|
279
|
|
|
|
45,783
|
|
Meridian Medical Technologies
|
|
|
|
|
|
|
5,962
|
|
|
|
|
|
|
|
|
|
|
|
5,330
|
|
Royalties
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
Contract manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trademark and product rights
|
|
$
|
153,665
|
|
|
$
|
48,566
|
|
|
|
|
|
|
$
|
279
|
|
|
$
|
51,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The intangible asset impairment associated with
Altace®
totaled $146,444, of which $124,406 related to
Altace®
trademarks and product rights. |
The remaining patent amortization period and the remaining
amortization period for trademarks and product rights associated
with significant products are as follows:
|
|
|
|
|
|
|
|
|
|
|
Remaining Life at September 30, 2007
|
|
|
|
|
|
|
Trademark &
|
|
|
|
Patent
|
|
|
Product Rights
|
|
|
Altace®
|
|
|
|
|
|
|
1 year 3 months
|
|
Skelaxin®
|
|
|
|
|
|
|
9 years 3 months
|
|
Avinza®
|
|
|
10 years 2 months
|
|
|
|
|
|
Intal®
|
|
|
|
|
|
|
1 year 3 months
|
|
|
|
|
|
|
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 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.
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Accruals for rebates, returns, and
chargebacks. We establish accruals for returns,
chargebacks and 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.
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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.
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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 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.
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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
Managements Discussion and Analysis of Financial
Condition and Results of Operations section, as well as
other sections of this report.
Forward-looking statements in this report include, but are not
limited to, statements about:
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the potential of, including anticipated net sales and
prescription trends for, our branded pharmaceutical products,
particularly
Altace®,
Skelaxin®,
Avinza®,
Thrombin-JMI®,
Levoxyl®
and
Sonata®;
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expectations regarding the enforceability and effectiveness of
product-related patents, including in particular patents related
to
Altace®,
Skelaxin®,
Avinza®,
Sonata®
and
Adenoscan®;
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expected trends and projections with respect to particular
products, reportable segment and income and expense line items;
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the adequacy of our liquidity and capital resources;
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anticipated capital expenditures;
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the development, approval and successful commercialization of
RemoxyTM,
an investigational drug for the treatment of moderate-to-severe
chronic pain; an
Altace®
diuretic combination product for patients who require an
antihypertensive as well as a diuretic; and product life-cycle
development projects;
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the successful execution of our growth and restructuring
strategies;
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anticipated developments and expansions of our business;
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our plans for the manufacture of some of our products, including
products manufactured by third parties;
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the potential costs, outcomes and timing of research, clinical
trials and other development activities involving pharmaceutical
products, including, but not limited to, the magnitude and
timing of potential payments to third parties in connection with
development activities;
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the development of product line extensions;
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the expected timing of the initial marketing of a ramipril
tablet formulation and other products;
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products developed, acquired or in-licensed that may be
commercialized;
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our intent, beliefs or current expectations, primarily with
respect to our future operating performance;
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expectations regarding sales growth, gross margins,
manufacturing productivity, capital expenditures and effective
tax rates;
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expectations regarding the outcome of various pending legal
proceedings including the
Altace®
and
Skelaxin®
patent challenges, governmental investigations, securities
litigation, and other legal proceedings described in this
report; and
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expectations regarding our financial condition and liquidity as
well as future cash flows and earnings.
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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 below in
Part II,
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Item 1A, Risk Factors and in the Risk
Factors section, found in Part I, Item 1A of our
2006
Form 10-K,
which we incorporate by reference.
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Item 3.
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Quantitative
and Qualitative Disclosures about Market Risk
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Certain of our financial instruments are subject to market
risks, including 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.
As of September 30, 2007, there were no significant changes
in our qualitative or quantitative market risk since the end of
our fiscal year ended December 31, 2006.
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.
The fair market 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 decrease as interest rates rise
and increase as interest rates fall. In addition, the fair value
of our convertible debentures is affected by our stock price.
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Item 4.
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Controls
and Procedures
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As of the end of the period covered by this report, we carried
out an evaluation, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as such term is defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934 (the Exchange
Act)). Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer have reasonable assurance
that our disclosure controls and procedures are effective to
ensure that information required to be disclosed in our reports
filed under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified, and that
management will be timely alerted to material information
required to be included in our periodic reports filed with the
Securities and Exchange Commission.
During our most recent fiscal quarter, there has not occurred
any change in our internal control over financial reporting (as
such term is defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
PART II
OTHER INFORMATION
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Item 1.
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Legal
Proceedings
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The information required by this Item is incorporated by
reference to Note 8 to the condensed consolidated financial
statements included elsewhere in this report.
We have disclosed a number of material risks under Item 1A
of our annual report on
Form 10-K
for the year ended December 31, 2006 which we filed with
the Securities and Exchange Commission on March 1, 2007.
The following risk factors have changed materially since we
filed that report.
If we
cannot successfully enforce our rights under the patents
relating to three of our largest products,
Altace®,
Skelaxin®
and
Avinza®,
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
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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 civil
investigative demand for information from the U.S. Federal
Trade Commission (FTC) in connection with our
collaboration with Arrow, the dismissal without prejudice of our
patent infringement litigation against Cobalt under the
Hatch-Waxman Act of 1984 and other information. We are
cooperating with the FTC in this investigation.
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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 appealed the
case and, on September 11, 2007, the Circuit Court reversed
the decision of the District Court and invalidated the
Companys 722 patent on the basis of obviousness. The
Company has filed with the Circuit Court a petition for
rehearing and rehearing en banc. Lupin filed its
responsive brief on November 7, 2007. The Circuit Court has
not yet issued a decision regarding this petition. Following the
Circuit Courts decision, we undertook an analysis of its
potential effects on future sales of
Altace®.
As a result of this analysis, we reduced our estimate of future
net sales of
Altace®
and recorded charges associated with minimum purchase
requirements under our supply agreement to purchase
Altace®
raw material, raw material inventories associated with
Altace®
and an impairment of our
Altace®
intangible assets. If our petition for rehearing and rehearing
en banc is unsuccessful, our actual and estimated future
net sales of
Altace®
are likely to decrease, and we may have to take additional
material charges related to
Altace®.
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Teva Pharmaceuticals USA, Dr. Reddys Pharmaceutical
Laboratories, Ltd and Dr. Reddys Pharmaceutical
Laboratories, Inc. have also sought to market generic versions
of
Altace®
and have filed related Paragraph IV certifications.
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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. On April 30, 2007, the 400 mg case was dismissed
without prejudice, although the question of Eon Labs
attorney fees and expenses was severed and consolidated with the
800 mg 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, 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
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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. On May 2, 2007, Mutual filed comments in
connection with the Companys supplemental submission. On
July 27, 2007, Mutual filed another Citizen Petition in
which it seeks a determination that
Skelaxin®
labeling should be revised to reflect the previously submitted
data in its earlier submissions.
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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Actavis, Inc. (Actavis) filed an ANDA with the FDA
seeking permission to market a generic version of
Avinza®
and filed a paragraph IV certification challenging the
validity and infringement of a composition of matter patent
related to
Avinza®.
We and Elan Pharma International LTD, the owner of the patent,
filed suit on October 18, 2007 in the United States
District Court for the District of New Jersey to enforce the
rights under the patent. Pursuant to the Hatch-Waxman Act, the
filing of the lawsuit against Actavis provided the Company with
an automatic stay of FDA approval of Actavis ANDA for up
to 30 months (unless the patent is held invalid,
unenforceable, or not infringed) from no earlier than
September 4, 2007.
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For additional information about these Paragraph IV
challenges, please see Note 8, Commitments and
Contingencies, in Part I, Item 1,
Financial Statements.
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.
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 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
70
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.
Seven
of our products plus royalty payments presently account for
85.3% 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®,
EpiPen®,
Levoxyl®,
Sonata®,
Avinza®
and royalty revenues for the last twelve months ended
September 30, 2007 accounted for 31.6%, 20.7%, 12.0%, 5.3%,
4.5%, 3.8%, 3.6% and 3.8% of our total revenues from continuing
operations, respectively, or 85.3% in total. 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, on September 11, 2007, the Circuit
Court invalidated our 722 patent, related to
Altace®.
Invalidation of this patent will likely lead to generic versions
of
Altace®
entering the market sooner than we previously anticipated. The
entry of generic products into the market would likely cause our
net sales of
Altace®
to decline significantly.
Product Competition. Additionally, since our
currently marketed products are generally established and
commonly sold, they are subject to competition from products
with similar qualities. For example:
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Our largest selling product,
Altace®,
competes in a very competitive and highly genericized market
with other cardiovascular therapies.
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Our product
Skelaxin®
competes in a highly genericized market with other muscle
relaxants.
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Our product
Sonata®
competes with other insomnia treatments in a highly competitive
market.
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Our product
Levoxyl®
competes in a competitive and highly genericized market with
other levothyroxine sodium products.
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We anticipate competition from recombinant human and human
thrombin for our product
Thrombin-JMI®
in the near future. Omrix Biopharmaceuticals, Inc.s
Biologics Licensing Application (BLA) for its human
thrombin product was approved in September 2007. Zymogenetics,
Inc. filed a BLA for its recombinant human thrombin product in
December 2006.
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Other of our branded pharmaceutical products also 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 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, 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.
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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. Our restructuring initiative might not succeed, and
we do not expect that the benefits of the initiative will
outweigh the adverse effect on our business if net sales of
Altace®
or another significant product are reduced by generic
competition.
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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sonodenoson, 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 potential new formulation of metaxalone;
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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.
In addition, following the Circuit Courts invalidation of
our 722 patent relating to Altace, we began a
restructuring initiative designed to accelerate our planned
strategic shift emphasizing our focus in neuroscience, hospital
and acute care medicine. This initiative includes, based on an
analysis of our strategic needs, a reduction in personnel, staff
leverage, expense reductions and additional controls over
spending, reorganization of sales teams and a realignment of
research and development priorities. If we are unable to
complete the objectives of this initiative, our business and
results of operations may be materially adversely affected.
Moreover, if sales of
Altace®
or another significant product are materially reduced by generic
competition, we do not expect that the anticipated benefits of
the restructuring initiative will be sufficient to offset the
loss of revenues from decreased product sales.
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®,
Avinza®,
Sonata®,
Intal®,
Tilade®,
Synercid®
and
Cortisporin®,
are currently manufactured in part or entirely by third parties.
With our completion of the sale of our Rochester, Michigan
sterile manufacturing facility, a third party will provide
certain filling and finishing manufacturing activities in
connection with our product
Thrombin-JMI®.
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
product lines or sell them 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.
73
We have experienced periodic stock-outs in our inventory of
Sonata®
due to problems with production experienced by the third-party
manufacturer of
Sonata®.
Based on our conversations with the manufacturer, and our
current levels of inventory and demand for the product, we do
not currently anticipate further stock-outs. However, if we do
experience additional stock-outs, they would likely negatively
affect net sales of
Sonata®
in future quarters. We are currently working to transfer the
manufacture of
Sonata®
to CorePharma.
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|
|
|
|
|
|
Number
|
|
|
|
Exhibit Title
|
|
|
10
|
.1(1)
|
|
|
|
Asset Purchase Agreement by and among King Pharmaceuticals,
Inc., Monarch Pharmaceuticals, Inc., Parkedale Pharmaceuticals,
Inc., King Pharmaceuticals Research and Development, Inc., and
JHP Pharmaceuticals, LLC dated as of July 14, 2007.
|
|
31
|
.1
|
|
|
|
Certification by Chief Executive Officer Pursuant to
Rule 13A-14(a)
or 15D-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
|
|
Certification by Chief Financial Officer Pursuant to
Rule 13A-14(a)
or 15D-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
|
|
Certification by Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
|
|
Certification by Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
(1) |
|
Incorporated by reference to Registrants Current Report on
Form 8-K
filed July 19, 2007. |
74
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
KING PHARMACEUTICALS, INC
|
|
|
|
By:
|
/s/ BRIAN
A. MARKISON
|
Brian A. Markison
President and Chief Executive Officer
Date: November 8, 2007
|
|
|
|
By:
|
/s/
JOSEPH SQUICCIARINO
|
Joseph Squicciarino
Chief Financial Officer
Date: November 8, 2007
75