Unassociated Document


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended June 30, 2011
   
 
OR
   
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from          to

Commission File Number: 001-33609

SUCAMPO PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
30-0520478
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
     
4520 East-West Highway, 3rd Floor
 
(301) 961-3400
Bethesda, MD 20814
 
(Registrant’s telephone number,
(Address of principal executive offices,
 
including area code)
including zip 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

 
Large accelerated filer o
 
Accelerated filer þ
Non accelerated filer o
 
Smaller reporting company o
       
(Do not check if a smaller reporting company)

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

As of July 29, 2011, there were 15,691,314 shares of the registrant’s class A common stock outstanding and 26,191,050 shares of the registrant’s class B common stock outstanding.
 


 
 
 

 
 
Sucampo Pharmaceuticals, Inc.

Form 10-Q Index

 
 
Page 
Part I.  FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
 
Condensed Consolidated Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010
1
 
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) for the
Three and Six Months Ended June 30, 2011 and 2010
 
2
 
Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the Six Months
Ended June 30, 2011
 
3
 
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2011
and 2010
 
4
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
5
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
23
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
35
Item 4.
Controls and Procedures
35
Part II.  OTHER INFORMATION
 
Item 1.
Legal Proceedings
37
Item 1A.
Risk Factors
37
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
37
Item 3.
Defaults Upon Senior Securities
37
Item 4.
(Removed and Reserved)
37
Item 5.
Other Information
37
Item 6.
Exhibits
38
SIGNATURES
39
INDEX TO EXHIBITS
40
 
 
 

 
 
PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements

SUCAMPO PHARMACEUTICALS, INC.
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
ASSETS:
           
             
Current assets:
           
Cash and cash equivalents
  $ 52,279     $ 49,243  
Investments, current
    42,163       54,524  
Product royalties receivable
    11,043       10,516  
Unbilled accounts receivable
    1,051       1,097  
Accounts receivable, net
    732       731  
Prepaid and income taxes receivable
    4,916       702  
Deferred tax assets, net
    1,026       243  
Restricted cash
    15,113       15,113  
Prepaid expenses and other current assets
    1,624       2,374  
Total current assets
    129,947       134,543  
                 
Investments, non-current
    -       5,028  
Property and equipment, net
    1,878       2,025  
Deferred tax assets, non-current
    4,562       4,178  
Other assets
    9,217       3,499  
Total assets
  $ 145,604     $ 149,273  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY:
               
                 
Current liabilities:
               
Accounts payable
  $ 4,175     $ 4,199  
Accrued expenses
    18,538       10,216  
Deferred revenue, current
    4,494       4,987  
Notes payable, current
    19,522       19,522  
Total current liabilities
    46,729       38,924  
                 
Notes payable, non-current
    45,583       44,439  
Deferred revenue, non-current
    7,694       8,321  
Other liabilities
    3,783       3,759  
Total liabilities
    103,789       95,443  
                 
Commitments (Note 7)
               
                 
Stockholders' equity:
               
Preferred stock, $0.01 par value; 5,000,000 shares authorized at June 30, 2011 and
               
December 31, 2010; no shares issued and outstanding at June 30, 2011 and December 31, 2010
    -       -  
Class A common stock, $0.01 par value; 270,000,000 shares authorized at June 30, 2011 and
               
December 31, 2010; 15,686,814 and 15,659,917 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively
    156       156  
Class B common stock, $0.01 par value; 75,000,000 shares authorized at June 30, 2011 and
               
December 31, 2010; 26,191,050 shares issued and outstanding at June 30, 2011 and December 31, 2010
    262       262  
Additional paid-in capital
    59,091       58,468  
Accumulated other comprehensive income
    19,864       16,574  
Accumulated deficit
    (37,558 )     (21,630 )
Total stockholders' equity
    41,815       53,830  
Total liabilities and stockholders' equity
  $ 145,604     $ 149,273  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
1

 
 
SUCAMPO PHARMACEUTICALS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)
(In thousands, except per share data)
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Revenues:
                       
Research and development revenue
  $ 1,742     $ 2,789     $ 3,706     $ 6,846  
Product royalty revenue
    11,043       9,612       20,161       19,385  
Co-promotion revenue
    1,061       1,220       1,999       2,075  
Contract and collaboration revenue
    154       154       308       305  
Total revenues
    14,000       13,775       26,174       28,611  
                                 
Operating expenses:
                               
Research and development
    7,893       4,855       17,113       10,221  
General and administrative
    11,694       6,716       21,391       12,610  
Selling and marketing
    2,028       2,313       4,446       4,500  
Total operating expenses
    21,615       13,884       42,950       27,331  
                                 
Income (loss) from operations
    (7,615 )     (109 )     (16,776 )     1,280  
Non-operating income (expense):
                               
Interest income
    55       178       125       391  
Interest expense
    (614 )     -       (1,225 )     -  
Other income (expense), net
    (3,122 )     217       (3,257 )     824  
Total non-operating income (expense), net
    (3,681 )     395       (4,357 )     1,215  
                                 
Income (loss) before income taxes
    (11,296 )     286       (21,133 )     2,495  
Income tax benefit (provision)
    2,277       (475 )     5,205       (884 )
Net income (loss)
  $ (9,019 )   $ (189 )   $ (15,928 )   $ 1,611  
                                 
Net income (loss) per share:
                               
Basic net income (loss) per share
  $ (0.22 )   $ -     $ (0.38 )   $ 0.04  
Diluted net income (loss) per share
  $ (0.22 )   $ -     $ (0.38 )   $ 0.04  
Weighted average common shares outstanding - basic
    41,864       41,848       41,858       41,847  
Weighted average common shares outstanding - diluted
    41,864       41,848       41,858       41,853  
                                 
Comprehensive income (loss):
                               
Net income (loss)
  $ (9,019 )   $ (189 )   $ (15,928 )   $ 1,611  
Other comprehensive income (loss):
                               
Unrealized gain (loss) on investments, net of tax effect
    (3 )     10       8       (7 )
Foreign currency translation
    2,845       (856 )     3,282       (1,601 )
Comprehensive income (loss)
  $ (6,177 )   $ (1,035 )   $ (12,638 )   $ 3  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
2

 

SUCAMPO PHARMACEUTICALS, INC.
Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)
(In thousands, except share data)
 
                                 
Accumulated
             
   
Class A
   
Class B
   
Additional
   
Other
         
Total
 
   
Common Stock
   
Common Stock
   
Paid-In
   
Comprehensive
   
Accumulated
   
Stockholders'
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Income
   
Deficit
   
Equity
 
Balance at December 31, 2010
    15,659,917     $ 156       26,191,050     $ 262     $ 58,468     $ 16,574     $ (21,630 )   $ 53,830  
Employee stock option expense
    -       -       -       -       519       -       -       519  
Stock issued upon exercise of stock options
    25,500       -       -       -       98       -       -       98  
Stock issued under employee stock purchase plan
    1,397       -       -       -       6       -       -       6  
Foreign currency translation
    -       -       -       -       -       3,282       -       3,282  
Unrealized gain on investments, net of tax effect
    -       -       -       -       -       8       -       8  
Net loss
    -       -       -       -       -       -       (15,928 )     (15,928 )
Balance at June 30, 2011
    15,686,814     $ 156       26,191,050     $ 262     $ 59,091     $ 19,864     $ (37,558 )   $ 41,815  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
3

 
 
SUCAMPO PHARMACEUTICALS, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
   
Six Months Ended June 30,
 
   
2011
   
2010
 
             
Cash flows from operating activities:
           
Net income (loss)
  $ (15,928 )   $ 1,611  
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    650       464  
Loss on disposal of fixed assets
    -       1  
Deferred tax provision
    (1,179 )     (76 )
Stock-based compensation
    519       702  
Amortization of premiums on investments
    502       869  
Notes payable paid-in-kind interest
    1,144       -  
Interest expense
    82       -  
Realized gain on trading securities
    -       (1,086 )
Realized loss on settlement rights of auction rate securities
    -       1,086  
Changes in operating assets and liabilities:
               
Accounts receivable
    (2 )     (377 )
Unbilled accounts receivable
    46       628  
Product royalties receivable
    (527 )     1,411  
Prepaid and income taxes receivable and payable, net
    (4,231 )     (127 )
Accounts payable
    (50 )     (859 )
Accrued expenses
    5,053       1,453  
Deferred revenue
    (1,095 )     (6,805 )
Other assets and liabilities, net
    630       825  
Net cash used in operating activities
    (14,386 )     (280 )
                 
Cash flows from investing activities:
               
Purchases of investments
    (12,782 )     (59,584 )
Proceeds from sales of investments
    3,293       12,000  
Maturities of investments
    26,395       48,242  
Purchases of property and equipment
    (180 )     (160 )
Proceeds from disposals of property and equipment
    -       3  
Purchases of intangible assets
    (3,000 )     -  
Net cash provided by investing activities
    13,726       501  
                 
Cash flows from financing activities:
               
Issuance of notes receivable
    -       (706 )
Proceeds from exercise of stock options
    98       -  
Proceeds from employee stock purchase plan
    6       8  
Net cash provided by (used in) financing activities
    104       (698 )
                 
Effect of exchange rates on cash and cash equivalents
    3,592       (2,933 )
                 
Net increase in cash and cash equivalents
    3,036       (3,410
Cash and cash equivalents at beginning of period
    49,243       61,420  
Cash and cash equivalents at end of period
  $ 52,279     $ 58,010  
                 
Supplemental disclosure of non-cash investing and financing activities:
               
Purchase of intangible assets included in accrued expenses
  $ 3,000     $ -  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
4

 

SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)
 
1.  Business Organization and Basis of Presentation

Description of the Business

Sucampo Pharmaceuticals, Inc., or the Company, is an international pharmaceutical company focused on the discovery, development and commercialization of proprietary drugs based on prostones. Prostones are a class of compounds that occur naturally in the human body as a result of enzymatic, 15-PGDH, transformation of certain fatty acids. The Company believes that most prostones function as activators of cellular ion channels. As a result, prostones promote fluid secretion and enhance cell protection, including the recovery of cellular barrier function. This activity gives prostones wide-ranging therapeutic potential, particularly for age-related diseases. The Company is focused on developing prostone-based compounds for the treatment of gastrointestinal, ophthalmic, respiratory, vascular, and central nervous system diseases and other disorders for which there are significant unmet medical needs, underserved patients and significant commercial potential.

The therapeutic potential of prostones was first identified by one of our founders, Dr. Ryuji Ueno. To date, two prostone products have received marketing approval. AMITIZA® (lubiprostone) is a treatment approved by the U.S. Food and Drug Administration, or FDA, for chronic idiopathic constipation, or CIC, in adults of both genders and for irritable bowel syndrome with constipation, or IBS-C, in women aged 18 years and older. RESCULA® (unoprostone isopropyl) is FDA approved for the lowering of intra-ocular pressure, or IOP, in open-angle glaucoma or ocular hypertension in patients who are intolerant of or insufficiently responsive to other IOP lowering medications.

AMITIZA is being marketed and developed in the U.S. for gastrointestinal indications under a collaboration and license agreement, dated October 29, 2004, or the Takeda Agreement, with Takeda Pharmaceutical Company Limited, or Takeda. The Company is primarily responsible for clinical development activities under the Takeda Agreement while Takeda is responsible for commercialization of AMITIZA. The Company and Takeda initiated commercial sales of AMITIZA in the U.S. for the treatment of CIC in April 2006 and for the treatment of IBS-C in May 2008. AMITIZA is currently being developed for the treatment of opioid-induced bowel dysfunction, or OBD. Takeda also holds marketing rights to AMITIZA in Canada, but has not yet commercialized it there. The Company has also entered into a supplemental agreement with Takeda on February 1, 2006, or the Supplemental Takeda Agreement, which consists of certain key funding streams, including reimbursements of co-promotion costs and reimbursements of the costs of miscellaneous marketing activities. The reimbursement of co-promotion costs under the Supplemental Takeda Agreement expired on May 31, 2011. Co-promotion costs after May 31, 2011 will be reimbursed under the Takeda Agreement.

In Switzerland, lubiprostone was approved by Swissmedic, the Swiss Agency for Therapeutic Products for the long-term treatment of adult patients with CIC in November 2009. This is the first European regulatory approval and is the first prescription medicine to be approved in Switzerland for the long-term treatment of CIC. Currently, we have conducted negotiations with the Swiss Federal Office of Public Health, or the BAG, for pricing approval and expect a decision from the BAG in the third quarter of this year. In the event of a favorable pricing decision from the Swiss authorities, the Company intends to market AMITIZA in Switzerland.

In Japan, lubiprostone is being developed under a license, commercialization and supply agreement, or the Abbott Agreement, with Abbott Japan Co. Ltd., or Abbott. The Company has filed a new drug application, or a NDA, in Japan with the Pharmaceuticals and Medical Devices Agency, or PMDA, following the successful conclusion of a phase 3 efficacy trial and a phase 3 long-term safety trial of lubiprostone in Japanese CIC patients. The Company anticipates a NDA will be approved in 2012. The Company continues to negotiate with third parties for the OBD indication, and Abbott will have 45 days to meet the terms and conditions of any third party bona fide offer.

Sucampo Pharma Europe Ltd., or SPE, filed for approval in the United Kingdom for CIC on August 4, 2011 and continues to evaluate the opportunities in European Union based on the fact that lubiprostone is the only product approved by the FDA in the U.S. for chronic therapy for either CIC or IBS-C and has received marketing authorization from Swissmedic in Switzerland. The Company holds all development and commercialization rights to lubiprostone except in the U.S., Canada and Japan.

Following the Company’s acquisition of Sucampo AG, or SAG, the Company has begun integrating SAG for future operational efficiencies through a simplified group structure and consolidation of intellectual property. On June 10, 2011, Sucampo Manufacturing & Research AG, or SMR, a direct wholly owned subsidiary of the Company, merged into SAG and SAG assumed all existing obligations of SMR. On June 28, 2011, Sucampo AG Japan, or SAG-J, an indirect wholly owned subsidiary of the Company, merged into Sucampo Pharma, Ltd., or SPL, and SPL assumed all existing obligations of SAG-J. On July 1, 2011, the Company’s Board of Directors approved the transition of certain subsidiaries’ intellectual property rights to SAG. The transition is expected to be completed in the third quarter of this year.
 
 
5

 
 
SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
 
In April 2009, Sucampo Pharma Americas, Inc. or SPA, acquired the rights from R-Tech Ueno, Ltd. or R-Tech, a pharmaceutical research, development and manufacturing company in Japan that is majority owned by the Company’s founders and a related party under the common control with SPA, to unoprostone isopropyl, which allows the Company to commercialize RESCULA in the U.S. and Canada for its approved indication and all indications for the use of unoprostone isopropyl developed by the Company and R-Tech. On March 22, 2011, SAG entered into a license agreement with R-Tech for unoprostone isopropyl, expanding the Company’s development and commercialization rights (which are held by SPA) as well as its territories beyond their previously agreed territory of the United States and Canada to with the exception of Japan, Korea, Taiwan and the People’s Republic of China, or the R-Tech Territory, all countries in Europe and the rest of the world, or the SAG Territories. SAG is now evaluating the opportunities to obtain an appropriate label in the European Union and other European countries as well as obtaining reauthorization in those countries to commercialize unoprostone isopropyl.

Other prostone compounds in the Company’s development plan include cobiprostone for the prevention of gastric ulcers and other gastrointestinal injuries in patients treated with non-steroidal anti-inflammatory drugs, or NSAIDs, for use as a treatment for chronic obstructive pulmonary disease, or COPD, oral mucositis in cancer patients and wound healing. Additionally, the Company is evaluating SPI-017 for use as a treatment of peripheral arterial disease, or PAD, and SPI-017/SPI-3608 as a potential treatment for the management of pain caused by spinal stenosis.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, and the rules and regulations of the Securities and Exchange Commission, or SEC, for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements as of and for the year ended December 31, 2010 included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on March 8, 2011. The financial information as of June 30, 2011 and for the three and six months ended June 30, 2011 and 2010 is unaudited. In the opinion of the Company’s management, all adjustments, consisting only of normal recurring adjustments or accruals, considered necessary for a fair statement of the results of these interim periods have been included. The results of the Company’s operations for any interim period are not necessarily indicative of the results that may be expected for any other interim period or for a full fiscal year.

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: SPL, which is based in Tokyo and Osaka, Japan and conducts Asian and Oceania operations; SPA, which is based in Bethesda, Maryland and conducts operations in North and South America; SPE, which is based in Oxford, U.K. and conducts certain operations in Europe; SAG, which is based in Switzerland and conducts certain operations in Europe and the rest of the world; and Ambrent Investments S.à r.l., or Ambrent, which is based in Luxembourg and conducts business in Luxembourg. All significant inter-company balances and transactions have been eliminated.

In December 2010, the Company acquired SAG, a Swiss-based patent-holding company, and SAG-J, a patent maintenance company and a wholly owned subsidiary of SAG. The acquisition of SAG and its subsidiary was accounted for as a merger of companies under common control and accounted for at historical cost. The financial information of these acquired entities is included in these condensed consolidated financial statements for all periods presented.

The preparation of financial statements in conformity with GAAP requires management to make estimates that affect the reported amounts of assets and liabilities at the date of the financial statements, disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

2.  Summary of Significant Accounting Policies

Cash and Cash Equivalents

For the purpose of the condensed consolidated balance sheets and statements of cash flows, cash equivalents include all highly liquid investments with a maturity of 90 days or less at the time of purchase.
 
 
6

 
 
SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
 
Restricted Cash

Restricted cash amounted to approximately $15.1 million at June 30, 2011 and December 31, 2010. Restricted cash represents cash required to be deposited with financial institutions in connection with the SPL and The Bank of Tokyo-Mitsubishi UFJ, Ltd. loan agreement and operating leases.

Current and Non-current Investments

Current and non-current investments consist primarily of U.S. Treasury bills and notes, U.S. government agencies securities, U.S. commercial paper, municipal and corporate bonds, mutual funds, variable rate demand notes, or VRDNs, and certificates of deposits. The Company classifies its investments into current and non-current based on their maturities and management’s reasonable expectation to realize these investments in cash. The Company classifies all of its investments, as available for sale securities and reports unrealized gains or losses, net of related tax effects, in other comprehensive income.

Fair Value

The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, restricted cash, current and non-current investments, receivables, accounts payable and accrued expenses, approximate their fair values based on their short maturities, independent valuations or internal assessments.

Revenue Recognition

The Company’s revenues are derived primarily from collaboration and license agreements and include up-front payments, development milestone payments, reimbursements of development and co-promotion costs and product royalties.

The Company evaluated the multiple deliverables within the collaboration and license agreements in accordance with the guidance of multiple deliverables to determine whether the delivered elements that are the obligation of the Company have value to other parties to the agreement on a stand-alone basis and whether objective reliable evidence of fair value of the undelivered items exists. Deliverables that meet these criteria are considered a separate unit of accounting. Deliverables that do not meet these criteria are combined and accounted for as a single unit of accounting. The appropriate recognition of revenue is then applied to each separate unit of accounting. The Company’s deliverables under the Takeda Agreement and the Abbott Agreement, including the related rights and obligations, contractual cash flows and performance periods, are more fully described in Note 10 below.

The Company applies a time-based model of revenue recognition for cash flows associated with research and development deliverables under the Takeda Agreement. Under this model, cash flow streams related to each unit of accounting are recognized as revenue over the estimated performance period. Upon receipt of cash payments, such as development milestones, revenue is recognized to the extent the accumulated service time has occurred. The remainder is deferred and recognized as revenue ratably over the remaining estimated performance period. A change in the period of time expected to complete the deliverable is accounted for as a change in estimate on a prospective basis. In cases where milestone payments are received after the completion of the associated development period, the Company recognizes revenue upon completion of the performance obligation. Revenue is limited to amounts that are nonrefundable and that the other party to the agreement is contractually obligated to pay to the Company. The Company recognizes reimbursable research and development costs under the Takeda Agreement as research and development revenue using a time-based model over the estimated performance period. The research and development revenue for these obligations is limited to the lesser of the actual reimbursable costs incurred or the straight-line amount of revenue recognized over the estimated performance period. Revenues are recognized for reimbursable costs only if those costs can be reasonably determined.

The Company applies a proportional-performance model using the percentage-of-completion method of revenue recognition for cash flows associated with research and development deliverables under the Abbott Agreement. Since the Company has previous research and development experience and the expected cost to complete the development can be reasonably estimated, the Company believes a proportional-performance methodology of revenue recognition is appropriate. Under this method, revenue in any period is recognized as a percentage of the total actual cost expended relative to the total estimated costs required to satisfy the performance obligations under the arrangement related to the development. Revenue recognized is limited to the amounts that are non-refundable and that the other party to the agreement is contractually obligated to pay to the Company. A change in the period of time expected to complete the deliverable is accounted for as a change in estimate on a prospective basis. Research and development costs are not reimbursable under the Abbott Agreement.
 
 
7

 
 
SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
 
Under the Takeda Agreement, royalties are based on net sales of licensed products and are recorded on the accrual basis when earned in accordance with contractual terms when third party results are reliably measurable, collectability is reasonably assured and all other revenue recognition criteria are met. Under the Abbott Agreement, should AMITIZA be commercialized in Japan, the Company will purchase and assume title to inventories of AMITIZA and recognize revenues from the sales of such product when earned.
  
The Company is reimbursed co-promotion costs and costs of miscellaneous marketing activities, which the Company recognizes as revenue as the related costs are incurred and Takeda becomes contractually obligated to pay the amounts. The reimbursement of co-promotion costs were made on a per day basis under the Supplemental Takeda Agreement, which expired May 31, 2011. The Company is reimbursed co-promotion costs after May 31, 2011 on a primary detail equivalent under the Takeda Agreement.
  
The Company considers its participation in the joint committees under the collaboration and license agreements as separate deliverables under the contracts and recognizes the fair value of such participation as collaboration revenue over the period of the participation per the terms of the contracts.

The Company has determined that it is acting as a principal under the Takeda Agreement and the Supplemental Takeda Agreement, or the Takeda Agreements, and the Abbott Agreement and, as such, records revenue on a gross basis in the condensed consolidated statements of operations and comprehensive income (loss).

Contract Revenue

Contract revenue relates to development and consulting activities with R-Tech and is accounted for under the time-based model.

Foreign Exchange

Our consolidated financial statements are reported in U.S. dollars. Assets and liabilities of international subsidiaries with a non-U.S. dollar functional currency are translated to U.S. dollars at the exchange rates in effect on the balance sheet date, or the last business day of the period, if applicable. Revenues and expenses for these subsidiaries are translated to U.S. dollars using a weighted average rate for the relevant reporting period. Translation adjustments resulting from this process are included, net of tax, in accumulated other comprehensive income in the condensed consolidated balance sheets. Gains and losses that arise from exchange rate fluctuations for monetary asset and liability balances that are not denominated in an entity’s functional currency are included within other income (expense), net in the condensed consolidated statements of operations and comprehensive income (loss).

Certain Risks, Concentrations and Uncertainties

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents, restricted cash, investments and receivables. The Company places its cash, cash equivalents and restricted cash with highly rated financial institutions and invests its excess cash in highly rated investments. As of June 30, 2011 and December 31, 2010, approximately $29.2 million, or 26.7%, and $34.1 million, or 27.6%, respectively, of the Company’s cash, cash equivalents, restricted cash and investments was issued or insured by the federal government or government agencies. The Company has not experienced any losses on these accounts related to amounts in excess of insured limits.

The Company’s products and product candidates under development require approval from the FDA or other international regulatory agencies prior to commercial sales. For those product candidates or indications that have not yet been approved by the FDA or international regulatory agencies, there can be no assurance the products will receive the necessary approval. If the Company is denied approval or approval is delayed, it may have a material adverse impact on the Company.

The Company’s products, AMITIZA and RESCULA, compete (or in the case of RESCULA, will compete) in a rapidly changing, highly competitive market, which is characterized by advances in scientific discovery, changes in customer requirements, evolving regulatory requirements and developing industry standards. Any failure by the Company to anticipate or to respond adequately or timely to scientific developments in its industry, changes in customer requirements or changes in regulatory requirements or industry standards, or any significant delays in the development or introduction of products could have a material adverse effect on the Company’s business, operating results and future cash flows.

The Company’s expected activities may necessitate significant uses of working capital. The Company’s working capital requirements will depend on many factors, including the successful sales of AMITIZA and RESCULA, research and development efforts to develop new products or indications, payments received under contractual agreements with other parties, the status of competitive products and market acceptance of the Company’s new products by physicians and patients. The Company plans to continue financing operations with its existing cash and investments as well as with product royalty revenue and cash received from milestones and other revenue related to its joint collaboration, license and supply agreements.
 
 
8

 

SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
 
Revenues from one unrelated party, Takeda, accounted for 97.1% and 88.1%, of the Company’s total revenues for the three months ended June 30, 2011 and 2010, respectively, and 96.0% and 84.3% for the six months ended June 30, 2011 and 2010, respectively. Accounts receivable, unbilled accounts receivable and product royalties receivable from Takeda accounted for 99.9% of the Company’s total accounts receivable, unbilled accounts receivable and product royalties receivable at June 30, 2011 and December 31, 2010. Revenues from another unrelated party, Abbott, accounted for 2.2% and 11.1% of the Company’s total revenues for the three months ended June 30, 2011 and 2010, respectively, and 3.2% and 15.0% for the six months ended June 30, 2011 and 2010, respectively. The Company depends significantly upon the collaborations with Takeda and Abbott and its activities may be impacted if these relationships are disrupted (see Note 10 below for additional details).

The Company has an exclusive supply arrangement with R-Tech to provide it with commercial and clinical supplies of its product and product candidates. Any difficulties or delays in performing the services under these arrangements may cause the Company to lose revenues, delay research and development activities or otherwise disrupt the Company’s operations (see Note 8 below for additional details).

Error in Previously Issued Financial Statements

The Company incorrectly classified certain VRDNs as cash equivalents rather than short-term investments in the financial statements reported in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010. The misclassification resulted in an immaterial error to the Company's quarterly balance sheet and statement of cash flows, whereby cash balances and net cash provided by investing activities were overstated by $19.1 million for the six months ended June 30, 2010. The June 30, 2010 cash flow statement has been revised.

Recent Accounting Pronouncements

In September 2009, the Financial Accounting Standards Board, or FASB, issued an amendment to the authoritative guidance which addresses how revenues should be allocated among products and services in a singular sales arrangement. The guidance establishes a hierarchy for determining the selling price of each product or service, with vendor-specific objective evidence, or VSOE, at the highest level, third-party evidence of VSOE at the intermediate level, and management's best estimate at the lowest level. It replaces "fair value" with "selling price" in revenue allocation guidance. It also significantly expands the disclosure requirements for multiple-deliverable revenue arrangements. This guidance will be effective prospectively for agreements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company adopted the guidance effective January 1, 2011, and such adoption did not have an impact on the Company’s condensed consolidated financial statements.

3.  Earnings per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the sum of the weighted average class A and B common shares outstanding. Diluted net income per share is computed by dividing net income by the weighted average common shares and potential dilutive common shares outstanding. Diluted net loss per share, when applicable, is computed by dividing net loss by the weighted average common shares outstanding without the impact of potential dilutive common shares outstanding because they would have an anti-dilutive impact on diluted net loss per share.

The computation of net income (loss) per share for the three and six months ended June 30, 2011 and 2010 is shown below:
 
 
9

 

SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
(in thousands, except per share data)
 
2011
   
2010
   
2011
   
2010
 
Basic net income (loss) per share:
                       
Net income (loss)
  $ (9,019 )   $ (189 )   $ (15,928 )   $ 1,611  
                                 
Weighted average class A and B common shares
                               
outstanding
    41,864       41,848       41,858       41,847  
                                 
Basic net income (loss) per share
  $ (0.22 )   $ -     $ (0.38 )   $ 0.04  
                                 
Diluted net income (loss) per share:
                               
Net income (loss)
  $ (9,019 )   $ (189 )   $ (15,928 )   $ 1,611  
                                 
Weighted average class A and B common shares
                               
outstanding for diluted net income per share
    41,864       41,848       41,858       41,853  
                                 
Diluted net income (loss) per share
  $ (0.22 )   $ -     $ (0.38 )   $ 0.04  
 
For the periods listed above, the potentially dilutive securities used in the calculations of diluted historical net loss per share as of June 30, 2011 and 2010 are shown below:
 
   
June 30,
 
(In thousands)
 
2011
   
2010
 
Employee stock options
    -       132  
Non-employee stock options
    -       -  
 
For the periods listed above, the following securities were excluded from the computation of diluted net loss per share as their effect would be anti-dilutive as of June 30, 2011 and 2010 are shown below:
 
   
June 30,
 
(In thousands)
 
2011
   
2010
 
Employee stock options
    3,293       1,268  
Non-employee stock options
    450       450  
 
4.  Current and Non-Current Investments

At June 30, 2011 and December 31, 2010, current and non-current available-for-sale investments consisted of the following securities:
 
 
10

 

SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
 
   
June 30, 2011
 
         
Unrealized
   
Unrealized
       
(In thousands)
 
Cost
   
Gains
   
Losses
   
Fair Value
 
Current:
                       
U.S. commercial paper
  $ 7,240     $ 9     $ -     $ 7,249  
U.S. government securities
    9,371       2       -       9,373  
Municipal securities
    5,322       1       (2 )     5,321  
Certificates of deposits
    250       -       -       250  
Corporate bonds
    7,505       20       -       7,525  
Variable rate demand notes
    12,445       -       -       12,445  
Total
  $ 42,133     $ 32     $ (2 )   $ 42,163  
 
   
December 31, 2010
 
         
Unrealized
   
Unrealized
       
(In thousands)
 
Cost
   
Gains
   
Losses
   
Fair Value
 
Current:
                       
U.S. Treasury bills and notes
  $ 1,002     $ 1     $ -     $ 1,003  
U.S. commercial paper
    999       -       -       999  
U.S. government securities
    16,525       7       (4 )     16,528  
Municipal securities
    17,582       6       (12 )     17,576  
Certificates of deposits
    750       -       -       750  
Corporate bonds
    6,665       5       (2 )     6,668  
Variable rate demand notes
    11,000       -       -       11,000  
Total
  $ 54,523     $ 19     $ (18 )   $ 54,524  
                                 
Non-current:
                               
Corporate bonds
  $ 5,019     $ 11     $ (2 )   $ 5,028  
Total
  $ 5,019     $ 11     $ (2 )   $ 5,028  
 
The Company performs fair value measurements in accordance with the FASB’s guidance for fair value measurements and disclosures, which defines fair value as the exchange price that would be received for selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy is established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company classifies its investments into the following categories based on the three levels of inputs used to measure fair value:

Level 1: quoted prices in active markets for identical assets or liabilities;
Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or
Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s assets measured at fair value on a recurring basis, which are subject to the fair value disclosure requirements, as of June 30, 2011 and December 31, 2010 are as follows:
 
 
11

 

SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
 
   
Fair Value Measurements at Reporting Date Using
 
                         
June 30, 2011
  Quoted Prices in
Active Markets
for identical
Assets
    Significant
Other
Observable
Inputs
   
Significant
Unobservable
Inputs
       
(In thousands)
 
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
U.S. government securities
  $ 9,373     $ -     $ -     $ 9,373  
U.S. commercial paper
    -       7,249       -       7,249  
Corporate bonds
    7,525       -       -       7,525  
Municipal securities
    5,321       -       -       5,321  
Certificates of deposits
    -       250       -       250  
Money market funds
    10,984       -       -       10,984  
Variable rate demand notes
    12,445       -       -       12,445  
Total assets measured at fair value
  $ 45,648     $ 7,499     $ -     $ 53,147  
                                 
                                 
   
Fair Value Measurements at Reporting Date Using
 
                         
December 31, 2010
  Quoted Prices in
Active Markets
for identical
Assets
    Significant
Other
Observable
Inputs
   
Significant
Unobservable
Inputs
       
(In thousands)
 
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
U.S. Treasury bills and notes
  $ 1,003     $ -     $ -     $ 1,003  
U.S. government securities
    16,528       -       -       16,528  
U.S. commercial paper
    -       999       -       999  
Corporate bonds
    11,696       -       -       11,696  
Municipal securities
    17,576       -       -       17,576  
Certificates of deposits
    -       750       -       750  
Money market funds
    780       -       -       780  
Variable rate demand notes
    11,000       -       -       11,000  
Total assets measured at fair value
  $ 58,583     $ 1,749     $ -     $ 60,332  
 
If quoted prices in active markets for identical assets and liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable, either directly or indirectly. This pricing methodology applies to the Company’s Level 2 investments.

5.  Intangible Assets

In April 2009, SPA entered into an agreement with R-Tech to acquire all patents and other intellectual property rights related to RESCULA for its FDA approved indication and any new indications for unoprostone isopropyl in the U.S. and Canada. Although RESCULA eye drops have been approved by the FDA since 2000, RESCULA is not currently marketed in the U.S. or Canada. SPA plans to re-launch RESCULA in the U.S. for its approved indication after approval of an enhanced label from the FDA.

Under the terms of the 2009 R-Tech agreement, SPA made an upfront payment of $3.0 million and may be required to pay up to $5.5 million in additional milestone payments to R-Tech based on the achievement of specified development and commercialization goals. The first milestone payment of $500,000 is payable upon the re-launch of RESCULA for the treatment of glaucoma which is considered as being probable; therefore, this amount is recorded as part of the initial cost of the acquired assets. The Company allocated the acquisition cost between an intangible asset of $3.4 million and a non-current prepaid inventory of $85,000 as of June 30, 2011, both of which are reflected in other non-current assets in the accompanying condensed consolidated balance sheet. The Company is amortizing the $3.4 million over the 10-year life of the license agreement, which management believes approximates the useful life of the underlying rights and data. Amortization expense was $171,000 for the six months ended June 30, 2011 and 2010. The annual amortization expense will be approximately $342,000 through April 2019.
 
 
12

 

SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
 
On March 22, 2011, SAG entered into a license agreement with R-Tech for unoprostone isopropyl, expanding the Company’s development and commercialization rights (which are held by SPA) as well as its territories beyond their previously agreed territory of the United States and Canada to the SAG Territories, which include all countries in Europe and the rest of the world except the R-Tech Territory, which includes Japan, Korea, Taiwan and the People’s Republic of China. This alliance ensures state of the art global development and commercialization between SAG and R-Tech for all current and potential indications.

SAG made an upfront payment to R-Tech of $3.0 million, which is reflected in other non-current assets in the accompanying condensed consolidated balance sheet, and may be required to pay up to $103.0 million in additional milestone payments to R-Tech based on the achievement of specified development and commercialization goals. The first milestone payment of $3.0 million is payable upon the earlier of product approval within the SAG Territories or by March 15, 2012, which is included within non-current assets, and the liability is reflected in accrued expenses in the accompanying condensed consolidated balance sheet. SAG will be responsible for all development, regulatory, and commercialization activities. The Company is amortizing the $6.0 million over the 10-year life of the license agreement, which management believes approximates the useful life of the underlying rights and data. Amortization expense was $150,000 for the six months ended June 30, 2011. The annual amortization expense will be approximately $600,000 through March 2021.

6.  Accrued Expenses

Accrued expenses consisted of the following as of June 30, 2011 and December 31, 2010:
 
   
June 30,
   
December 31,
 
(In thousands)
 
2011
   
2010
 
Research and development costs
  $ 5,961     $ 4,146  
Employee compensation
    1,237       1,795  
Selling and marketing costs
    78       305  
Legal service fees
    6,934       2,620  
RESCULA milestone
    3,500       500  
Other accrued expenses
    828       850  
Total
  $ 18,538     $ 10,216  
 
7.  Commitments

Operating Leases

The Company leases office space in the United States, the United Kingdom and Japan under operating leases ranging through 2017. Total future minimum, non-cancelable lease payments under operating leases were as follows as of June 30, 2011:
 
(In thousands)
     
2011 (July - December)
  $ 699  
2012
    1,280  
2013
    995  
2014
    1,024  
2015
    1,052  
2016 and thereafter
    1,222  
Total minimum lease payments
  $ 6,272  
 
Rent expense for all operating leases was approximately $378,000 and $301,000 for the three months ended June 30, 2011 and 2010, respectively, and $743,000 and $659,000 for the six months ended June 30, 2011 and 2010, respectively.

Research and Development Costs
 
 
13

 

SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
 
The Company routinely enters into agreements with third-party contract research organizations, or CROs, to oversee clinical research and development studies provided on an outsourced basis. The Company is not generally contractually obligated to pay the CRO if the service or reports are not provided.

8.      Related Party Transactions

R-Tech Ueno, Ltd.

In addition to the unoprostone isopropyl agreements described in Note 5 above, the Company is a party to other development and exclusive supply agreements with R-Tech covering various compounds and territories. The Company’s founders, Drs. Ueno and Kuno, directly or indirectly, own a majority of the stock of R-Tech.

The Company recorded the following expenses under its agreements with R-Tech for the three and six months ended June 30, 2011 and 2010:
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
(In thousands)
 
2011
   
2010
   
2011
   
2010
 
Clinical supplies
  $ -     $ 33     $ -     $ 53  
Other research and development services
    3       66       7       66  
Commercial supplies
    -       83       123       152  
    $ 3     $ 182     $ 130     $ 271  
 
The following table summarizes the amounts included in deferred revenue resulting from the deferral of upfront payments relating to the exclusive supply agreements with R-Tech as of June 30, 2011 and December 31, 2010:
 
   
June 30,
   
December 31,
 
(In thousands)
 
2011
   
2010
 
Deferred revenue, current
  $ 433     $ 433  
Deferred revenue, non-current
    5,623       5,839  
    $ 6,056     $ 6,272  
 
The Company recognized approximately $105,000 of revenue relating to its agreements with R-Tech for each of the three months ended June 30, 2011 and 2010, which was recorded as contract and collaboration revenue in the accompanying condensed consolidated statements of operations and comprehensive income (loss).

9.      Notes Payable

In November 2010, SPL entered into a ¥1,000, 000,000, approximating $12.0 million as of the closing date, secured term loan agreement with The Bank of Tokyo-Mitsubishi UFJ, Ltd, or the Bank. The loan agreement provides for the extension of credit for the period of one year, which can be renewed annually upon the agreement of the Company, SPL and the Bank. Borrowings may be used to finance research and development activities, for working capital needs and for the general corporate purposes of SPL. The loan bears annual interest based on the three-month Tokyo Interbank Offer Rate, or TIBOR, plus 1% and is reset quarterly. The interest rate for the first six months of 2011 is 1.34%. In connection with the loan agreement, the Company and the Bank executed a guarantee agreement, which provides full guarantee by the Company on behalf of SPL’s obligation to the Bank. The loan agreement includes representations, covenants, and events of default customary for financing transactions of this type. Additionally, the Company agreed to maintain an amount of collateral that would not fall below 90.0% of the initial balance throughout the term of the loan. The Company deposited $14.9 million with the Bank, and the deposit bears annual interest of 0.4%, which is recorded as restricted cash in the accompanying condensed consolidated balance sheet as of June 30, 2011 and December 31, 2010.

Subordinated Unsecured Promissory Notes
 
 
14

 

SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
 
In connection with the December 2010 acquisition of SAG and SAG-J, Ambrent issued a subordinated unsecured promissory note, or notes, to each of the Ueno Trust and Kuno Trust, a related party. Each of the notes was issued with an initial principal balance of approximately $25.9 million, or approximately $51.9 million in the aggregate. The interest rate for the notes is equal to the per annum rate of interest determined on the basis of the sum of London Interbank Offered Rate, or LIBOR, plus 4.0%, and will be reset every six months on December 1st and June 1st of each year, with the first reset on June 1, 2011. The interest rate beginning June 1, 2011 is 4.4%.

The notes provide for a semi-annual repayment schedule of interest and principal over a seven-year period on each June 1st and December 1st, provided that, until December 1, 2012, all accrued and unpaid interest will not be paid in cash and will instead be added to the principal balance of the notes, and Ambrent will make only two scheduled principal payments on December 1, 2011 and December 1, 2012. For the six months ended June 30, 2011, approximately $1.1 million of interest expense was added to the principal balance of the notes as paid-in-kind.

The notes can be prepaid at any time without penalty. In addition, the notes provide for a mandatory prepayment (i) in full in the event of an acquisition by an unaffiliated third party in an all-cash acquisition of all of the issued and outstanding shares of capital stock of the Company or (ii) either in full or in part in certain change of control transactions involving the Company where an unaffiliated third party acquires a majority of the Company’s voting stock.

Notes payable consist of the following as of June 30, 2011 and December 30, 2010:
             
   
June 30,
   
December 31,
 
(In thousands)
 
2011
   
2010
 
Loan agreement, The Bank of Tokyo-Mitsubishi UFJ, Ltd
  $ 12,022     $ 12,022  
Promissory notes, Sellers of SAG
    53,083       51,939  
    $ 65,105     $ 63,961  
                 
Notes payable, current
  $ 19,522     $ 19,522  
Notes payable, non-current
    45,583       44,439  
    $ 65,105     $ 63,961  

The aggregated scheduled maturities of notes payable were as follows as of June 30, 2011:
 
(In thousands)
 
2011
 
Due in one year
  $ 19,522  
Due in two years
    7,500  
Due in three years
    7,921  
Due in four years
    8,181  
Due in five years
    8,453  
Thereafter
    13,528  
    $ 65,105  
 
10.  Collaboration and License Agreements

Abbott Agreement

In February 2009, SPL entered into the Abbott Agreement, an exclusive 19-year license, commercialization and supply agreement with Abbott to develop and commercialize lubiprostone for the treatment of CIC in Japan. Additionally, the agreement grants Abbott the right of first refusal to any additional indications for which lubiprostone is developed in Japan under all relevant patents, know-how and trademarks. SPL is currently negotiating with third parties for a licensing arrangement for the OBD indication. Payments to SPL under the terms of the Abbott Agreement include a non-refundable upfront payment and non-refundable development and commercial milestone payments based on achieving specified development, regulatory and sales goals.
 
 
15

 
 
SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
 
SPL has received a total of $22.5 million in up-front and development milestone payments through June 30, 2011 under the Abbott Agreement. Subject to future development and commercial milestones, SPL will receive additional development milestone and commercial milestone payments under the Abbott Agreement, although there can be no assurance that the Company will receive any such payments.

The following table summarizes the cash streams and related revenue recognized or deferred under the Abbott Agreement for the six months ended June 30, 2011:

   
Amount
Deferred at
December 31,
 
Cash Received
for the Six
Months Ended
June 30,
   
Revenue
Recognized for
the Six Months
Ended June 30,
   
Foreign Currency
Effects for
the Six Months
Ended June 30,
   
Amount
Deferred at
June 30,
 
(In thousands)
 
2010
   
2011
   
2011
   
2011
   
2011
 
Collaboration revenue:
                             
Up-front payment associated with the Company's
                   
obligation to participate in joint committees
  $ 868     $ -     $ 25     $ 2     $ 845  
                                         
Research and development revenue:
                                 
Up-front payment
  $ 707     $ -     $ 346     $ -     $ 361  
Development milestone payment
  $ 948       -       463       (2 )   $ 483  
Total
  $ 1,655     $ -     $ 809     $ (2 )   $ 844  
 
Takeda commercialization and license agreement

In October 2004, the Company entered into the Takeda Agreement and on February 1, 2006, the Company entered into the Supplemental Takeda Agreement. Payments to the Company under the Takeda Agreements, include a non-refundable up-front payment, non-refundable development and commercial milestone payments, reimbursement of certain development and co-promotion costs and product royalties.

The Company has received a total of $150.0 million in up-front and development milestone payments through June 30, 2011 under the Takeda Agreement. Subject to the potential arbitration award, future development and commercial milestones, the Company will receive additional development milestone and commercial milestone payments under the Takeda Agreement, although there can be no assurance that the Company will receive any such payments.

On March 12, 2010, the Company submitted for filing with the International Court of Arbitration, International Chamber of Commerce a demand for arbitration under the applicable provisions of the Takeda Agreement, which specify that New York law will govern the procedural and substantive aspects of the arbitration. The hearing on the Company’s claims is set to conclude by December 2011; it is not known if the arbitration will remain on schedule or how long thereafter the arbitration proceedings will conclude. The Company has spent and expects to spend significant resources in the dispute with Takeda, and these arbitration proceedings may require the continuing attention of the Company’s senior management.

The following table summarizes the cash streams and related revenue recognized or deferred under the Takeda Agreements for the six months ended June 30, 2011:
 
 
16

 

SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
 
   
Amount
Deferred at
December 31,
   
Cash Received
for the Six
Months Ended
June 30,
   
Revenue
Recognized for
the Six Months
Ended June 30,
   
Change in Accounts
Receivable for
the Six Months
Ended June 30,
   
Amount
Deferred at
June 30,
 
(In thousands)
 
2010
   
2011
   
2011
      2011*       2011  
Collaboration revenue:
                                 
Up-front payment associated with the Company's
                       
obligation to participate in joint committees
  $ 1,470     $ -     $ 74     $ -     $ 1,396  
                                         
Research and development revenue:
                                 
Reimbursement of research and development expenses
  $ 3,042     $ 2,947     $ 2,897     $ (45 )   $ 3,047  
                                         
Product royalty revenue
  $ -     $ 19,634     $ 20,161     $ 527     $ -  
                                         
Co-promotion revenue
  $ -     $ 1,978     $ 1,999     $ 21     $ -  
 

*      Includes billed and unbilled accounts receivable.

11.  Stock Option Plans

The following table summarizes the employee stock option activity for the six months ended June 30, 2011 under the Company’s 2001 Incentive Plan:

   
Shares
   
Weighted Average
Exercise Price Per
Share
   
Weighted Average
Remaining
Contractual Term
(Years)
   
Aggregate
Intrinsic Value
 
Options outstanding, December 31, 2010
    345,100     $ 10.44              
Options expired
    (154,700 )     10.99              
Options outstanding, June 30, 2011
    190,400       10.00       4.84     $ -  
Options exercisable, June 30, 2011
    190,400       10.00       4.84     $ -  
 
The following table summarizes the employee stock option activity for the six months ended June 30, 2011 under the Company’s Amended and Restated 2006 Stock Incentive Plan, or 2006 Incentive Plan:
 
 
17

 

SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
 
   
Shares
   
Weighted Average
Exercise Price
Per Share
   
Weighted Average
Remaining
Contractual Term
(Years)
   
Aggregate
Intrinsic Value
 
Options outstanding, December 31, 2010
    1,201,650     $ 5.69              
Options granted
    2,081,790       4.41              
Options exercised
    (25,500 )     3.85              
Options forfeited
    (137,870 )     4.48              
Options expired
    (17,100 )     1.61              
Options outstanding, June 30, 2011
    3,102,970       4.88       9.22     $ -  
Options exercisable, June 30, 2011
    608,450       6.76       7.60     $ -  
 
During the quarter ended June 30, 2011, the Company made a grant of time-based and performance-based options to all eligible employees and independent directors. The aggregate options total 2,081,790 shares of the Company’s class A common stock, consisting of 690,284 shares of time-based options and 1,391,506 shares of performance-based options. The performance-based options (a) vest in certain percentages based on the attainment of specific stock price targets over a 30 day trading period so long as the individual is in continuous service with the Company on each such date (subject to certain exceptions), (b) have an exercise price equal to the closing price of the Company's class A common stock on the Nasdaq Global Market on the date of grant, and (c) must vest within a term of 4 years from such date. These options must be exercised within a term of 10 years from the date of grant. The percentages and target prices are: 40.0% at $8.00 per share, 40.0% at $12.00 per share, and 20.0% at $16.00 per share. The Company determined that the market condition options should be classified as equity instruments, and selected, in accordance with GAAP, a lattice option-pricing model to estimate the fair value of those options. A lattice option-pricing model produces an estimated fair value of the option based on the assumed changes in the price of the underlying share over successive periods of time.

The time-based stock options (a) vest in equal annual installments over the four-year period commencing on the first anniversary of the date of grant (i.e., the first 1/4 of the stock option grant would vest on the first anniversary of the date of grant) so long as the individual is in continuous service with the Company on each such date (subject to certain exceptions) and (b) have an exercise price equal to the closing price of the Company's class A common stock on the Nasdaq Global Market on the date of grant. These options must be exercised within a term of 10 years from such date. All options that were granted on May 2, 2011 have an exercise price equal to the fair market value of the stock price, or $4.41 per share of class A common stock, on the date of the grant.

The weighted average grant date fair value of options granted during the six months ended June 30, 2011 and the year ended December 31, 2010 were $4.41 and $2.05, respectively. As of June 30, 2011, approximately $4.0 million of total unrecognized compensation costs, net of estimated forfeitures, related to non-vested awards are expected to be recognized over a weighted average period of 3.71 years.

The Company granted 510,000 stock options with an exercise price of $5.85 per share to non-employees in August 2005 under the Company’s 2001 Incentive Plan. As of June 30, 2011 and December 31, 2010, 450,000 of these options were outstanding and exercisable. These non-employee stock options vested immediately and have a weighted average exercise price per share of $5.85 and $5.85, respectively, and remaining contractual life of 3.84 and 5.33 years, respectively, as of June 30, 2011 and December 31, 2010.

Employee Stock Purchase Plan

Under the Company’s 2006 Employee Stock Purchase Plan, or ESPP, a total of 1,397 and 2,207 shares of class A common stock were purchased during the six months ended June 30, 2011 and 2010, respectively. The ESPP is non-compensatory and is intended to qualify as an Employee Stock Purchase Plan as defined in Section 423 of the Internal Revenue Code of 1986, as amended, and in accordance with GAAP guidance that requires estimates in the fair value of share-based payment awards on the date of the grant using an option-pricing model and recognizing the expense over the required service periods in the accompanying condensed consolidated statement of operations and comprehensive income (loss). The Company received $5,514 and $7,452 upon purchase of shares under the ESPP for the six months ended June 30, 2011 and 2010, respectively.

12.  Income Taxes
 
 
18

 

SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
 
For the three months ended June 30, 2011 and 2010, the Company recorded a tax benefit of $2.3 million and a tax provision of $475,000, respectively. For the six months ended June 30, 2011 and 2010, the Company recorded a tax benefit of $5.2 million and a tax provision of $884,000, respectively. The tax benefit for the three and six months ended June 30, 2011 primarily pertained to the taxable loss generated by the Company's U.S. subsidiary for which a tax benefit is being recognized, offset by the tax provision by its Swiss subsidiary. The tax provision for the three and six months ended June 30, 2010 primarily pertained to taxable income generated by the Company’s U.S. and Swiss subsidiaries. The Company’s other subsidiaries based in Europe and Japan incurred pre-tax losses for the three and six months ended June 30, 2011 and 2010, for which no tax benefit was recognized.

The Company has estimated its annual effective tax rate for the full fiscal year 2011 and 2010 and applied that rate to its income before income taxes in determining its income tax provision for the interim periods. There is no tax benefit recognized on the net operating losses incurred in the foreign jurisdictions due to the lack of evidence supporting the Company’s ability to use these losses in the future.

Uncertain Tax Positions

The Company applies the FASB’s guidance for uncertainty in income taxes that requires the application of a more likely than not threshold to the recognition and derecognition of uncertain tax positions.

The Company had an outstanding non-current income tax liability of approximately $1.4 million, including interest, for uncertain tax positions as of June 30, 2011. The amount represented the aggregate tax effect of differences between tax return positions and the amounts otherwise recognized in the Company’s condensed consolidated financial statements, and is reflected in other liabilities in the accompanying condensed consolidated balance sheets. The liability for uncertain tax positions as of June 30, 2011 mainly pertained to the Company’s interpretation of nexus in certain states related to revenue sourcing for state income tax purposes, as well as uncertain tax positions related to related party interest in foreign jurisdictions.

The Company recognizes accrued interest and penalties related to uncertain tax positions as a component of the income tax provision. The Company has identified no uncertain tax position for which it is reasonably possible that the total amount of liability for unrecognized tax benefits will significantly increase or decrease within 12 months, except for recurring accruals on existing uncertain tax positions.

13.  Segment Reporting

The Company has determined that it has three reportable segments based on the Company’s method of internal reporting, which disaggregates business by geographic location. These segments are the Americas, Europe and Asia. The Company evaluates the performance of these segments based on income (loss) from operations, as well as other factors, including the progress of its research and development activities. The reportable segments have historically derived their revenue from joint collaboration and strategic alliance agreements. Transactions between the segments consist primarily of loans and the provision of research and development services. Following is a summary of financial information by reportable geographic segment for the three and six months ended June 30, 2011 and 2010.
 
 
19

 

SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
 
(In thousands)
 
Americas
   
Europe
   
Asia
   
Consolidated
 
Three Months Ended June 30, 2011
                       
Research and development revenue
  $ 1,449     $ -     $ 293     $ 1,742  
Product royalty revenue
    11,043       -       -       11,043  
Co-promotion revenue
    1,061       -       -       1,061  
Contract and collaboration revenue
    142       -       12       154  
Total revenues
    13,695       -       305       14,000  
Research and development expenses
    5,587       860       1,446       7,893  
Depreciation and amortization
    55       1       22       78  
Other operating expenses
    13,114       252       278       13,644  
Loss from operations
    (5,061 )     (1,113 )     (1,441 )     (7,615 )
Interest income
    54       -       1       55  
Interest expense
    -       (573 )     (41 )     (614 )
Other non-operating expense
    (7 )     (3,043 )     (72 )     (3,122 )
Loss before income taxes
  $ (5,014 )   $ (4,729 )   $ (1,553 )   $ (11,296 )
Capital expenditures
  $ 36     $ -     $ 11     $ 47  
                                 
Three Months Ended June 30, 2010
                               
Research and development revenue
  $ 1,269     $ -     $ 1,520     $ 2,789  
Product royalty revenue
    9,612       -       -       9,612  
Co-promotion revenue
    1,220       -       -       1,220  
Contract and collaboration revenue
    142       -       12       154  
Total revenues
    12,243       -       1,532       13,775  
Research and development expenses
    1,765       102       2,988       4,855  
Depreciation and amortization
    222       3       9       234  
Other operating expenses
    7,997       506       292       8,795  
Income (loss) from operations
    2,259       (611 )     (1,757 )     (109 )
Interest income
    177       -       1       178  
Other non-operating income (expense), net
    3       381       (167 )     217  
Income (loss) before income taxes
  $ 2,439     $ (230 )   $ (1,923 )   $ 286  
Capital expenditures
  $ 63     $ 2     $ -     $ 65  
 
 
 
20

 
 
SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
 
(In thousands)
 
Americas
   
Europe
   
Asia
   
Consolidated
 
Six Months Ended June 30, 2011
                       
Research and development revenue
  $ 2,897     $ -     $ 809     $ 3,706  
Product royalty revenue
    20,161       -       -       20,161  
Co-promotion revenue
    1,999       -       -       1,999  
Contract and collaboration revenue
    283       -       25       308  
Total revenues
    25,340       -       834       26,174  
Research and development expenses
    12,913       1,387       2,813       17,113  
Depreciation and amortization
    453       158       39       650  
Other operating expenses
    24,218       404       565       25,187  
Loss from operations
    (12,244 )     (1,949 )     (2,583 )     (16,776 )
Interest income
    123       1       1       125  
Interest expense
    -       (1,143 )     (82 )     (1,225 )
Other non-operating expense
    (11 )     (3,242 )     (4 )     (3,257 )
Loss before income taxes
  $ (12,132 )   $ (6,333 )   $ (2,668 )   $ (21,133 )
Capital expenditures
  $ 78     $ 6,000     $ 102     $ 6,180  
                                 
Six Months Ended June 30, 2010
                               
Research and development revenue
  $ 2,573     $ -     $ 4,273     $ 6,846  
Product royalty revenue
    19,385       -       -       19,385  
Co-promotion revenue
    2,075       -       -       2,075  
Contract and collaboration revenue
    283       -       22       305  
Total revenues
    24,316       -       4,295       28,611  
Research and development expenses
    3,905       278       6,038       10,221  
Depreciation and amortization
    440       6       18       464  
Other operating expenses
    15,265       816       565       16,646  
Income (loss) from operations
    4,706       (1,100 )     (2,326 )     1,280  
Interest income
    387       1       3       391  
Other non-operating income (expense), net
    (32 )     1,009       (153 )     824  
Income (loss) before income taxes
  $ 5,061     $ (90 )   $ (2,476 )   $ 2,495  
Capital expenditures
  $ 154     $ 2     $ 4     $ 160  
 
As of June 30, 2011
                       
Property and equipment, net
  $ 1,546     $ 18     $ 314     $ 1,878  
Identifiable assets, net of intercompany loans
                               
and investments
  $ 98,020     $ 47,584     $ -     $ 145,604  
                                 
As of December 31, 2010
                               
Property and equipment, net
  $ 1,750     $ 24     $ 251     $ 2,025  
Identifiable assets, net of intercompany loans
                               
and investments
  $ 102,096     $ 30,789     $ 16,388     $ 149,273  
 
14.  Supplemental Information

The following is additional information on SAG and the Company for the six months ended June 30, 2010 as well as on the Company, which incorporates results of SAG, for the six months ended June 30, 2011 and 2010.
 
 
21

 

SUCAMPO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)

               
Consolidating Information
 
   
Six Months Ended June 30,
   
Six Months Ended June 30,
 
   
2011
   
2010
   
2010
   
2010
 
Income Statement
 
Consolidated Including SAG
   
SAG
   
Consolidated
Excluding SAG
 
Revenues
  $ 26,174     $ 28,611     $ -     $ 28,611  
Operating expenses
    (42,950 )     (27,331 )     3,198       (30,529 )
Non-operating income (expense)
    (4,357 )     1,215       1,054       161  
Income (loss) before income taxes
    (21,133 )     2,495       4,252       (1,757 )
Income tax benefit (provision)
    5,205       (884 )     (364 )     (520 )
Net income (loss)
    (15,928 )     1,611       3,888       (2,277 )
                                 
Cash Flows
                               
Operating activities
    (14,386 )     (280 )     3,692       (3,972 )
Investing activities
    13,726       501       -       501  
Financing activities
    104       (698 )     (706 )     8  
Effect of exchange rates on cash and cash equivalents
    3,592       (2,933 )     (2,925 )     (8 )
Net increase in cash and cash equivalents
    3,036       3,410       61       (3,471 )
Cash and cash equivalents at beginning of period
    49,243       61,420       34,706       26,714  
Cash and cash equivalents at end of period
    52,279       58,010       34,767       23,243  
 
15.  Subsequent events

On July 8, 2011, SAG obtained the development and commercial rights to a peptide compound from CuroNZ Limited, a New Zealand company, through a $100,000 loan agreement.  SAG believes that the peptide compound has the potential to augment the Company’s ophthalmic disease technology. SAG is currently in discussions with CuroNZ on the development of the peptide compound.

 
22

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This Quarterly Report on Form 10-Q contains forward-looking statements regarding Sucampo Pharmaceuticals, Inc. (the “Company,” “we,” “us,” or “our”) and our business, financial condition, results of operations and prospects within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties known and unknown that could cause actual results and developments to differ materially from those expressed or implied in such statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this Quarterly Report Form 10-Q and in our other Securities and Exchange Commission, or SEC, filings, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, which we filed with the SEC on March 8, 2011. You should also read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements as of and for the year ended December 31, 2010 included in our Annual Report on Form 10-K.

Overview

We are an international pharmaceutical company focused on the discovery, development and commercialization of proprietary drugs based on prostones. Prostones are a class of compounds that occur naturally in the human body as a result of enzymatic, 15-PGDH, transformation of certain fatty acids.

We believe that most prostones function as activators of cellular ion channels. As a result, prostones promote fluid secretion and enhance cell protection, including the recovery of cellular barrier function. This activity gives prostones wide-ranging therapeutic potential, particularly for age-related diseases. We are focused on developing prostone-based compounds for the treatment of gastrointestinal, ophthalmic, respiratory, vascular, central nervous system diseases and other disorders for which there are significant unmet medical needs, underserved patients and significant commercial potential.

The therapeutic potential of prostones was first identified by one of our founders, Dr. Ryuji Ueno. To date, two prostone products have received marketing approval. AMITIZA® (lubiprostone) is a treatment approved by the U.S. Food and Drug Administration, or FDA, for chronic idiopathic constipation, or CIC, in adults of both genders and for irritable bowel syndrome with constipation, or IBS-C, in women aged 18 years and older. RESCULA® (unoprostone isopropyl) is FDA-approved for the lowering of intra-ocular pressure, or IOP, in open-angle glaucoma or ocular hypertension in patients who are intolerant of or insufficiently responsive to other IOP lowering medications.

We generate revenue mainly from product royalties, development milestone payments, and clinical development activities. We expect to continue to incur significant expenses for the next several years as we continue our research and development activities and as we seek regulatory approvals for additional indications for AMITIZA, RESCULA and other compounds both in the U.S. and other countries. Additionally, we expect to expand our international operations.

In the United States, AMITIZA is being marketed and developed under a collaboration and license agreement, dated October 29, 2004, or the Takeda Agreement, with Takeda Pharmaceutical Company Limited, or Takeda, for gastrointestinal indications. Takeda holds the same rights to AMITIZA in Canada, but it has not yet marketed AMITIZA there. Under the Takeda Agreement, Takeda is responsible for the commercialization of AMITIZA in the U.S. and Canada. Takeda currently sells AMITIZA mainly to U.S. office-based specialty and primary care physicians and under a supplemental agreement with Takeda entered into on February 1, 2006, or the Supplemental Takeda Agreement, we co-promoted AMITIZA in the U.S. through a specialty sales force which focuses on the institutional marketplace, including long-term care and U.S. Department of Veterans Affairs facilities. Takeda reimburses us for a portion of our co-promotion expenses under the Supplemental Takeda Agreement prior to May 31, 2011 and thereafter under the Takeda Agreement. Takeda records all sales of AMITIZA and we receive a tiered royalty based on net sales. We are primarily responsible for AMITIZA research and development efforts and hold the new drug application, or NDA. Takeda reimburses us for a significant portion of our research and development activities.

On March 12, 2010, we submitted for filing with the International Court of Arbitration, International Chamber of Commerce a demand for arbitration under the applicable provisions of the Takeda Agreement, which specify that New York law will govern the procedural and substantive aspects of the arbitration. The arbitration hearing on our claims is set to conclude by December 2011; it is not known if the arbitration will remain on schedule or how long thereafter the arbitration proceedings will conclude. We have spent and expect to spend significant resources in the dispute with Takeda, and these arbitration proceedings may require the continuing attention of our senior management.
 
 
23

 
 
In Japan, lubiprostone is developed under a license, commercialization and supply agreement, or the Abbott Agreement, with Abbott Japan Co. Ltd., or Abbott. Sucampo Pharma Ltd., or SPL, has filed a NDA in Japan with the Pharmaceuticals and Medical Devices Agency, or PMDA, and we anticipate that the NDA, if successful, will be approved in 2012. Abbott has the right of first refusal to any additional indications for which lubiprostone is developed in Japan but SPL and Abbott failed to reach an agreement. SPL is currently negotiating with third parties for a licensing arrangement for the opioid-induced bowel dysfunction, or OBD, indication.

We hold all other development and commercialization rights to lubiprostone in all other territories worldwide, including in Switzerland, where lubiprostone has received marketing approval from the Swiss authorities.

Following our acquisition of Sucampo AG, or SAG, we are integrating SAG for future operational efficiencies through a simplified group structure and consolidation of intellectual property. In June 2011, Sucampo Manufacturing & Research AG, or SMR, merged into SAG, and SAG assumed all existing obligations of SMR. In June 2011, Sucampo AG Japan, or SAG-J, merged into SPL and SPL assumed all existing obligations of SAG-J. On July 1, 2011, the Company’s Board of Directors approved the transition of certain subsidiaries’ intellectual property rights to SAG and such transition is expected to be completed in the third quarter of this year.

As a result of the commercial rights to unoprostone isopropyl in the U.S. and Canada for its approved indication and any indications developed by us or R-Tech Ueno, Ltd., or R-Tech, and commercial rights for unoprostone isopropyl all countries in Europe and the rest of the world except Japan, Korea, Taiwan and the People’s Republic of China, or the SAG Territories, SAG is now evaluating the opportunities to obtain an appropriate label in the European Union and other European countries as well as obtaining reauthorization in those countries to commercialize unoprostone isopropyl.

Our operations are conducted through subsidiaries based in the United States, Japan, Switzerland, the United Kingdom and Luxembourg. Our reportable geographic segments are the United States, Asia, and Europe and we evaluate the performance of these segments based primarily on income (loss) from operations, as well as other factors that depend on the development status of these subsidiaries. Such measures include the progress of research and development activities, collaboration and licensing efforts, commercialization activities and other factors.

Drs. Ryuji Ueno and Sachiko Kuno, together, directly or indirectly, own a majority of the stock of R-Tech. Drs. Ueno and Kuno also are our controlling stockholders and are married to each other. Dr. Ueno is our Chief Executive Officer and Chairman of the Board of Directors. Dr. Kuno is a member of our Board of Directors and our advisor on international business development.

Our Clinical Development Programs

We are developing prostone compounds for the treatment of a broad range of diseases. The most advanced of these programs are:

AMITIZA (lubiprostone) in the United States and Canada

We currently are pursuing development of a third gastrointestinal indication of AMITIZA for the treatment of OBD in patients with chronic non-cancer pain, a constipation-related gastrointestinal indication. Our third phase 3 study of lubiprostone to evaluate its effectiveness as a treatment of OBD was initiated in December 2010, and subsequent to the quarter end, we reached the enrollment goal of 420 patients in our third phase 3 clinical trial of lubiprostone in patients with OBD caused by their chronic use of pain medications for non-malignant pain, excluding those taking methadone. If successful, the data from the trials will enable a filing of a NDA with the FDA and the regulatory authorities in the European Union and Switzerland.

AMITIZA (lubiprostone) in Japan

In September 2010, we submitted a NDA to PMDA for lubiprostone at a dosage strength of 24 micrograms for the indication of CIC. The September 2010 submission was updated in December 2010 with the complete results of the phase 3 long-term, open-label multicenter safety trial in an additional 209 Japanese CIC patients. If the NDA is successful, we expect the approval to occur in 2012.
 
 
24

 
 
SPL and Abbott did not reach an agreement on the terms and conditions for a license for the OBD indication for cancer patients. SPL is now negotiating with third parties, and Abbott will have 45 days to meet the terms and conditions of any third party bona fide offer.

AMITIZA (lubiprostone) in other countries

Sucampo Pharma Europe, Ltd., or SPE, filed for approval in the United Kingdom for CIC on August 4, 2011.

SAG and SPE conducted negotiations with the Federal Office of Public Health in Switzerland, or the BAG, for pricing approval and we expect a decision from the BAG in the third quarter of this year. In the event of a favorable pricing decision from the Swiss authorities, we intend to market AMITIZA in Switzerland.

We continue to evaluate the opportunities to obtain approvals in the other countries of Europe for chronic therapy of CIC patients.

RESCULA (unoprostone isopropyl)

As a result of the 2009 and 2011 agreements with R-Tech, SAG is now evaluating the requirements to reactivate RESCULA’s licenses in the European countries in which it has been registered were approved but have lapsed. In addition, SAG may develop RESCULA as a treatment for an array of ophthalmic diseases including dry age-related macular degeneration, or dry AMD, and diabetic retinopathy. SAG initiated an exploratory clinical study for the ophthalmic indication of dry AMD in the second quarter of 2011, which is proceeding on schedule and is intended to evaluate the effects of RESCULA in 28 patients with dry AMD. If this study is successful, SAG plans to initiate a dose-ranging phase 2 trial in a significantly larger number of patients to evaluate the effectiveness of RESCULA to prevent the progression of dry AMD to wet AMD. SAG is currently designing that trial protocol and plans to initiate that trial in the first half of 2012.

On July 8, 2011, SAG also obtained the development and commercial rights to a peptide compound from Curo NZ, a New Zealand company, for a loan of $100,000 that will augment our ophthalmic disease technology. SAG is currently in discussions with CuroNZ on the development of the peptide compound.

Product Pipeline

The table below summarizes the development status of AMITIZA, RESCULA and several other prostone-based product candidates. We currently hold all of the commercialization rights to the prostone compounds in our product pipeline, other than for commercialization of AMITIZA in the U.S., Canada and Japan, which is covered by the Takeda Agreements and the Abbott Agreement, and for RESCULA, for which we hold the rights in the SAG territories. Commercialization may take several years after successful completion of studies.
 
 
25

 

Product/Product
Candidate
 
 
Target Indication
 
 
Development Phase
 
 
Next Milestone
AMITIZA ®
(lubiprostone)
 
Chronic idiopathic constipation (CIC)
(adults of all ages)
 
Marketed in the U.S.
 
_____
             
       
Approved in Switzerland
 
Complete pricing negotiations with Swiss government health agency
             
       
New Drug Application (NDA)
submitted in 2010 to authorities
(PMDA) in Japan, and updated in
early 2011 with results of long-term
safety study
 
Approval of NDA, to be followed by pricing negotiations with government
             
   
Irritable bowel syndrome with
constipation (adult women) (IBS-C)
 
Marketed in the U.S.; phase 4 study on
higher dosage and with additional male
subjects
 
_____
             
   
Chronic idiopathic constipation (CIC) (pediatric, patients with renal
impairment and patients with hepatic
impairment)
 
Phase 4 pediatric, revised label to
reflect renal and hepatic impairment
reduced dosage
 
_____
             
   
Inflammatory bowel disease (IBD)
 
Preclinical
 
_____
             
   
Mixed irritable Bowel Syndrome (IBS-M)
 
Proof of concept study under design
 
_____
             
   
Opioid-induced bowel dysfunction
(OBD) in patients with chronic
non-cancer pain
 
Two phase 3 efficacy trials results
reported; third phase 3 efficacy trial
ongoing
 
Top-line results of third phase 3 efficacy trial anticipated near year-end 2011
             
   
Opioid-induced bowel dysfunction
(OBD) in cancer patients
 
Phase 2/3 clinical trial design
underway
 
Initiation of phase 2/3 clinical trial
             
RESCULA ®
(unoprostone
isopropyl)
 
Dry age-related macular degeneration
(dry AMD)
 
Exploratory clinical study at a single site ongoing to evaluate efficacy to slow progression from dry AMD to wet AMD
 
Treatment phase of study to complete during 2011
             
       
Phase 2b trial protocol under design.
 
Phase 2b dose-ranging trial in dry
AMD patients to slow progression
from dry to wet AMD
             
   
Glaucoma and ocular hypertension
 
Approved in the U.S.
 
Limited commercialization
             
Cobiprostone
 
Gastrointestinal
       
   
Oral mucositis
 
Preclinical
 
Phase 1 trial
             
   
Prevention of non-steroidal
anti-inflammatory drug
(NSAID)-induced ulcers
 
Phase 2a trial results reported
 
_____
             
   
Pulmonary
       
   
Chronic obstructive pulmonary
disease (COPD)
 
Preclinical
 
Finalize inhaled formulation
             
   
Dermatology
       
             
   
Wound Healing
 
Preclinical
 
Phase 1 trial
             
SPI-3608
 
Spinal stenosis
 
Preclinical
 
Phase 1 trial
             
SPI-017
 
Spinal stenosis
 
Preclinical
 
Phase 1 trial
             
   
Peripheral arterial disease (PAD)
 
Phase 1 completed
 
Phase 2a trial
 
 
26

 
 
Results of Operations

Comparison of three months ended June 30, 2011 and June 30, 2010

Revenues

The following table summarizes our revenues for the three months ended June 30, 2011 and 2010:
 
   
Three Months Ended
 
   
June 30,
 
(In thousands)
 
2011
   
2010
 
Research and development revenue
  $ 1,742     $ 2,789  
Product royalty revenue
    11,043       9,612  
Co-promotion revenue
    1,061       1,220  
Contract and collaboration revenue
    154       154  
Total
  $ 14,000     $ 13,775  
 
Total revenues were $14.0 million for the three months ended June 30, 2011 compared to $13.8 million for the three months ended June 30, 2010, an increase of $225,000 or 1.6%.

Research and development revenue was $1.7 million for the three months ended June 30, 2011 compared to $2.8 million for the three months ended June 30, 2010, a decrease of $1.1 million or 37.5%. The decrease was primarily due to lower activity of our Japanese development program for lubiprostone under the Abbott Agreement, while we await a response to the NDA filing. The revenue recognized under the Abbott Agreement decreased to $293,000 for the three months ended June 30, 2011 from $1.5 million for the three months ended June 30, 2010. We are recognizing the revenue from the payments from Abbott using a percentage-of-completion model over the estimated term of the CIC development program. The revenue recognized under the Takeda Agreement increased to $1.4 million for the three months ended June 30, 2011 from $1.3 million for the three months ended June 30, 2010. We are recognizing the revenue from the payments from Takeda using a time-based model over the estimated performance period.

Product royalty revenue represents royalty revenue earned on net sales, as reported by Takeda, of AMITIZA in the United States. For the three months ended June 30, 2011 and 2010, we recognized $11.0 million and $9.6 million, respectively, of product royalty revenue, an increase of $1.4 million or 14.9%.

Co-promotion revenues represent partial reimbursement by Takeda of co-promotion costs for our specialty sales force. For each of the three months ended June 30, 2011 and 2010, we recognized $1.1 million and $1.2 million, respectively, of co-promotion revenues for partial reimbursement of sales force costs.

Research and Development Expenses

The following summarizes our research and development expenses for the three months ended June 30, 2011 and 2010:
 
 
27

 
 
   
Three Months Ended
 
   
June 30,
 
(In thousands)
 
2011
   
2010
 
Direct costs:
           
AMITIZA
  $ 6,418     $ 3,222  
Cobiprostone
    -       162  
SPI-017
    47       733  
RESCULA
    80       174  
Other
    940       21  
Total
    7,485       4,312  
                 
Indirect costs
    408       543  
Total
  $ 7,893     $ 4,855  
 
Total research and development expenses for the three months ended June 30, 2011 were $7.9 million compared to $4.9 million for the three months ended June 30, 2010, an increase of $3.0 million or 62.6%. The increase was primarily due to expenses associated with initiating the additional phase 3 trial of lubiprostone for OBD patients which is being 50.0% reimbursed by Takeda, remonitoring costs for previous trials which is being 50.0% reimbursed by Takeda, and an increase in other prostone development activities. Certain expenses are reimbursed and included as revenue earned from Takeda. However, due to the method adopted for revenue recognition, as described in the accounting policies, there may be timing differences between the costs incurred and the recognition of cost reimbursement.

General and Administrative Expenses

The following summarizes our general and administrative expenses for the three months ended June 30, 2011 and 2010:

   
Three Months Ended
 
   
June 30,
 
(In thousands)
 
2011
   
2010
 
Salaries, benefits and related costs
  $ 1,598     $ 1,574  
Legal, consulting and other professional expenses
    8,803       3,532  
Stock-based compensation
    276       240  
Other expenses
    1,017       1,370  
Total
  $ 11,694     $ 6,716  
 
General and administrative expenses were $11.7 million for the three months ended June 30, 2011, compared to $6.7 million for the three months ended June 30, 2010, an increase of $5.0 million or 74.1%. The increase is due primarily to the increase in legal, consulting and other professional expenses, which relate primarily to costs incurred in connection with the on-going legal matters, including our dispute with Takeda, a separate dispute with a contract research organization, or a CRO, and SAG integration as discussed in Item 1 of Part II of this Quarterly Report on Form 10-Q.

Selling and Marketing Expenses

Selling and marketing expenses represent costs we incur to co-promote AMITIZA, including salaries, benefits and related costs of our sales force and other sales and marketing personnel, and represent costs of market research and analysis and other selling and marketing expenses. Selling and marketing expenses were $2.0 million for the three months ended June 30, 2011, compared to $2.3 million for the three months ended June 30, 2010, a decrease of $285,000 or 12.3%. The decrease in selling and marketing expenses relates primarily to the timing of pre-commercialization activities for RESCULA in the U.S. Part of the AMITIZA co-promotion expenses are funded by Takeda and recorded as co-promotion revenue.

Non-Operating Income and Expense

The following table summarizes our non-operating income and expense for the three months ended June 30, 2011 and 2010:
 
 
28

 

             
   
Three Months Ended
 
   
June 30,
 
(In thousands)
 
2011
   
2010
 
Interest income
  $ 55     $ 178  
Interest expense
    (614 )     -  
Other income (expense), net
    (3,122 )     217  
Total
  $ (3,681 )   $ 395  
 
Interest income was $55,000 for the three months ended June 30, 2011, compared to $178,000 for the three months ended June 30, 2010, a decrease of $123,000, or 69.1%. The decrease was primarily due to lower prevailing interest rates earned by our investments and a shift in the composition of our portfolio from auction rate securities, or ARS, which bear higher interest rates, to other types of investments. Our investment in ARS was redeemed in June 2010.

Interest expense was $614,000 for the three months ended June 30, 2011, including $573,000 on the notes payable issued for the December 2010 SAG acquisition and $41,000 on the notes payable issued on SPL’s borrowings.

Other expense was $3.1 million for the three months ended June 30, 2011, compared to other income of $217,000 for the three months ended June 30, 2010, a decrease of $3.3 million. The majority of the decrease belongs to foreign exchange losses that are unrealized and non-cash and that relate to amounts held within subsidiaries.

Income Taxes

We recorded a tax benefit of $2.3 million and a provision of $475,000 for the three months ended June 30, 2011 and 2010, respectively. The tax benefit for the three months ended June 30, 2011 mainly pertained to the taxable loss generated by our U.S. subsidiary for which a tax benefit is being recognized. This benefit was partially offset by the tax expense recorded for the taxable income generated by our Swiss subsidiary. Our other subsidiaries, based in Europe and Japan, incurred a pre-tax loss for the three months ended June 30, 2011, for which no tax benefit was recognized. As of June 30, 2011, we had an outstanding non-current income tax liability of approximately $1.4 million, including interest, for uncertain tax positions which represented the aggregate tax effect of differences between tax return positions and the amounts otherwise recognized in our condensed consolidated financial statements. The liability for uncertain tax positions as of June 30, 2011 was mainly a result of our interpretation of nexus in certain states related to revenue sourcing for state income tax purposes, as well as uncertain tax positions related to related party interest in foreign jurisdictions.

Comparison of six months ended June 30, 2011 and June 30, 2010

Revenues

The following table summarizes our revenues for the three months ended June 30, 2011 and 2010:
 
   
Six Months Ended
 
   
June 30,
 
(In thousands)
 
2011
   
2010
 
Research and development revenue
  $ 3,706     $ 6,846  
Product royalty revenue
    20,161       19,385  
Co-promotion revenue
    1,999       2,075  
Contract and collaboration revenue
    308       305  
Total
  $ 26,174     $ 28,611  
 
Total revenues were $26.2 million for the six months ended June 30, 2011 compared to $28.6 million for the six months ended June 30, 2010, a decrease of $2.4 million or 8.5%.
 
 
29

 
 
Research and development revenue was $3.7 million for the six months ended June 30, 2011 compared to $6.8 million for the six months ended June 30, 2010, a decrease of $3.1 million or 45.9%. The decrease was primarily due to lower activity of our Japanese development program for lubiprostone under with the Abbott Agreement, while we await a response to the NDA filing. The revenue recognized under the Abbott Agreement decreased to $809,000 for the six months ended June 30, 2011 from $4.3 million for the six months ended June 30, 2010. We are recognizing the revenue from the payments from Abbott using a percentage-of-completion model over the estimated term of the CIC development program. The revenue recognized under the Takeda Agreement increased to $2.9 million for the six months ended June 30, 2011 from $2.6 million for the six months ended June 30, 2010. We are recognizing the revenue from the payments from Takeda using a time-based model over the estimated performance period.

Product royalty revenue represents royalty revenue earned on net sales, as reported by Takeda, of AMITIZA in the United States. For the six months ended June 30, 2011 and 2010, we recognized $20.2 million and $19.4 million, respectively, of product royalty revenue, an increase of $776,000 or 4.0%.

Co-promotion revenues represent partial reimbursement by Takeda of co-promotion costs for our specialty sales force. For each of the six months ended June 30, 2011 and 2010, we recognized $2.0 million and $2.1 million, respectively, of co-promotion revenues for partial reimbursement of sales force costs.

Research and Development Expenses

The following summarizes our research and development expenses for the six months ended June 30, 2011 and 2010:
 
   
Six Months Ended
 
   
June 30,
 
(In thousands)
 
2011
   
2010
 
Direct costs:
           
AMITIZA
  $ 13,398     $ 7,011  
Cobiprostone
    176       306  
SPI-017
    127       1,543  
RESCULA
    763       290  
Other
    1,759       67  
Total
    16,223       9,217  
                 
Indirect costs
    890       1,004  
Total
  $ 17,113     $ 10,221  
 
Total research and development expenses for the six months ended June 30, 2011 were $17.1 million compared to $10.2 million for the six months ended June 30, 2010, an increase of $6.9 million or 67.4%. The increase was primarily due to expenses associated with initiating the additional phase 3 trial of lubiprostone for OBD patients which is being 50.0% reimbursed by Takeda, remonitoring costs for previous trials which is being 50.0% reimbursed by Takeda, and an increase in other prostone development activities. Certain expenses are reimbursed and included as revenue earned from Takeda. However, due to the method adopted for revenue recognition, as described in the accounting policies, there may be timing differences between the costs incurred and the recognition of cost reimbursement.

We routinely enter into agreements with third-party contract research organizations, or CROs, to oversee clinical research and development studies provided on an outsourced basis. We are not generally contractually obligated to pay the CRO if the service or reports are not provided. Total future estimated costs through 2013 under these agreements as of June 30, 2011 were approximately $13.3 million.

General and Administrative Expenses

The following summarizes our general and administrative expenses for the six months ended June 30, 2011 and 2010:
 
 
30

 

   
Six Months Ended
 
   
June 30,
 
(In thousands)
 
2011
   
2010
 
Salaries, benefits and related costs
  $ 3,358     $ 2,961  
Legal, consulting and other professional expenses
    15,407       6,803  
Stock-based compensation
    400       337  
Other expenses
    2,226       2,509  
Total
  $ 21,391     $ 12,610  
 
General and administrative expenses were $21.4 million for the six months ended June 30, 2011, compared to $12.6 million for the six months ended June 30, 2010, an increase of $8.8 million or 69.6%. The increase is primarily to the increase in legal, consulting and other professional expenses, which relate primarily to costs incurred in connection with the on-going legal matters, including our disputes with Takeda and a CRO, and SAG integration activities as discussed in Item 1 of Part II of this Quarterly Report on Form 10-Q.

Selling and Marketing Expenses

Selling and marketing expenses represent costs we incur to co-promote AMITIZA, including salaries, benefits and related costs of our sales force and other sales and marketing personnel, and represent costs of market research and analysis and other selling and marketing expenses. Selling and marketing expenses were $4.4 million for the six months ended June 30, 2011, compared to $4.5 million for the six months ended June 30, 2010, a decrease of $54,000 or 1.2%. The decrease in selling and marketing expenses relates primarily to the timing of pre-commercialization activities for RESCULA in the U.S. Part of the AMITIZA co-promotion expenses are funded by Takeda and recorded as co-promotion revenue.

Non-Operating Income and Expense

The following table summarizes our non-operating income and expense for the six months ended June 30, 2011 and 2010:

   
Six Months Ended
 
   
June 30,
 
(In thousands)
 
2011
   
2010
 
Interest income
  $ 125     $ 391  
Interest expense
    (1,225 )     -  
Other income (expense), net
    (3,257 )     824  
Total
  $ (4,357 )   $ 1,215  
 
Interest income was $125,000 for the six months ended June 30, 2011, compared to $391,000 for the six months ended June 30, 2010, a decrease of $266,000, or 68.0%. The decrease was primarily due to lower prevailing interest rates earned by our investments and a shift in the composition of our portfolio from auction rate securities, or ARS, which bear higher interest rates, to other types of investments. Our investment in ARS was redeemed in June 2010.

Interest expense was $1.2 million for the six months ended June 30, 2011, including $1.1 million on the notes payable issued for the December 2010 SAG acquisition and $82,000 on the notes payable issued on SPL’s borrowings.

Other expense was $3.3 million for the six months ended June 30, 2011, compared to other income of $824,000 for the six months ended June 30, 2010, a decrease of $4.1 million. The majority of the decrease belongs to foreign exchange losses that are unrealized and non-cash and that relate to amounts held within subsidiaries.

Income Taxes

We recorded a tax benefit of $5.2 million and a provision of $884,000 for the six months ended June 30, 2011 and 2010, respectively. The tax benefit for the six months ended June 30, 2011 mainly pertained to the taxable loss generated by our U.S. subsidiary for which a tax benefit is being recognized. This benefit was partially offset by the tax expense recorded for the taxable income generated by our Swiss subsidiary. Our other subsidiaries, based in Europe and Japan, incurred a pre-tax loss for the six months ended June 30, 2011, for which no tax benefit was recognized. As of June 30, 2011, we had an outstanding non-current income tax liability of approximately $1.4 million, including interest, for uncertain tax positions which represented the aggregate tax effect of differences between tax return positions and the amounts otherwise recognized in our condensed consolidated financial statements. The liability for uncertain tax positions as of June 30, 2011 was mainly a result of our interpretation of nexus in certain states related to revenue sourcing for state income tax purposes, as well as uncertain tax positions related to related party interest in foreign jurisdictions.
 
 
31

 
 
Reportable Geographic Segments

We have determined that we have three reportable segments based on our method of internal reporting, which disaggregates business by geographic location. These segments are the Americas, Europe and Asia. We evaluate the performance of these segments based primarily on income (loss) from operations, as well as other factors, including the progress of research and development activities. The financial results in these three segments based on geographic locations for the three and six months ended June 30, 2011 are summarized in the table below.

The financial results of our segments reflect their varying stages of development. Our Americas segment recorded a loss before taxes of $12.1 million for the six months ended June 30, 2011 compared to income before taxes of $5.1 million for the six months ended June 30, 2010. These results primarily reflect the expenses associated with initiating the additional phase 3 trial of lubiprostone for OBD in chronic non-cancer pain patients, a reduction in royalty revenues receivable from Takeda and the increased expenses in legal matters, including our dispute with Takeda.

Our segment in Europe recorded a loss before taxes of $6.3 million for the six months ended June 30, 2011 compared to loss before taxes of $90,000 for the six months ended June 30, 2010. These results primarily reflect the on-going regulatory submission for AMITIZA and the interest accruing on the loan notes issued for the December 2010 SAG acquisition.

Our segment in Asia recorded a loss before taxes of $2.7 million for the six months ended June 30, 2011 compared to a loss before taxes of $2.5 million during the six months ended June 30, 2010. These results primarily reflect the reduction of revenue recognized during the six months ended June 30, 2011 from the payments received from Abbott in 2009 and 2010.
 
(In thousands)
 
Americas
   
Europe
   
Asia
   
Consolidated
 
Three Months Ended June 30, 2011
                       
Total revenues
  $ 13,695     $ -     $ 305     $ 14,000  
Loss before taxes
    (5,014 )     (4,729 )     (1,553 )     (11,296 )
                                 
Three Months Ended June 30, 2010
                               
Total revenues
  $ 12,243     $ -     $ 1,532     $ 13,775  
Income (loss) before taxes
    2,439       (230 )     (1,923 )     286  
 
Six Months Ended June 30, 2011
                       
Total revenues
  $ 25,340     $ -     $ 834     $ 26,174  
Loss before taxes
    (12,132 )     (6,333 )     (2,668 )     (21,133 )
                                 
Six Months Ended June 30, 2010
                               
Total revenues
  $ 24,316     $ -     $ 4,295     $ 28,611  
Income (loss) before taxes
    5,061       (90 )     (2,476 )     2,495  
 
Identifiable assets
                               
As of June 30, 2011
  $ 98,020     $ 47,584     $ -     $ 145,604  
As of December 31, 2010
    102,096       30,789       16,388       149,273  
 
 
32

 
 
Liquidity and Capital Resources

Sources of Liquidity

We require cash principally to meet our operating expenses. We finance our operations principally from cash and cash equivalents and to a lesser extend from the sale of securities through the exercise of stock options. Revenues generated from operations principally consist of a combination of upfront payments, milestone and royalty payments and research and development expense reimbursements received from Takeda, Abbott and other parties.

Our cash, cash equivalents, restricted cash and investments consisted of the following as of June 30, 2011 and December 31, 2010:
 
   
June 30,
   
December 31,
 
(In thousands)
 
2011
   
2010
 
Cash and cash equivalents
  $ 52,279     $ 49,243  
Restricted cash
    15,113       15,113  
Investments, current
    42,163       54,524  
Investments, non-current
    -       5,028  
Total
  $ 109,555     $ 123,908  
 
Our cash and cash equivalents are deposits in operating accounts and highly liquid investments with a maturity at time of purchase of 90 days or less.

As of June 30, 2011 and December 31, 2010, our restricted cash consisted primarily of the collateral to SPL’s loan with The Bank of Tokyo-Mitsubishi UFJ, Ltd.

As of June 30, 2011, our short-term investments consisted of U.S. government agencies securities, U.S. commercial paper, municipal and corporate bonds, variable rate demand notes and certificates of deposits that have short-term maturities of one year or less.

Cash Flows

The following table summarizes our cash flows for the six months ended June 30, 2011 and 2010:

   
Six Months Ended June 30,
 
(In thousands)
 
2011
   
2010
 
Cash provided by (used in):
           
Operating activities
  $ (14,386 )   $ (280 )
Investing activities
    13,726       501  
Financing activities
    104       (698 )
Effect of exchange rates
    3,592       (2,933 )
Net decrease in cash and cash equivalents
  $ 3,036     $ (3,410 )
 
Six Months Ended June 30, 2011

Net cash used in operating activities was $14.4 million for the six months ended June 30, 2011. This reflected a net loss of $15.9 as well as changes in other operating assets and liabilities.

Net cash provided by investing activities of $13.7 million for the six months ended June 30, 2011 primarily reflected our proceeds from the sales and maturities of investments, offset in part by purchases of investments and intangible assets.

Net cash provided by financing activities of $104,000 for the six months ended June 30, 2011 resulted from the proceeds received from the exercise of stock options and proceeds we received under our employee stock purchase plan.

The effect of exchange rates on the cash balances of currencies held in foreign denominations for six months ended June 30, 2011 was an increase of $3.6 million.
 
 
33

 
 
Six Months Ended June 30, 2010

Net cash used in operating activities was $280,000 for the six months ended June 30, 2010. This reflected a net income of $1.6 million, a decrease in deferred revenue of $6.8 million, offset in part by an increase in product royalty receivable of $1.4 million and changes in other operating assets and liabilities.

Net cash provided by investing activities of $501,000 for the six months ended June 30, 2010 primarily reflected our proceeds from the sales and maturities of investments, offset in part by purchases of investments.

Net cash used in financing activities of $698,000 for the six months ended June 30, 2010 resulted from the issuance of notes receivable, offset in part by the proceeds we received under our employee stock purchase plan.

The effect of exchange rates on the cash balances of currencies held in foreign denominations for the six months ended June 30, 2010 was a decrease of $2.9 million.

Off-Balance Sheet Arrangements

As of June 30, 2011, we did not have any off-balance sheet arrangements, as such term is defined in Item 303(a)(4) of Regulation S-K under the Securities Act of 1933, as amended.

Funding Requirements

We may need substantial amounts of capital to continue growing our business. We may require this capital, among other things, to fund:

 
·
our share of the ongoing development program of AMITIZA in the U.S.;
 
·
development and regulatory efforts in Europe and Asia for lubiprostone;
 
·
development and regulatory activities for RESCULA in the U.S., Canada and the rest of the world except Japan, Korea, Taiwan and The People’s Republic of China;
 
·
transition of certain subsidiaries’ intellectual property to SAG;
 
·
activities to resolve our ongoing legal matters;
 
·
research and development activities for other prostone compounds, including cobiprostone and SPI-017;
 
·
other business development activities, including investments in or acquisitions of other businesses, products and technologies;
 
·
the initiation of commercialization efforts in non-U.S. markets;
 
·
the expansion of our commercialization activities in the U.S. and the initiation of commercialization efforts in non-U.S. markets;
 
·
the purchase of shares of our class A common stock up to $10.0 million, if we elect to do so, pursuant to our board-approved stock repurchase program; and
 
·
the satisfaction of the conditions of our loan note obligations.

The timing of these funding requirements is difficult to predict due to many factors, including the outcomes of our preclinical and clinical research and development programs and when those outcomes are determined, the timing of obtaining regulatory approvals and the presence and status of competing products. Our capital needs may exceed the capital available from our future operations, collaborative and licensing arrangements and existing liquid assets. Our future capital requirements and liquidity will depend on many factors, including, but not limited to:

 
·
the revenue from AMITIZA and RESCULA;
 
·
the future expenditures we may incur to increase revenue from AMITIZA or in our dispute with Takeda;
 
·
the cost and time involved to pursue our research and development programs;
 
·
our ability to establish collaborative arrangements and to enter into licensing agreements and contractual arrangements with others; and
 
·
any future change in our business strategy.
 
 
34

 
 
To the extent that our capital resources may be insufficient to meet our future capital requirements, we may need to finance our future cash needs through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. At June 30, 2011, we have sufficient liquidity for the next 12 months.

Additional equity or debt financing, grants or corporate collaboration and licensing arrangements may not be available on acceptable terms, if at all. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate our research and development programs, reduce our planned commercialization efforts or obtain funds through arrangements with collaborators or others that may require us to relinquish rights to certain product candidates that we might otherwise seek to develop or commercialize independently. In addition, any future equity funding would dilute the ownership of our stockholders.

Effects of Foreign Currency

We currently incur a portion of our operating expenses in the United Kingdom, Switzerland and Japan. The reporting currency for our consolidated financial statements is U.S. dollars. As such, the results of our operations could be adversely affected by changes in exchange rates either due to transaction losses, which are recognized in the statement of operations, or translation losses, which are recognized in comprehensive income. We currently do not hedge foreign exchange rate exposure through the use of derivative instruments.

Recent Accounting Pronouncements

Recent accounting pronouncements applicable to our financial statements are described in Note 2 to the accompanying condensed consolidated financial statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

Foreign Exchange Risk

We are subject to foreign exchange risk for revenues and expenses denominated in foreign currencies. Foreign currency risk arises from the fluctuation of foreign exchange rates and the degree of volatility of these rates relative to the United States dollar. We do not believe that a hypothetical one percentage point fluctuation in the U.S. dollar exchange rate would materially affect the fair value of our foreign currency sensitive assets and investments as of June 30, 2011. We do not currently hedge our foreign currency transactions.

Interest Rate Risk

We are subject to interest rate risks associated with fluctuations in interest rates. Our interest income is more sensitive to fluctuations in the interest rates in the U.S. than to changes in interest rates in other markets. Our interest expense is more sensitive to fluctuations in LIBOR and TIBOR than to changes in other interest rates. We ensure the safety and preservation of invested funds by attempting to limit default risk, market risk and reinvestment risk. We attempt to mitigate default risk by investing in investment grade securities. A hypothetical one percentage point decline in interest rates would not have materially affected the fair value of our interest-sensitive financial instruments as of June 30, 2011.

We do not use derivative financial instruments for trading or speculative purposes. However, we regularly invest excess cash in overnight repurchase agreements that are subject to changes in short-term interest rates. We believe that the market risk arising from holding these financial instruments is minimal.

Credit Risk

Our exposure to credit risk consists of cash and cash equivalents, restricted cash, investments and receivables. We place our cash, cash equivalents and restricted cash with what we believe to be highly rated financial institutions and invest the excess cash in highly rated investments. As of June 30, 2011 and December 31, 2010, approximately 26.7% and 27.6%, respectively, of our cash, cash equivalents, restricted cash and investments is issued or insured by the federal government or government agencies. We have not experienced any losses on these accounts related to amounts in excess of insured limits.

Item 4.  Controls and Procedures.
 
 
35

 
 
a) Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Principal Accounting Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of June 30, 2011. In designing and evaluating such controls, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Based upon the evaluation we carried out, our Chief Executive Officer and Principal Accounting Officer have concluded that, as of June 30, 2011, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified under the applicable rules and forms of the SEC, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Principal Accounting Officer, as appropriate, to allow timely decisions regarding required disclosures.

b) Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
36

 
 
Part II — OTHER INFORMATION

Item 1.  Legal Proceedings

As previously reported in our Quarterly Reports on Forms 10-Q, on March 12, 2010, we submitted for filing with the International Court of Arbitration, International Chamber of Commerce a demand for arbitration under the applicable provisions of the Takeda Agreements between us and Takeda, which specify that New York law will govern the procedural and substantive aspects of the arbitration. The arbitrators have reset the hearing on our claims to conclude by December 2011; it is not known if the arbitration will remain on schedule or how long thereafter the arbitration proceedings will conclude. We have spent and expect to spend significant resources in the dispute with Takeda, and these arbitration proceedings may require the continuing attention of our senior management.

As previously reported in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, on December 9, 2010, we filed an amended lawsuit under seal in Circuit Court for Montgomery County, Maryland against the CRO that performed the clinical trials for the OBD indication. We are pursuing our claims in the lawsuit, and the court has set a trial date in September 2012. We have spent and expect to spend significant resources in the dispute with the CRO, and these court proceedings may require the continuing attention of our senior management.

Item 1A.  Risk Factors.

Our business is subject to certain risks and events that, if they occur, could adversely affect our financial condition and results of operations and the trading price of our common stock. For a discussion of these risks, please refer to the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed by us with the SEC on March 8, 2011.  There have not been any material changes from the risk factors as previously disclosed in our Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On December 11, 2008, we announced a stock repurchase program pursuant to which we are authorized to purchase up to $10.0 million of our class A common stock from time to time in open market transactions. During the quarter ended June 30, 2011, we did not purchase any shares of our class A common stock under this program.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. (Removed and Reserved).

Item 5. Other Information.

None.
 
 
37

 
 
Item 6.  Exhibits

(a)      Exhibits

Exhibit
       
Number
 
Description
 
Reference
         
3.1
 
Certificate of Incorporation
 
Exhibit 3.1 to the Company's Current Report on Form 8-K (filed December 29, 2008)
         
3.2
 
Certificate of Amendment
 
Exhibit 3.2 to the Company's Current Report on Form 8-K (filed December 29, 2008)
         
3.3
 
Restated Bylaws
 
Exhibit 3.3 to the Company's Current Report on Form 8-K (filed December 29, 2008)
         
4.1
 
Specimen Stock Certificate evidencing the shares of class A common stock
Exhibit 4.1 to Registration Statement No. 333-135133, Amendment No. 5 (filed February 1, 2007)
         
10.1
 
Form of Sucampo Pharmaceuticals, Inc. Duration and Performance-Based Stock Option Incentive Award
Exhibit 10.1 to the Company’s Current Report on Form 8-K (filed May 6, 2011)
         
101.[INS]†
 
XBRL Instance Document
 
Included herewith
         
101.[SCH]†
 
XBRL Taxonomy Extension Schema Document
 
Included herewith
         
101.[CAL]†
 
XBRL Taxonomy Extension Calculation Linkbase Document
Included herewith
         
101.[LAB]†
 
XBRL Taxonomy Extension Label Linkbase Document
 
Included herewith
         
101.[PRE]†
 
XBRL Taxonomy Extension Presentation Linkbase Document
Included herewith
         
31.1
 
Certification of the Principal Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002
Included herewith
         
31.2
 
Certification of the Principal Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002
Included herewith
         
32.1
 
Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Included herewith
         
32.2
 
Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Included herewith
 
†           Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, the interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is otherwise not subject to liability under these sections.
 
 
38

 
 
SIGNATURES
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.

 
Sucampo Pharmaceuticals, Inc.
       
       
August 5, 2011
By:
 
/s/  RYUJI UENO
     
Ryuji Ueno, M.D., Ph.D., Ph.D.
     
Chief Executive Officer, Chief Scientific Officer and Chairman of the Board of Directors
     
(Principal Executive Officer)
       
August 5, 2011
By:
 
/s/  ANDREW P. SMITH
     
Andrew P. Smith
     
Principal Accounting Officer
 
 
39

 

 
Sucampo Pharmaceuticals, Inc.
Exhibit Index

Exhibit
       
Number
 
Description
 
Reference
         
3.1
 
Certificate of Incorporation
 
Exhibit 3.1 to the Company's Current Report on Form 8-K (filed December 29, 2008)
         
3.2
 
Certificate of Amendment
 
Exhibit 3.2 to the Company's Current Report on Form 8-K (filed December 29, 2008)
         
3.3
 
Restated Bylaws
 
Exhibit 3.3 to the Company's Current Report on Form 8-K (filed December 29, 2008)
         
4.1
 
Specimen Stock Certificate evidencing the shares of class A common stock
Exhibit 4.1 to Registration Statement No. 333-135133, Amendment No. 5 (filed February 1, 2007)
         
10.1
 
Form of Sucampo Pharmaceuticals, Inc. Duration and Performance-Based Stock Option Incentive Award
Exhibit 10.1 to the Company’s Current Report on Form 8-K (filed May 6, 2011)
         
101.[INS]†
 
XBRL Instance Document
 
Included herewith
         
101.[SCH]†
 
XBRL Taxonomy Extension Schema Document
 
Included herewith
         
101.[CAL]†
 
XBRL Taxonomy Extension Calculation Linkbase Document
Included herewith
         
101.[LAB]†
 
XBRL Taxonomy Extension Label Linkbase Document
 
Included herewith
         
101.[PRE]†
 
XBRL Taxonomy Extension Presentation Linkbase Document
Included herewith
         
31.1
 
Certification of the Principal Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002
Included herewith
         
31.2
 
Certification of the Principal Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002
Included herewith
         
32.1
 
Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Included herewith
         
32.2
 
Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Included herewith
 
 
†           Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, the interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is otherwise not subject to liability under these sections.

 
40