forest10k2009.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
___________________
FORM
10-K
(Mark
one)
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the Fiscal Year Ended March 31, 2009
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from _____ to _____
Commission
File No. 1-5438
FOREST LABORATORIES,
INC.
(Exact
name of registrant as specified in its charter)
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Delaware
(State
or other jurisdiction of incorporation or organization)
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11-1798614
(I.R.S.
Employer
Identification
Number)
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909
Third Avenue
New
York, New York
(Address
of principal executive offices)
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10022-4731
(Zip
code)
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(212)
421-7850
(Registrant's
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name
of each exchange
on which
registered
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Common
Stock, $.10 par value
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes X
No .
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes No X .
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 X No .
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in the Proxy Statement incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
..
Indicate
by a check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
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Large
accelerated filer x
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting company o
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(Do
not check if a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes No X .
The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 30, 2008 was $8,460,949,990.
Number of
shares outstanding of the registrant's Common Stock as of May 28, 2009:
301,616,739.
The
following documents are incorporated by reference herein:
Portions
of the definitive proxy statement to be filed pursuant to Regulation 14A
promulgated under the Securities Exchange Act of 1934 in connection with the
2009 Annual Meeting of Stockholders of registrant have been incorporated by
reference into Part III of this Form 10-K.
Portions
of the registrant's Annual Report to Stockholders for the fiscal year ended
March 31, 2009 have been incorporated by reference into Parts II and IV of
this Form 10-K.
_________________
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EXHIBIT 101.INS
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EXHIBIT 101.SCH
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EXHIBIT 101.PRE
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EXHIBIT 101.CAL
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EXHIBIT 101.LAB
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EXHIBIT
101.DEF
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General
Forest
Laboratories, Inc. and its subsidiaries develop, manufacture and sell both
branded and generic forms of ethical drug products which require a physician's
prescription. Our most important United States products consist of
branded ethical drug specialties marketed directly, or "detailed," to physicians
by our Forest Pharmaceuticals, Forest Therapeutics, Forest Healthcare, Forest
Ethicare and Forest Specialty Sales salesforces. We emphasize
detailing to physicians of those branded ethical drugs which we believe have the
most potential for growth and benefit to patients, and the development and
introduction of new products, including products developed in collaboration with
licensing partners.
Our
products include those developed by us and those acquired from other
pharmaceutical companies and integrated into our marketing and distribution
systems.
We are a
Delaware corporation organized in 1956, and our principal executive offices are
located at 909 Third Avenue, New York, New York 10022 (telephone number
212-421-7850). Our corporate website address is
http://www.frx.com. We make all electronic filings with the
Securities and Exchange Commission (or SEC), including Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments
to those Reports available on our corporate website free of charge as soon as
practicable after filing with or furnishing to the SEC.
Cautionary
Statement Regarding Forward-Looking Statements
Except
for the historical information contained herein, this report contains forward
looking statements that involve a number of risks and uncertainties, including
the difficulty of predicting FDA approvals, acceptance and demand for new
pharmaceutical products, the impact of competitive products and pricing, the
impact of legislative and regulatory developments on the manufacture and
marketing of pharmaceutical products and the uncertainty and timing of the
development and launch of new pharmaceutical products. This report
contains forward-looking statements that are based on Management's current
expectations, estimates, and projections. Words such as “expects,”
“anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,”
“forecasts,” variations of these words and similar expressions are intended to
identify these forward-looking statements. Certain factors, including
but not limited to those identified under “Item 1A. Risk Factors” of this
report, may cause actual results to differ materially from current expectations,
estimates, projections, forecasts and from past results. No assurance
can be made that any expectation, estimate or projection contained in a
forward-looking statement will be achieved or will not be affected by the
factors cited above or other future events. Forest undertakes no
obligation to release publicly any revisions to forward-looking statements as
the result of subsequent events or developments. We disclaim any
obligation to publicly update any forward-looking statements, whether as a
result of new information, future events or otherwise, except as required by
law. This discussion is provided as permitted by the Private Securities
Litigation Reform Act of 1995.
Recent Developments
The
following is a summary of selected key developments affecting our business
during the fiscal year ended March 31, 2009, including developments regarding
our marketed products and products in various stages of
development.
Savella™: In
January 2009 we received approval for the marketing of Savella (milnacipran
HCl), a selective serotonin and norepinephrine reuptake inhibitor (or SNRI), for
the management of fibromyalgia. Fibromyalgia is a chronic condition
characterized by widespread pain and decreased physical function and affects as
many as six million people in the United States. The safety and
efficacy of Savella was established in two Phase III trials conducted in the
United States and submitted with the New Drug Application (or NDA) involving
more than 2,000 patients with fibromyalgia. We license the United
States and Canadian rights to develop and commercialize Savella from Cypress
Bioscience, Inc. (or Cypress). Pursuant to our collaboration
agreement with Cypress, we made approximately $50 million in upfront and
development milestone payments, as well as a $25 million milestone payment upon
approval by the United States Food and Drug Administration (or
FDA). We will also pay Cypress royalties based on net sales of
Savella. We are responsible for sales and marketing activities, and
Cypress will also perform a portion of details to specialty physicians on a
fee-for-service basis. Our license agreement includes two patents
covering the use of Savella as a treatment for fibromyalgia. These
patents expire in 2021 and we filed for a patent term extension until
2023. In addition, as a new chemical entity not previously approved by the
FDA, Savella will qualify for five years of marketing exclusivity under the Drug
Price Competition and Patent Restoration Act of 1984, commonly known as the
Hatch-Waxman Act. Savella became available to trade channels in April
2009 at which time we began detailing to physicians.
Dutogliptin: In
October 2008, we entered into a collaboration agreement with Phenomix
Corporation (or Phenomix) to develop and commercialize dutogliptin in North
America. Dutogliptin is a proprietary orally administered, small
molecule dipeptidyl-peptidase-4 (or DPP-4) inhibitor currently undergoing Phase
III studies for the treatment of Type II diabetes mellitus. Under the
terms of our collaboration agreement, we made an upfront payment to Phenomix of
$75 million. Phenomix and Forest will jointly fund the development of
dutogliptin in the United States and we will share profits and losses with
Phenomix. Phenomix will be responsible for the promotion of
dutogliptin to certain specialists, with Forest promoting to both primary care
and specialty physicians. In Canada and Mexico, Forest has exclusive
development and marketing rights and Phenomix will receive a royalty based upon
net sales in these countries. Phenomix retains development and
commercialization rights to the product outside of North America and Mexico and
will pay Forest a royalty on net sales in these territories.
Dutogliptin
inhibits DPP-4 enzymes from breaking down the incretin hormone glucagon-like
peptide 1 (or GLP-1), thereby increasing the levels of this hormone in the
digestive tract and the blood. The increased levels of GLP-1
stimulate insulin production by the pancreatic beta cells and reduce glucagon
production by the pancreas, both of which result in reduced blood glucose
levels.
In a
double-blind, randomized 12-week, 422 patient, placebo-controlled Phase II(b)
clinical trial, dutogliptin met all primary and secondary endpoints, including
statistically significant reductions in HbA1c when administered once-daily in
combination with metformin, a glitazone, or metformin and a glitazone for the
treatment of Type II diabetes. Dutogliptin was also well
tolerated. In addition to five years of Hatch-Waxman exclusivity that
would be granted upon approval, dutogliptin is covered by a U.S. composition of
matter patent that expires in 2024, subject to possible patent term
extension.
F2695: In December
2008, we entered into a collaboration agreement with Pierre Fabre Medicament (or
Pierre Fabre) for the development and commercialization of F2695 in the United
States and Canada. F2695 is a proprietary selective norepinephrine
and serotonin reuptake inhibitor, two neurotransmitters known to play an
essential role in regulating mood, and is being developed for the treatment of
depression. Under the terms of our agreement, we made an upfront
payment to Pierre Fabre of $75 million and are obligated to pay future
development milestones. We have assumed responsibility for the
clinical development and commercialization of F2695 in the United States and
Canada, while Pierre Fabre will fund all pre-clinical development and drug
substance manufacturing activities.
In a
recently completed European placebo-controlled, double-blind Phase II study of
F2695 in over 550 patients with major depressive disorder, the compound
demonstrated statistically significant improvement compared to placebo
(p<0.0001) on the primary endpoint, the change from baseline in total score
on the Montgomery-Asberg Depression Rating Scale (or MADRS) and for a secondary
endpoint, the Hamilton Depression Scale (or HAMD-17) as well as in response and
remission rates using both the MADRS and HAMD-17. F2695 demonstrated
symptom improvement compared to placebo within two weeks after treatment
initiation. F2695 is an isomer of milnacipran and is protected by a
method of use patent that extends through June 2023, subject to patent term
extension. We also anticipate that under the Food and Drug Administration
Amendments Acts of 2007, F2695 will qualify for five years of Hatch-Waxman
exclusivity upon approval.
Bystolic®: In
December 2007 we received approval from the FDA for the marketing of Bystolic
for the treatment of hypertension. We commenced the sale and
marketing of Bystolic in January 2008. Bystolic is a beta-1 selective
beta-blocker with vasodilating properties. In its Phase III study
program, Bystolic demonstrated significant reductions in sitting diastolic and
systolic blood pressure in a general hypertension population. The
studies also found that Bystolic was well tolerated, with a low incidence of
side effects traditionally associated with beta-blockers. Bystolic
has received five years of marketing exclusivity under the Hatch-Waxman Act and
is also covered by a U.S. pharmaceutical composition of matter patent set to
expire in 2020. We have filed for patent term extension until 2021. See
“Business – Patents and Trademarks.” Hypertension affects
approximately 72 million adults in the United States and a substantial number of
patients diagnosed with hypertension have not reduced their blood pressure to an
acceptable range.
In fiscal
2009, Bystolic achieved net sales of $69,238,000.
We
recently filed a supplemental New Drug Application (or sNDA) for a congestive
heart failure indication based on a single large Phase III study.
We
license exclusive U.S. and Canadian rights to Bystolic from Mylan Inc. (or
Mylan). In February 2008, we amended our license agreement with Mylan
to terminate Mylan’s further commercial rights for Bystolic in the U.S. and
Canada and to reduce future payment obligations to Mylan. Pursuant to
the amendment, we made a one-time cash payment of $370 million to
Mylan. Following such payment, we remain obligated to pay Mylan its
original contractual royalties for a period of three years, after which our
royalty rate will be reduced.
Cerexa, Inc.: On
January 10, 2007, we acquired Cerexa, Inc. (or Cerexa), a biopharmaceutical
company based in Oakland, California, in a cash merger pursuant to which Cerexa
became a wholly-owned subsidiary of Forest.
Pursuant
to the merger, we acquired worldwide development and marketing rights (excluding
Japan) to ceftaroline acetate (or ceftaroline), a next generation,
broad-spectrum, hospital-based injectable cephalosporin antibiotic that exhibits
bactericidal activity against the most resistant strains of gram-positive
bacteria, including MRSA (methicillin resistant Staphylococcus aureus) in
patients with complicated skin and skin structure infections (or
cSSSI). Ceftaroline has also demonstrated bactericidal activity
against penicillin resistant Streptococcus pneumonia and common gram-negative
bacteria. Ceftaroline is being developed initially for the cSSSI
indication and for the treatment of community acquired pneumonia (or
CAP). In June 2008, we announced positive results from two globally
conducted multi-center Phase III studies in the treatment of
cSSSI. In both studies, ceftaroline as a monotherapy achieved the
primary endpoint of non-inferiority versus a combination of vancomycin plus
aztreonam. The studies also indicated that ceftaroline was generally
well-tolerated. Additionally, two Phase III studies in CAP are
on-going and we anticipate the CAP results in calendar 2009. Based on
positive results from both indications, we anticipate submitting a New Drug
Application to the FDA around the end of calendar 2009.
The
rights to ceftaroline are in-licensed by Cerexa on an exclusive basis from
Takeda Pharmaceutical Company. In addition to five years of
Hatch-Waxman exclusivity that would be granted upon approval, ceftaroline is
covered by a U.S. composition of matter patent that expires in 2018, subject to
possible patent term extension. Ceftaroline is also covered by two
U.S. patents that relate to the ceftaroline formulation that expire in 2021 and
that may provide additional exclusivity.
We paid
cash consideration of approximately $494 million in connection with the merger
and certain related expenses. We are obligated to pay an additional
$100 million in the event that annual United States sales of ceftaroline exceed
$500 million during the five year period following product
launch. The merger consideration paid at closing was expensed in
fiscal 2007 as in-process research and development.
NXL104: In January
2008, we entered into an agreement with Novexel, S.A. (or Novexel) for the
development, manufacture and commercialization of Novexel’s novel intravenous
beta-lactamase inhibitor, NXL104, in combination with our ceftaroline
compound. NXL104 is designed to be co-administered with select
antibiotics to enhance their spectrum of activity. Under the terms of
the license, we received the exclusive rights to administer NXL104 with
ceftaroline as a combination product in North America. We intend to
initiate Phase I studies of the ceftaroline/NXL104 combination during the second
half of calendar 2009. We also received a first negotiation right in
North America to an additional NXL104 combination with ceftazidime, a
cephalosporin antibiotic having a different spectrum of activity compared to
ceftaroline. This combination is currently being studied in Phase II
clinical trials conducted by Novexel.
NXL104
inhibits bacterial enzymes called beta-lactamases that break down beta-lactam
antibiotics (in particular penicillins and
cephalosporins). Beta-lactamase inhibition represents a mechanism for
counteracting resistance and enhancing the broad-spectrum activity of
beta-lactam antibiotics. A composition of matter patent which claims
NXL104 would provide protection for the ceftaroline/NXL104 combination product
until 2022, subject to possible patent term extension.
Under the
terms of the agreement, we made an upfront license payment of approximately $110
million to Novexel. We will fund development and commercialization of
the ceftaroline/NXL104 combination. Following the product’s
regulatory marketing approval, we will pay Novexel a low double digit royalty on
net sales throughout North America.
Linaclotide: In
September 2007, we entered into a 50/50 partnership in the United States with
Ironwood Pharmaceuticals, Inc. (or Ironwood) to co-develop and co-market
Ironwood’s first-in-class compound linaclotide. Linaclotide is
currently being investigated for the treatment of constipation-predominant
irritable bowel syndrome (or IBS-C) and chronic constipation (or
CC).
Under the
terms of the agreement, we initially paid Ironwood $70 million in licensing
fees. Ironwood and Forest will jointly and equally fund development
and commercialization of linaclotide in the United States, sharing profits
equally. Additionally, we will have exclusive rights in Canada and
Mexico and will pay Ironwood a royalty on net sales in these
countries.
Linaclotide
is an agonist of the guanylate cyclase type-C receptor found in the intestine
and acts by a mechanism distinct from previously developed products for IBS-C
and CC. Linaclotide is administered orally but acts locally in the
intestine with no measurable systemic exposure.
One out
of six adults in developed countries suffers from IBS, a chronic condition
marked by abdominal pain and disturbed bowel function. IBS accounts
for 12% of adult visits to primary care physicians and is the most common
disorder diagnosed by gastroenterologists. Health care costs
associated with IBS exceed $25 billion annually. IBS patients fall
into three subgroups; constipation-predominant IBS-C, diarrhea-predominant (or
IBS-D), and alternating (or IBS-A), and 30% to 40% of these patients suffer from
IBS-C. There are currently few available therapies to treat the nine
million U.S. patients diagnosed with IBS-C.
As many
as 26 million Americans suffer from CC. The discomfort of CC
significantly affects patients’ quality of life by impairing their ability to
work and participate in typical daily activities.
In March
2008, we announced positive top-line results from two Phase II(b) randomized,
double-blind, placebo-controlled studies assessing the safety, therapeutic
effect and dose response of four different once-daily doses of
linaclotide: 75 mcg, 150 mcg, 300 mcg and 600 mcg. The
first study examined the effects of linaclotide in patients with CC, while the
second study examined its effects in patients with IBS-C. The
analyses of the CC study data and the IBS-C study data indicate that each study
met its primary endpoint in favor of linaclotide. Based on this data,
we and Ironwood have initiated a comprehensive Phase III study program to
evaluate linaclotide’s safety and efficacy in patients with either IBS-C or
CC. The program involves two Phase III double-blind studies in each
condition.
In
addition to five years of Hatch-Waxman exclusivity that would be granted upon
approval, linaclotide is covered by a U.S. composition of matter patent that
expires in 2025, subject to possible patent term extension.
Aclidinium: In
April 2006, we entered into a collaboration and license agreement with
Laboratorios Almirall, S.A. (or Almirall), a pharmaceutical company
headquartered in Barcelona, Spain, for the development and exclusive United
States marketing rights to aclidinium, Almirall’s novel long-acting muscarinic
antagonist. Aclidinium is being developed as an inhaled therapy for
chronic obstructive pulmonary disease (or COPD). Aclidinium is
designed to have specific action in the lungs and is believed to be rapidly
metabolized in the lungs with limited systemic exposure. Studies to
date support a favorable tolerability profile. The product is being
developed in a Multi-Dose Dry Powder Inhaler (or MDPI) which we believe
represents an improvement in drug delivery over currently available
devices.
COPD is a
debilitating respiratory condition that includes two related lung
diseases: chronic bronchitis and emphysema. It affects
approximately 24 million Americans, a population even larger than the 20 million
who suffer from asthma. However, COPD frequently goes undiagnosed and
untreated because it is difficult to identify in its early
stages. The primary cause of COPD is prolonged cigarette
smoking. It is the fourth leading cause of death in the United States
after heart disease, cancer and stroke. According to the National
Heart, Lung and Blood Institute, COPD’s prevalence and associated death rate are
rising. In 2020, COPD is projected to become the third leading cause
of death in the United States. Today, the economic burden of COPD on
the U.S. healthcare system is substantial, estimated at over $30 billion
annually.
Under the
terms of the agreement, we made an upfront payment of $60 million to Almirall in
May 2006, development milestone payments in May 2007 and September 2008 and may
be obligated to pay future milestone payments. In addition, Almirall
will receive royalty payments based on aclidinium sales. Forest and
Almirall will jointly oversee the development and regulatory approval of
aclidinium and share all expenses for current and future development
programs. Almirall has granted us certain rights of first negotiation
for other Almirall respiratory products that could be combined with
aclidinium. Pursuant to such rights, we have commenced the
development of a fixed-dose combination of aclidinium and the beta-agonist
formoterol, which is currently in Phase II testing.
In
September 2008, we and Almirall announced results from two global Phase III
studies of aclidinium. In both trials, once-daily aclidinium showed a
statistically significant difference versus placebo in the primary endpoint of
trough FEV1, a measure of pulmonary function that is decreased in patients with
moderate to severe COPD. After consultation with the FDA, we and
Almirall have determined to conduct additional clinical trials of aclidinium to
provide further support for a range of dosing regimens, including higher and
more frequent dosing.
We will
be responsible for sales and marketing of aclidinium in the U.S. and Almirall
has retained an option to co-promote the product in the U.S. in the future while
retaining commercialization rights for the rest of the world. In
addition to five years of Hatch-Waxman exclusivity that would be granted upon
approval, aclidinium is protected by an issued U.S. composition of matter patent
expiring in 2020, subject to possible patent term extension.
Lexapro®: In
September 2002, we launched Lexapro (escitalopram oxalate), a single isomer
version of citalopram HBr for the treatment of major depression, following
approval of the product by the FDA in August 2002. Citalopram is a
racemic mixture with two mirror image molecules, the S- and
R-isomers. The S-isomer of citalopram is the active isomer in terms
of its contribution to citalopram's antidepressant effects, while the R-isomer
does not contribute to the antidepressant activity. With Lexapro, the
R-isomer has been removed, leaving only the active S-isomer. Clinical
trials demonstrate that Lexapro is a more potent selective serotonin reuptake
inhibitor (or SSRI) than its parent compound, and confirm the antidepressant
activity of Lexapro in all major clinical measures of
depression. During fiscal 2009, sales of Lexapro were
$2,300,945,000. According to data published by IMS, an independent
prescription audit firm, as of April 30, 2009, Lexapro’s market share was 16.03%
of total prescriptions for antidepressants in the SSRI/SNRI
category.
In
December 2003, Lexapro received FDA approval for the treatment of generalized
anxiety disorder (or GAD), a disorder characterized by excessive anxiety and
worry about everyday events or activities for a period of six months or
more. The approval was based upon three GAD studies involving Lexapro
which demonstrated significantly greater improvement in anxiety symptoms
relative to placebo. Forest began marketing Lexapro for the treatment
of GAD in January 2004.
In March
2009, the FDA approved our supplemental NDA for the acute and maintenance
treatment of Major Depressive Disorder (or MDD) in adolescents, 12-17 years of
age. Lexapro is only the second antidepressant to be approved for the
treatment of MDD in adolescents, a condition that affects approximately two
million adolescents in the United States. The approval of Lexapro for
the treatment of adolescent depression was supported by two placebo-controlled
studies, one conducted in adolescent patients taking Lexapro and one conducted
in children and adolescents taking citalopram. In an 8-week
flexible-dose, placebo-controlled study that compared Lexapro 10-20 mg/day to
placebo in 12 to 17 year old patients reported in 2008, Lexapro showed
statistically significant greater mean improvement from baseline, compared to
placebo, on the Children’s Depression Rating Scale-Revised
(CDRS-R). In another 8-week, flexible-dose, placebo-controlled study,
children and adolescents 7 to 17 years of age treated with citalopram 20-40
mg/day showed statistically significant greater mean improvement from baseline
on the CDRS-R compared to patients treated with placebo. The positive
results for this trial largely came from the adolescent subgroup. The
FDA’s determination of the efficacy of Lexapro in the acute treatment of MDD in
adolescents was established, in part, on the basis of extrapolation from this
study. Two additional flexible-dose, placebo-controlled MDD studies
were conducted: one Lexapro study in patients 7 to 17 and one
citalopram study in adolescents. Neither study demonstrated
statistically significant efficacy on the primary parameter. Although
maintenance efficacy in adolescent patients has not been systematically
evaluated, the FDA in its review concluded that maintenance efficacy can be
extrapolated from adult data along with comparisons of escitalopram
pharmacokinetic parameters in adults and adolescent patients.
Lexapro
was developed by us and H. Lundbeck A/S (or Lundbeck), a Danish pharmaceutical
firm which licenses to us the exclusive United States marketing rights to this
compound, as well as Celexa®.
Lexapro
is covered by a U.S. composition of matter patent which expires in March 2012,
inclusive of additional exclusivity granted as a result of a pediatric study we
performed. In September 2007, the United States Court of Appeals for
the Federal Circuit affirmed a July 2006 decision by the United States District
Court for the District of Delaware which determined that our composition of
matter patent for Lexapro is valid and upheld our injunction against Teva
Pharmaceuticals (or Teva) preventing Teva from launching a generic equivalent to
Lexapro. During fiscal 2007, Caraco Pharmaceutical Laboratories (or
Caraco), a generic manufacturer, filed an Abbreviated New Drug Application (or
ANDA) seeking approval to market a generic version of Lexapro. We,
together with Lundbeck, have commenced patent infringement litigation against
Caraco which is pending in the United States District Court for the Eastern
District of Michigan. Caraco has stipulated to infringing our patent
leaving only Caraco’s invalidity defenses to be litigated. A five day
bench trial, originally scheduled to begin on April 27, 2009, was adjourned
until June 1, 2009. See “Item 3. Legal
Proceedings”.
Namenda®: In
October 2003, Namenda (memantine HC1) was approved for marketing and
distribution by the FDA for the treatment of moderate and severe Alzheimer's
disease. Namenda is a moderate-affinity, uncompetitive
N-methyl-D-aspartate (or NMDA) receptor antagonist that modulates the effects of
glutamate - a neurotransmitter found in the brain. Excessive levels
of glutamate are hypothesized to contribute to the dysfunction and eventual
death of brain cells observed in Alzheimer's disease. We believe that
Namenda's mechanism of action is distinct from other drugs currently available
to treat Alzheimer's disease. We obtained the exclusive rights to
develop and market memantine in the United States by license agreement with Merz
Pharma GmbH & Co. KgaA of Germany (or Merz), the originator of the
product.
Namenda
achieved sales of $949,289,000 during our 2009 fiscal year and, according to
data published by IMS, an independent prescription audit firm, as of April 30,
2009, Namenda achieved a 34.01% share of total prescriptions in the Alzheimer’s
market. Namenda is covered by a U.S. method of use patent which
expires in 2010. In March 2009 the U.S. Patent and Trademark Office
issued a Notice of Final Determination that Namenda is entitled to a patent term
extension until April 2015. In January 2008, we and Merz commenced
patent infringement litigation against several generic manufacturers who had
filed ANDAs seeking FDA approval to market generic equivalents of
Namenda. The actions are pending in the United States District Court
for the District of Delaware. We intend to fully enforce our patent
rights for Namenda.
In
February 2008, we received preliminary results of a Phase III study of memantine
HC1 in a novel once-daily formulation. The study evaluated the
efficacy, safety and tolerability of an innovative, proprietary, 28 mg memantine
extended-release, once-daily formulation compared to placebo in outpatients with
moderate and severe Alzheimer’s disease currently treated with an acetyl-
cholinesterase inhibitor. The results indicated that patients treated
with memantine 28 mg extended-release formulation experienced statistically
significant benefits in cognition and clinical global status compared to
placebo. Based on the results of this study, we intend to prepare a
NDA for this new formulation.
Cariprazine: In
November 2004, we entered into a collaboration and license agreement with Gedeon
Richter Ltd. (or Richter), based in Budapest, Hungary, for the development of
and exclusive United States rights to Richter's cariprazine (RGH 188) and
related compounds, being developed as an atypical antipsychotic for the
treatment of schizophrenia, bipolar mania and other psychiatric
conditions.
In
September 2008, we received positive preliminary top-line results from a Phase
II study of cariprazine in patients with acute mania associated with bipolar
disorder. A review of top-line results of a Phase II study in
schizophrenia indicated that cariprazine demonstrated a nominally statistical
significant (i.e., not adjusted for multiple comparisons) therapeutic effect
compared to placebo in a low-dose arm and a numerical improvement compared to
placebo in a high-dose arm that did not reach nominal statistical
significance. Based on the review of the results, we and Richter
initiated a Phase II(b) dose-ranging study in schizophrenia
patients. This study is being performed in order to better determine
an optimal dose to take into the planned Phase III program. We expect
to report this data in the second half of calendar 2009. In addition,
two Phase II studies to explore the safety and efficacy of cariprazine in
bipolar depression and as adjunct therapy in major depressive disorder will
begin later this year.
Upon
execution of the collaboration agreement, we paid Richter an upfront license fee
and we will be obligated to pay further milestone payments if development and
commercialization are successfully completed. We are also obligated
to pay Richter a royalty based on net sales and to purchase our requirements of
the active pharmaceutical ingredient from them. Our license grants us
exclusive development and commercialization rights in the United States and
Canada. We will collaborate with Richter in product development and
will jointly fund such development activities.
In
addition to five years of Hatch-Waxman exclusivity which would be granted upon
approval, Richter owns pending U.S. patent applications covering the cariprazine
compound that if issued, will expire in 2024.
Radiprodil (RGH-896) and mGLUR1/5
Compounds: In November 2005, we entered into two new
collaboration agreements with Richter with whom we are currently developing
cariprazine for the treatment of schizophrenia and bipolar mania.
The first
collaboration will focus upon a group of compounds that target the NR2B receptor
that will be developed for the treatment of chronic pain and other central
nervous system (or CNS) conditions. Radiprodil is the first of this
group and is currently in Phase II in patients with diabetic peripheral
neuropathic pain with results expected in calendar year 2010. We paid
Richter an upfront payment and will become obligated to pay milestone payments
based upon achievement of development objectives. The two companies
will jointly fund the development program. Forest has exclusive
marketing rights in the United States and Canada and will pay Richter a royalty
on net sales. In addition to five years Hatch-Waxman exclusivity that
would be granted upon approval, radiprodil is covered by a U.S. composition of
matter patent that expires in 2024, subject to possible patent term
extension.
The
second new collaboration will focus upon a series of novel compounds that target
metabotropic glutamate receptors (or mGLUR1/5). mGLUR1/5 antagonists
represent novel potential agents for the treatment of anxiety, depression and
other CNS conditions. Forest and Richter intend to advance promising
leads to clinical trials within the next two to three years. We paid
Richter an upfront payment and will pay milestone payments based upon the
achievement of development objectives in addition to royalties. We
will have exclusive marketing rights in North America while Richter will retain
exclusive rights in Europe and countries comprising the former Soviet
Union. The two companies will share rights in other
countries.
Oglemilast: In
September 2004, we entered into a collaboration and license agreement with
Glenmark Pharmaceuticals Ltd. (or Glenmark), of Mumbai, India, covering
oglemilast (GRC 3886) Glenmark's PDE4 inhibitor. Oglemilast is a
novel, orally available phosphodiesterase-IV (or PDE4) inhibitor in development
for COPD and asthma, and may also have use in other conditions.
Bronchodilators
and anticholinergics are the most commonly prescribed therapies in COPD, but do
not address the underlying inflammation. PDE4 inhibitors represent a
new class of drugs that are interesting because they have the potential to relax
the smooth muscles of the airway resulting in bronchodilation, as well as
inhibit inflammatory cell activity, thus providing both short-term relief and
control over the progression of the disease.
We have
commenced a Phase II study of this compound for the COPD indication with results
expected in the second half of calendar 2009. Glenmark is conducting
a Phase II study in adult patients with asthma. In addition to five years
of Hatch-Waxman exclusivity that would be granted upon approval, oglemilast is
covered by a U.S. composition of matter patent that expires in 2024, subject to
possible patent term extension.
We will
develop, register and commercialize oglemilast for the North American market,
while Glenmark will retain commercialization rights for the rest of the
world. We paid Glenmark an upfront payment upon initiation of the
agreement and additional payments upon the successful completion of other
development milestones. We will be required to pay future milestones
if the development and commercialization of the product is successfully
completed in the North American market. Additionally, after
commercial launch, Glenmark will earn a royalty from us on net sales of the
product, and will supply all of the active pharmaceutical ingredient required by
us.
Co-Promotion of Benicar® with Daiichi
Sankyo: In December 2001, we entered into a co-promotion
agreement with Daiichi Sankyo (or Sankyo) for the co-promotion in the United
States of Benicar (olmesartan medoxomil) an angiotensin receptor blocker (or
ARB) discovered and developed by Sankyo for the treatment of
hypertension. The NDA for Benicar was approved by the FDA in April
2002. In August 2003, the FDA approved Benicar HCT®, a combination of
Benicar and hydrochlorothiazide, which was also jointly promoted by Forest and
Sankyo.
Pursuant
to the co-promotion agreement with Sankyo, we shared with Sankyo in the
detailing of the product to physicians, hospitals, managed care organizations
and other institutional users of pharmaceutical products over a six-year period
ended March 31, 2008 (we subsequently agreed to perform limited additional
detailing through May 2008). We received co-promotion income based
upon the relative contribution of the two companies to the co-promotion effort
through fiscal year ended March 31, 2008, and will receive residual payments on
a reduced basis following the end of the co-promotion period based on sales
levels achieved through the fiscal year ending March 31, 2014. During
fiscal 2009, we received co-promotion income of $195,563,000. According to
market share data published by IMS, an independent prescription audit firm, as
of April 30, 2009, Benicar and Benicar HCT achieved a combined 18.33% share of
total prescriptions in the ARB market. Benicar and Benicar HCT are
covered by a U.S. composition of matter patent that expires in
2016. Sankyo has sued a generic manufacturer for infringing this
patent after an ANDA was submitted seeking FDA approval to distribute generic
versions of Benicar. A bench trial in this lawsuit was completed in
April 2009.
Effective
July 1, 2008, we terminated our co-promotion agreement for Azor® (amlodipine and
olmesartan medoxomil), Sankyo’s fixed-dose combination of two antihypertensives,
the calcium channel blocker amlodipine besylate and the angiotensin receptor
blocker olmesartan medoxomil. In connection with this termination, we
recorded a one-time charge of approximately $44,100,000 which is comprised of a
one-time payment to Sankyo of approximately $26,600,000 related to the
termination of the agreement and $17,500,000 related to the unamortized portion
of the initial upfront payment. We determined that the resources we
had allocated to the Azor co-promotion would be better utilized in providing
additional support for our other currently marketed products.
Share Repurchase
Program: On May 18, 2006 our Board of Directors (or the Board)
authorized a share repurchase program for up to 25 million shares of our common
stock (or the 2007 Repurchase Program). On August 13, 2007 the Board
authorized the purchase of an additional 10 million shares of common
stock. The authorizations became effective immediately and have no
set expiration dates. We expect to make the repurchases from time to
time on the open market, depending on market conditions. As of May
28, 2009, 29,346,700 shares have been repurchased and we continue to have
authority to purchase up to an additional 5,653,300 shares under the 2007
Repurchase Program.
Principal
Products
We
actively promote in the United States those branded products which we believe
have the most potential for growth and patient benefit, and which enable our
salesforces to concentrate on groups of physicians who are high prescribers of
our products. Such products include: Lexapro, our SSRI for
the treatment of major depression and GAD; Namenda, our NMDA antagonist for the
treatment of moderate and severe Alzheimer's disease; Bystolic, our beta-blocker
for the treatment of hypertension; and Savella, our newest product, a dual
reuptake inhibitor for the treatment of fibromyalgia.
Sales of
Lexapro, launched in September 2002, accounted for 63% of our sales for the
fiscal year ended March 31, 2009 and 66% of our sales for our fiscal years 2008
and 2007.
Sales of
Namenda, launched in December 2003, accounted for 26% of our sales for the
fiscal year ended March 31, 2009 and 24% and 21%, respectively, of our sales for
fiscal years 2008 and 2007.
Our
generic line, marketed by our Inwood Laboratories, Inc. subsidiary, includes
generic equivalents to certain of our branded products, including Tiazac®, as
well as products using our controlled release technology.
Our
United Kingdom and Ireland subsidiaries sell both ethical products and
over-the-counter preparations. Their most important products include
Sudocrem®, a topical preparation for the treatment of diaper rash; Colomycin®,
an antibiotic used in the treatment of cystic fibrosis; Infacol®, used to treat
infant colic; and Exorex®, used in the treatment of eczema and
psoriasis.
Marketing
In the
United States, we directly market our products through our domestic salesforces,
Forest Pharmaceuticals, Forest Therapeutics, Forest Healthcare, Forest Ethicare
and Forest Specialty Sales, currently numbering approximately 2,700 persons,
which detail products directly to physicians, pharmacies, hospitals, managed
care and other healthcare organizations. In the United Kingdom, our
Forest Laboratories U.K. subsidiary's salesforce, currently 41 persons, markets
its products directly. Our products are sold elsewhere through
independent distributors.
Competition
The
pharmaceutical industry is highly competitive as to the sale of products,
research for new or improved products and the development and application of
competitive drug formulation and delivery technologies. There are
numerous companies in the United States and abroad engaged in the manufacture
and sale of both proprietary and generic drugs of the kind which we
sell. Many of these companies have substantially greater financial
resources than we do. We also face competition for the acquisition or
licensing of new product opportunities from other companies. In
addition, the marketing of pharmaceutical products is increasingly affected by
the growing role of managed care organizations in the provision of health
services. Such organizations negotiate with pharmaceutical
manufacturers for highly competitive prices for pharmaceutical products in
equivalent therapeutic categories, including certain of our principal promoted
products. Failure to be included or to have a preferred position in a
managed care organization's drug formulary could result in decreased
prescriptions of a manufacturer's products.
Government
Regulation
The
pharmaceutical industry is subject to comprehensive government regulation which
substantially increases the difficulty and cost incurred in obtaining the
approval to market newly proposed drug products and maintaining the approval to
market existing drugs. In the United States, products which we
develop, manufacture or sell are subject to regulation by the FDA, principally
under the Federal Food, Drug and Cosmetic Act, as well as by other federal and
state agencies. The FDA regulates all aspects of the testing,
manufacture, safety, labeling, storage, record keeping, advertising and
promotion of new and old drugs, including the monitoring of compliance with good
manufacturing practice regulations. Non-compliance with applicable
requirements can result in fines and other sanctions, including the initiation
of product seizures, injunction actions and criminal prosecutions based on
practices that violate statutory requirements. In addition,
administrative remedies can involve voluntary recall of products as well as the
withdrawal of approval of products in accordance with due process
procedures. Similar regulations exist in most foreign countries in
which our products are manufactured or sold. In many foreign
countries, such as the United Kingdom, reimbursement under national health
insurance programs frequently require that manufacturers and sellers of
pharmaceutical products obtain government approval of initial prices and
increases if the ultimate consumer is to be eligible for reimbursement for the
cost of such products.
During
the past several years, the FDA, in accordance with its standard practice, has
conducted a number of inspections of our manufacturing
facilities. Following these inspections, the FDA called our attention
to certain "Good Manufacturing Practices" compliance and record keeping
deficiencies. We have responded to the FDA's comments and modified
our procedures to comply with the requests made by the FDA.
The cost
of human healthcare products continues to be a subject of investigation and
action by governmental agencies, legislative bodies and private organizations in
the United States and other countries. In the United States, most
states have enacted generic substitution legislation requiring or permitting a
dispensing pharmacist to substitute a different manufacturer's version of a drug
for the one prescribed. Federal and state governments continue to
press efforts to reduce costs of Medicare and Medicaid programs, including
restrictions on amounts agencies will reimburse for the use of
products. In addition, several states have adopted prescription drug
benefit programs which supplement Medicaid programs and are seeking discounts or
rebates from pharmaceutical manufacturers to subsidize such
programs. Failure to provide such discounts or rebates may lead to
restrictions upon the availability of a manufacturer's products in health
programs, including Medicaid, run by such states. Under the Omnibus
Budget Reconciliation Act of 1990 (or OBRA), manufacturers must pay certain
statutorily-prescribed rebates on Medicaid purchases for reimbursement of
prescription drugs under state Medicaid plans. Federal Medicaid
reimbursement for drug products of original NDA-holders is denied if less
expensive generic versions are available from other manufacturers. In
addition, the Federal government follows a diagnosis related group (or DRG)
payment system for certain institutional services provided under Medicare or
Medicaid. The DRG system entitles a healthcare facility to a fixed
reimbursement based on discharge diagnoses rather than actual costs incurred in
patient treatment, thereby increasing the incentive for the facility to limit or
control expenditures for many healthcare products. Under the
Prescription Drug User Fee Act of 1992, the FDA has imposed fees on various
aspects of the approval, manufacture and sale of prescription
drugs.
In April
2003, the Federal Office of the Inspector General published guidance for
pharmaceutical manufacturers with respect to compliance programs to assure
manufacturer compliance with Federal laws and programs relating to
healthcare. In addition, several states have adopted laws and
regulations requiring certain specific disclosures with respect to our
compliance program and our practices relating to interactions with physicians
and other healthcare providers. We maintain a company-wide compliance
program to assure compliance with applicable laws and regulations, as well as
the standards of professional bodies governing interactions between
pharmaceutical manufacturers and physicians, and believe we are in compliance
with all material legal requirements and standards.
A
prescription-drug benefit for Medicare beneficiaries was established pursuant to
the Medicare Prescription Drug, Improvement and Modernization Act of
2003. Under the program, pharmaceutical benefit managers and health
programs offer discounted prices on prescription drugs to qualified Medicare
recipients reflecting discounts negotiated with manufacturers. The
failure of a manufacturer to offer discounts to these programs could result in
reduced use of the manufacturer's products.
From time
to time, we have implemented revised product labeling in accordance with FDA
requirements. There can be no assurance that such labeling changes or
changes which may be required by subsequent rulemaking will not have an adverse
effect upon the marketing of our products. In addition, the FDA
continues to review various aspects of our NDAs and product labeling for
approved products as we submit supplements seeking approval for new indications
or dosage forms, labeling changes or to comply with FDA requests, and at the
agency’s own initiative in light of post-marketing experience. In
connection with such reviews, the FDA may request labeling changes based on the
data submitted by us or from other sources, including post-marketing experience
data. Sometimes those requested changes may apply to an entire class
of drugs which includes one of our products, and sometimes the changes requested
may apply only to our product. In some cases, the labeling changes
requested, if implemented, might adversely affect the prescribing of our
products by physicians. If we believe changes requested by the FDA
are not correct, we may submit further data and analyses to the FDA which may
modify the agency’s position. There can be no assurance, however,
that the FDA will ultimately agree with our position or that post-marketing
clinical experience will not require labeling changes, either initiated by us or
by the FDA, which may adversely affect our products’ acceptance and
utilization.
We expect
that competing healthcare reform proposals will continue to be introduced and
debated. The adoption of any such proposal may entail new regulatory
requirements and may affect the marketing of prescription drugs. We
cannot predict the outcome or effect on the marketing of prescription drug
products of the legislative and political process.
Principal
Customers
The
following sets forth information with respect to the percentage of net sales
accounted for by our principal customers:
|
Customer
|
2009
|
2008
|
2007
|
|
McKesson
Drug Company
|
37%
|
38%
|
37%
|
|
Cardinal
Health, Inc.
|
33%
|
30%
|
27%
|
|
AmeriSource
Bergen Corporation
|
19%
|
15%
|
13%
|
No other
customer accounted for 10% or more of our net sales for the fiscal years
presented.
Financial
Information About Segments and Geographic Area
The
Company and its subsidiaries, which are located in the U.S., Ireland and the
United Kingdom, operate in only one segment: the manufacture and marketing of
ethical and other pharmaceutical products. Data regarding revenues
from principal customers, net sales and long-lived assets for each of the last
three fiscal years, where applicable, and information concerning the geographic
areas in which we operate is presented in “Note 3 – Business Operations” in the
accompanying “Notes to Consolidated Financial Statements” incorporated by
reference herein.
Environmental
Standards
We
anticipate that the effects of compliance with federal, state and local laws and
regulations relating to the discharge of materials into the environment will not
have any material effect on our capital expenditures, earnings or competitive
position.
Raw
Materials
The
active pharmaceutical ingredients in our principal promoted products, including
Lexapro, Namenda, Bystolic and Savella, are patented or otherwise available to
us only pursuant to our contractual arrangements with our licensing
partners. Other raw materials used by us are purchased in the open
market. We have not experienced any significant shortage in supplies
of active pharmaceutical ingredients or other raw materials.
Product
Liability Insurance
We
currently maintain $140 million of product liability coverage per "occurrence"
and in the aggregate. Although in the past there have been product
liability claims asserted against us, none for which we have been found liable,
there can be no assurance that all potential claims which may be asserted
against us in the future would be covered by our present
insurance. See “Item 3. Legal Proceedings”
and “Item 1A. Risk
Factors”.
Research
and Development
During
the fiscal year ended March 31, 2009, we spent $661,294,000 for research and
development, as compared to $670,973,000 and $941,003,000 in the fiscal years
ended March 31, 2008 and 2007, respectively. Included in research and
development expense are payments made pursuant to licensing and acquisition
agreements for new product opportunities where FDA approval has not yet been
received and accordingly payments made in connection with acquiring the product
rights are charged to research and development. Research and
development expenses for fiscal 2009 included an upfront payment of $75,000,000
to Phenomix in connection with acquiring product rights to dutogliptin and an
upfront payment of $75,000,000 paid to Pierre Fabre in connection with acquiring
product rights to F2695. Research and development expense for fiscal
2008 included an upfront payment of $70,000,000 in connection with the
collaboration agreement with Ironwood for the rights to co-develop and co-market
linaclotide and an upfront license payment of approximately $110,000,000 made to
Novexel in connection with the acquisition of rights to develop, manufacture and
commercialize NXL104 in combination with ceftaroline. Research and
development expenses for fiscal 2007 included approximately $476,000,000 of
acquisition and related costs incurred in the acquisition of Cerexa, which was
treated as the acquisition of in-process research and development and
approximately $60,000,000 in upfront license payments to Almirall for
aclidinium. Other research and development expenditures consist
primarily of the conduct of pre-clinical and clinical studies required to obtain
approval of new products, as well as clinical studies designed to further
differentiate our products from those of our competitors or to obtain additional
labeling indications.
Employees
At March
31, 2009, we had a total of 5,225 employees.
Patents
and Trademarks
Forest
seeks to obtain, where possible, patents and trademarks for Forest’s products in
the United States and all countries of major marketing interest to
Forest. Forest owns or has licenses to a substantial number of
patents and patent applications. Several of these patents, which
expire during the period 2012 to 2021, are believed to be of material importance
in the operation of Forest’s business. Forest believes that patents,
licenses and trademarks (or related group of patents, licenses, or trademarks)
covering our marketed products are material in relation to Forest’s business as
a whole.
The
following patents, licenses and trademarks are significant for Forest’s
business: those related to Lexapro (escitalopram oxalate), those
related to Namenda (memantine hydrochloride), those related to Benicar
(olmesartan medoxomil) and Benicar HCT (olmesartan medoxomil and
hydrochlorothiazide), those related to Bystolic (nebivolol hydrochloride) and
those related to Savella (milnacipran hydrochloride). The U.S.
composition of matter patent covering Lexapro is licensed from Lundbeck and will
expire in 2012. The principal U.S. method of use patent related to
Namenda is licensed from Merz and expires in 2015. The U.S.
composition of matter patent covering Benicar and Benicar HCT is owned by Sankyo
and expires in 2016. A U.S. method of use patent related to Benicar
HCT expires in 2021. Forest and Sankyo are parties to a co-promotion
agreement with respect to Benicar and Benicar HCT pursuant to which Forest will
continue to receive contract revenues through March 2014. The U.S.
pharmaceutical composition of matter patent covering Bystolic is licensed from
Mylan (which in turn licensed the patent from Janssen Pharmaceutica N.V.) and
expires in 2020 (Forest has submitted a patent term extension application to
extend this patent until 2021). In November 2008, the United States
Patent and Trademark Office closed the prosecution of the merits of
reexamination proceedings for the patents covering Bystolic and confirmed the
validity of the previously granted claims. The principal method of
use patent covering Savella is licensed from Cypress and expires in 2021 (Forest
has submitted a patent term extension application to extend this patent until
2023). Litigation involving Forest’s patents covering Lexapro and
Namenda is discussed at “Item 3. Legal
Proceedings”.
When a
product patent expires, the patent holder often loses effective market
exclusivity for the product. This can result in a severe and rapid
decline in sales of the formerly patented product, particularly in the United
States. However, in some cases the innovator company may achieve
exclusivity beyond the expiry of the product patent through manufacturing trade
secrets, later-expiring patents on methods of use or formulations, or data-based
exclusivity that may be available under pharmaceutical regulatory
laws.
We own or
exclusively license various trademarks and trade names which we believe are of
significant benefit to our business.
Backlog
- Seasonality
Backlog
of orders is not considered material to our business prospects. Our
business is not seasonal in nature.
We
operate in an industry which involves a number of significant risks, some of
which are beyond our control. The following discussion highlights
some of these risks and others are discussed elsewhere in this Form
10-K. The risks discussed herein and other risks could have a
material adverse effect on our business, prospects, results of operations,
financial condition and cash flows. Additional risks not currently
known to the Company or that the Company presently deems immaterial may also
impair our business operations. You should carefully consider all of
the information set forth in this Form 10-K, including the following risk
factors, before making an investment decision with respect to the Company’s
securities. This Form 10-K also contains forward-looking statements
that involve risks and uncertainties. The Company’s results could
materially differ from those anticipated in these forward-looking statements as
a result of certain factors, including the risks it faces as described below and
elsewhere. See “Item 1. Business” Cautionary Statement Regarding
Forward-Looking Statements.
We
are Substantially Dependent on Sales of Our Two Principal Products.
For the
2009 fiscal year, sales of Lexapro and Namenda accounted for 63% and 26%,
respectively, of our net sales. Any unexpected negative development
with respect to such products (for example, loss of market exclusivity or an
unexpected safety or efficacy concern) would have a material adverse effect on
our results of operations, financial condition and liquidity. While
the validity and enforceability of our patent covering escitalopram, the active
ingredient in Lexapro, were upheld in September 2007 by decision of the United
States Court of Appeals for the Federal Circuit, we are currently prosecuting
patent infringement litigation against a generic manufacturer who is seeking FDA
approval to market a generic equivalent to Lexapro. A bench trial in
this litigation, originally scheduled to begin April 27, 2009, was adjourned
until June 1, 2009. In addition, we have instituted patent
infringement litigation against multiple generic manufacturers who are seeking
FDA approval to market generic versions of Namenda. See “Item 3.
Legal
Proceedings”.
If
We Are Unable to Successfully Develop or Commercialize New Products, Our
Operating Results May Suffer.
Our
future results of operations will depend to a significant degree upon our
ability to successfully develop and commercialize new products. New
product development is subject to a great deal of uncertainty, risk and
expense. Promising pharmaceutical candidates may fail at various
stages of the research and development process, often after a great deal of
financial and other resources have been invested in their exploration and
development. Even where pharmaceutical development is successfully
completed, a product may fail to reach the market or have limited commercial
success because the safety and efficacy profile achieved during the course of
development is not as favorable as originally anticipated or is viewed by the
marketplace as less favorable in comparison to new and competing therapies which
may become available during the lengthy period of drug development.
The
Company cannot state with certainty when or whether any of its products now
under development will be approved or launched; whether it will be able to
develop, license or otherwise acquire compounds, product candidates or products;
or whether any products, once launched, will be commercially
successful. The Company must maintain a continuous flow of successful
new products and successful new indications or brand extensions for existing
products sufficient both to cover its substantial research and development costs
and to replace sales that are lost as profitable products lose patent protection
or are displaced by competing products or therapies. Failure to do so
in the short-term or long-term would have a material adverse effect on the
Company’s business, results of operations, cash flow, financial position and
prospects.
Regulatory
Compliance Issues Could Materially Affect Our Financial Position and Results of
Operations.
The
marketing and promotional practices of pharmaceutical manufacturers, as well as
the manner in which manufacturers interact with prescribers of pharmaceutical
products and other healthcare decision makers, are subject to extensive
regulation by numerous federal, state and local governmental authorities in the
United States, including the FDA, and by foreign regulatory
authorities. Such regulation takes the form of explicit governmental
regulation and guidance, as well as practices established by healthcare and
industry codes of conduct. In addition, federal, state, local and
foreign governmental authorities actively seek to enforce such regulations and
can assert both civil and criminal theories of enforcement not specifically
prescribed by published regulations or standards and accordingly with little
objective guidance to permit voluntary industry compliance. Such
enforcement can include actions initially commenced by “whistleblowers” under
the Federal False Claims Act which provides incentives to whistleblowers based
upon penalties successfully imposed as a result of the investigation or related
legal proceedings or settlements. There can be no assurance that the
resolution of pending or future claims, as well as the resolution of private
party (such as consumers or third-party payers) litigation which may be
associated with any such claims or their resolution, will not entail material
fines, penalties or settlement payments. See “Item 3. Legal Proceedings”
for information about pending government investigations and litigation
concerning our marketing and promotional practices and certain third-party payor
litigation pending against the Company. In addition, the
manufacturing, testing, storage and shipment of pharmaceutical products is
highly regulated and the failure to comply with regulatory standards can lead to
product withdrawals or seizures or to delays in FDA approval of products pending
resolution of such issues. Moreover, even when a manufacturer has
fully complied with applicable regulatory standards, products manufactured and
distributed may ultimately fail to comply with applicable specifications,
leading to product withdrawals or recalls.
Our
Business Depends on Intellectual Property Protection.
Our
ability to generate the revenue necessary to support our investment in acquiring
and developing new product opportunities, as well as the commitment of resources
to successfully market our products, greatly depends on effective intellectual
property protection to ensure we can take advantage of lawful market
exclusivity. Manufacturers of generic products have strong incentives
to challenge the patents which cover our principal products. While we
believe that our patent portfolio, together with market exclusivity periods
granted by the Hatch-Waxman Act, offers adequate exclusivity protection for our
current products, there can be no assurance that some of our patents will not be
determined to be invalid or unenforceable, resulting in unanticipated early
generic competition for the affected product. See “Item 3. Legal Proceedings”
for a description of pending patent litigation involving Lexapro and Namenda,
our two principal products.
We also
rely on trade secrets and proprietary know-how that we seek to protect, in part,
through confidentiality agreements with our partners, customers, employees and
consultants. It is possible that these agreements will be breached or
that they will not be enforceable in every instance, and that we will not have
adequate remedies for any such breach. It is also possible that our
trade secrets will become known or independently developed by our
competitors.
Loss of
patent protection for a product typically is followed promptly by generic
substitutes, reducing the Company’s sales of that
product. Availability of generic substitutes for the Company’s drugs
may adversely affect its results of operations and cash flow. In
addition, proposals emerge from time to time in the United States and other
countries for legislation to further encourage the early and rapid approval of
generic drugs.
If we are
unable to adequately protect our technology, trade secrets or propriety
know-how, or enforce our patents, our results of operations, financial condition
and cash flows could suffer.
Our
Business Model Currently Depends on the Successful In-Licensing or Acquisition
of New Product Opportunities.
In order
to remain competitive, we must continue to develop and launch new pharmaceutical
products. Our pipeline of new products is currently dependent on the
licensing and acquisition of new product opportunities. To
successfully accomplish these transactions, we commit substantial effort and
expense to seeking out, evaluating and negotiating collaboration arrangements
and acquisitions. The competition for attractive product
opportunities may require us to devote substantial resources to an opportunity
with no assurance that such efforts will result in a commercially successful
product.
Our
Business Could be Negatively Affected by the Performance of Our Collaboration
Partners.
Our
principal products, as well as certain of our principal product development
opportunities, involve strategic alliances with other companies. Our
alliance partners typically possess significant patents or other technology
which are licensed to us and remain significantly involved in product research
and development activities and in the exclusive manufacture and supply of active
pharmaceutical ingredients upon which our products are based. While
some of our collaboration partners are large well-established companies, others
are smaller companies, often in the “start-up” stage. A failure or
inability of our partners to perform their collaboration obligations could
materially negatively affect our operations or business plans. In
addition, while our relationships with our strategic partners have been good,
differences of opinion upon significant matters arise from time to
time. Any such differences of opinion, as well as disputes or
conflicting corporate priorities, could be a source of delay or uncertainty as
to the expected benefits of the alliance.
Pharmaceutical
Cost-Containment Initiatives May Negatively Affect Our Net Income.
The
Medicare Prescription Drug Improvement and Modernization Act of 2003 included a
prescription drug benefit for Medicare participants. Companies that
negotiate prices on behalf of Medicare drug plans will have a significant degree
of purchasing power and we expect pricing pressure as a result. In
addition, our net income continues to be impacted by cost-containment
initiatives adopted by managed care organizations and pharmaceutical benefit
managers which negotiate discounted prices from pharmaceutical manufacturers in
order to secure placement on formularies adopted by such organizations or their
health-plan or employer customers. Failure to be included in such
formularies or to achieve favorable formulary status may negatively impact the
utilization of our products. We expect that competing healthcare
reform proposals will continue to be introduced and debated. The
adoption of any such proposal may entail new regulatory requirements and may
affect the marketing of prescription drugs. We cannot predict the
outcome or effect on the marketing of prescription drug products of the
legislative and political process.
We
Face Substantial Competition from Other Pharmaceutical Manufacturers and Generic
Product Distributors.
Our
industry is characterized by significant technological innovation and
change. Many of our competitors are conducting research and
development activities in therapeutic areas served by our products and our
product-development candidates. The introduction of novel therapies
as alternatives to our products may negatively impact our revenues or reduce the
value of specific product development programs. In addition, generic
alternatives to branded products, including alternatives to brands of other
manufacturers in therapeutic categories where we market products, may be
preferred by doctors, patients or third-party payors.
Our
Business, and in Particular the Treatment of CNS Disorders, Presents Risk of
Product Liability Claims.
As more
fully discussed in “Item 3. Legal Proceedings”,
we are subject to approximately 75 legal actions asserting product liability
claims relating to the use of Celexa or Lexapro. These cases include
claims for wrongful death from suicide or injury from suicide attempts while
using Celexa or Lexapro as well as claims that Celexa or Lexapro caused birth
defects or persistent pulmonary hypertension in newborns. We believe
that suicide and related events are inherent in the symptoms and consequences of
major depressive disorder and therefore these types of occurrences are not
unexpected from patients who are being treated for such condition, including
patients who may be using our products. While we believe there is no
merit to the cases which have been brought against us, litigation is inherently
subject to uncertainties and there can be no assurance that we will not be
required to expend substantial amounts in the defense or resolution of some of
these matters.
The
Effective Rate of Taxation upon Our Results of Operations is Dependent on
Multi-National Tax Considerations.
A portion
of our earnings is taxed at more favorable rates applicable to the activities
undertaken by our subsidiaries based or incorporated in the Republic of
Ireland. Changes in tax laws or in their application or
interpretation, such as to the transfer pricing between Forest’s non-U.S.
operations and the U.S., could increase our effective tax rate and negatively
affect our results of operations. Our transfer pricing is the subject
of an ongoing audit by the U.S. Internal Revenue Service (or IRS). In
connection with such audit, the IRS has issued a Revenue Agent Report which
seeks to assess approximately $206.7 million of additional corporation income
tax with respect to the 2002 and 2003 fiscal years, excluding interest and
penalties. We continue to disagree with the IRS position and have
filed a formal written protest of the proposed adjustment. If the IRS
prevails in a position that increases the U.S. tax liability in excess of
established reserves, it is likely that the IRS could make similar claims for
years subsequent to fiscal 2003 which could be material. See Note 15
to our Consolidated Financial Statements incorporated by reference
herein.
Many
of Our Principal Products and Active Pharmaceutical Ingredients are Only
Available From a Single Manufacturing Source.
As
described immediately above, many of the proprietary active ingredients in our
principal products are available to us only pursuant to contractual supply
arrangements with our collaboration partners. In addition, our
manufacturing facilities in the Republic of Ireland are the exclusive qualified
manufacturing facilities for finished dosage forms of our principal products,
including Lexapro and Namenda. Difficulties or delays in product
manufacture, both within and outside of our control, or the inability to locate
and qualify third party alternative sources, if necessary, in a timely manner,
could lead to shortages or long-term product unavailability, which could have a
material adverse effect on our results of operations, financial condition and
cash flows.
None.
We own a
387,000 square foot building on 28 acres in Commack, New York. This
facility is used for packaging, warehousing, administration and sales
training. In addition, we lease a portion of a hotel facility in
Hauppauge, New York, for the purpose of housing sales representatives during
sales training. We also own a 105,000 square foot facility in
Hauppauge, which is used for warehousing, administrative offices and clinical
packaging. We lease an additional 57,000 square foot facility in
Hauppauge, which is used for our information technology
departments.
We own
buildings of 180,000, 100,000 and 20,000 square feet in Commack, New York, which
are or will be part of our research and development complex. The
100,000 and 20,000 square foot facilities are operational; the 180,000 square
foot facility (on 11 acres) is currently sub-leased to a tenant through fiscal
2014. We also lease 28,000 square feet in Hauppauge, as well as
approximately 59,000 square feet in Farmingdale, New York, both of which
facilities are used as laboratory testing facilities.
We
presently lease approximately 120,000 square feet of executive office space at
909 Third Avenue, New York, New York. The lease expires in
2010.
We also
lease approximately 238,000 square feet of office space in Jersey City, New
Jersey, which is used by certain of our medical, scientific and regulatory
personnel. The lease expires in 2017.
Forest
Pharmaceuticals, Inc. (or FPI), our wholly-owned subsidiary, owns two facilities
in Cincinnati, Ohio, aggregating approximately 150,000 square feet used for
manufacturing, warehousing and administration. In St. Louis,
Missouri, FPI owns a 495,000 square foot facility on 26 acres of
land. This facility is being used for manufacturing, warehousing,
distribution and administration. FPI also owns a 40,000 square foot
facility near its distribution center, which is being used as offices and a data
center.
Cerexa,
Inc., our wholly-owned subsidiary, leases approximately 38,000 square feet of
office space in Oakland, California, which is used by research and
administrative personnel. The lease expires in 2016.
Forest
Laboratories UK, our wholly-owned subsidiary, owns an approximately 95,000
square foot complex in the London suburb of Bexley, England and leases
approximately 7,500 square feet of office space in Dartford Crossing, also a
suburb of London.
Our
wholly owned subsidiary, Forest Tosara Ltd., owns a 33,000 square foot
manufacturing and distribution facility located in an industrial park in Dublin,
Ireland. Forest Ireland Limited, a wholly-owned subsidiary, owns two
plants in Clonshaugh, Dublin totaling 220,000 square feet which are used
principally for the manufacture and distribution to the United States of
Lexapro, Namenda, Bystolic and Savella tablets.
We
believe that our current facilities will adequately meet our operating needs for
the foreseeable future.
Net
rentals for leased space for the fiscal year ended March 31, 2009 aggregated
approximately $17,790,000 and for the fiscal year ended March 31, 2008
aggregated approximately $17,694,000.
We remain
a defendant in actions filed in various federal district courts alleging certain
violations of the federal anti-trust laws in the marketing of pharmaceutical
products. In each case, the actions were filed against many
pharmaceutical manufacturers and suppliers and allege price discrimination and
conspiracy to fix prices in the sale of pharmaceutical products. The
actions were brought by various pharmacies (both individually and, with respect
to certain claims, as a class action) and seek injunctive relief and monetary
damages. The Judicial Panel on Multi-District Litigation ordered
these actions coordinated (and, with respect to those actions brought as class
actions, consolidated) in the Federal District Court for the Northern District
of Illinois (Chicago) under the caption “In re Brand Name Prescription Drugs
Antitrust Litigation.”
On
November 30, 1998, the defendants remaining in the consolidated federal class
action (which proceeded to trial beginning in September 1998), including Forest,
were granted a directed verdict by the trial court after the plaintiffs had
concluded their case. In ruling in favor of the defendants, the trial
judge held that no reasonable jury could reach a verdict in favor of the
plaintiffs and stated “the evidence of conspiracy is meager, and the evidence as
to individual defendants paltry or non-existent.” The Court of
Appeals for the Seventh Circuit subsequently affirmed the granting of the
directed verdict in the federal class case in our favor.
Following
the Seventh Circuit’s affirmation of the directed verdict in our favor, we have
secured the voluntary dismissal of the conspiracy allegations contained in all
of the federal cases brought by individual plaintiffs who elected to “opt-out”
of the federal class action, which cases were included in the coordinated
proceedings, as well as the dismissal of similar conspiracy and price
discrimination claims pending in various state courts. We remain a
defendant, together with other manufacturers, in many of the federal opt-out
cases included in the coordinated proceedings to the extent of claims alleging
price discrimination in violation of the Robinson-Patman Act. While
no discovery or other significant proceedings with respect to us have been taken
to date in respect of such claims, there can be no assurance that we will not be
required to actively defend such claims or to pay substantial amounts to dispose
of such claims. However, by way of a decision dated January 25, 2007,
the judge handling the Robinson-Patman Act cases for certain of a smaller group
of designated defendants whose claims are being litigated on a test basis,
granted summary judgment to those designated defendants due to plaintiffs’
failure to demonstrate any antitrust injury. Subsequently, the Court
also granted the designated defendants’ motion for summary judgment with respect
to plaintiffs’ effort to obtain injunctive relief. It is likely that
the plaintiffs will pursue an appeal of both rulings.
In
December 2008, we entered into a definitive Stipulation of Settlement with
respect to consolidated securities class action cases pending against us and
certain of our executive officers in the United States District Court for the
Southern District of New York under the caption “In re Forest Laboratories, Inc.
Securities Litigation” pursuant to which we paid $65 million to settle
these actions. The cases alleged that defendants made materially
false and misleading statements and omitted to state material facts with respect
to our drugs for the treatment of depression. The settlement was
approved by the Court following a hearing held in April 2009. While
we believe a majority of the settlement will be covered by our insurance and we
are engaged in discussions with the carriers concerning their liability for
payment, we have recorded a $25 million expense in connection with this
settlement. In addition, our directors and certain of our officers
have been named as defendants in two derivative actions purportedly brought on
behalf of the Company, filed in the same Court and consolidated under the
caption “In re Forest
Laboratories, Inc. Derivative Litigation, 05-CV-3489
(RJH).” The complaints in these derivative actions allege that
the defendants have breached their fiduciary duties by, among other things,
causing Forest to misrepresent its financial results and prospects, selling
shares of our common stock while in possession of proprietary non-public
information concerning our financial condition and future prospects, abusing our
control and mismanaging the Company and wasting corporate assets. The
complaint seeks damages in an unspecified amount and various forms of equitable
relief. In September 2006, the Court granted our motion to dismiss
this case on the ground that the plaintiffs failed to make a pre-suit demand on
our Board of Directors. By stipulation, plaintiffs appeal of this
decision to the United States Court of Appeals for the Second Circuit and any
other actions in this litigation have been stayed until June 30,
2009.
In April
2009, a new derivative action captioned Arnold Wandel, derivatively,
Plaintiff vs. Howard Solomon, Lawrence S. Olanoff, et al, Defendants and Forest
Laboratories, Inc. and Forest Pharmaceuticals, Inc., Nominal Defendants
was filed in New York State Supreme Court, alleging that our directors and
certain officers breached their fiduciary duties to the Company in connection
with disclosure of Celexa and Lexapro pediatric studies and alleged improper
marketing of Celexa and Lexapro, and thereby caused Forest to be harmed by
incurring the $65 million settlement of the securities class action described
above and exposed Forest to possible damages and fines in connection with the
matters alleged in the amended complaint filed by the United States Government
in the qui tam actions
described below. The complaint also alleges that some defendants sold
shares of Forest stock at inflated prices and thereby harmed the Company (even
though the shares were not purchased by the Company). Most of the
substantive allegations in this complaint (other than those relating
specifically to the recently filed amended complaint in the qui tam actions described
below) were also made in the derivative action in federal court described above
which was dismissed because the plaintiffs did not make a pre-suit demand on our
Board of Directors. We intend to vigorously defend this
action.
Forest
Laboratories, Inc. and Forest Pharmaceuticals, Inc. are named, in one capacity
or another, as defendants, along with numerous other manufacturers of
pharmaceutical products in various actions which allege that the plaintiffs (all
governmental entities) were overcharged for their share of Medicaid drug
reimbursement costs as a result of reporting by manufacturers of “average
wholesale prices” (or AWP) which did not correspond to actual provider costs of
prescription drugs. Actions brought by nearly all of the counties of
the State of New York (first action commenced January 14, 2003) and by the State
of Iowa (commenced October 9, 2007) are pending in the United States District
Court for the District of Massachusetts under the caption “In re Pharmaceutical Industry AWP
Litigations” for coordinated treatment. In addition, various
state court actions are pending in actions brought by the States of Alabama
(commenced January 26, 2005), Alaska (commenced October 6, 2006), Hawaii
(commenced April 27, 2006), Idaho (commenced June 8, 2007), Illinois (commenced
February 7, 2005), Mississippi (commenced October 20, 2005) and Kansas
(commenced November 3, 2008), as well as actions brought by the Commonwealth of
Kentucky (commenced November 4, 2004) and the State of Utah (commenced in May
2008). Furthermore, state court actions pending in the State Court of
New York were brought by three of the New York counties, Erie (commenced March
8, 2005), Schenectady (commenced May 10, 2006) and Oswego (commenced May 11,
2006).
Motions
to dismiss have been filed with respect to most of the actions. While
the motions to dismiss largely have been denied, some claims have been
dismissed, including RICO claims brought by various New York counties whose
remaining claims are pending in the MDL proceeding in
Massachusetts. The Utah motion was granted with leave to
replead. Discovery is ongoing. As of the date of
this report, a trial is scheduled with respect to Forest in Hawaii on July 5,
2010. In May 2009, several defendants, including Forest, reached an
agreement in principle to settle the action brought by the State of
Alabama. Forest’s share of the settlement payment is not material to
Forest’s financial condition or results of operations and is fully covered by
established reserves. It is not anticipated that any other trials
involving Forest will take place before the end of calendar 2010.
The
United States Attorney’s Office for the District of Massachusetts is
investigating whether we may have committed civil or criminal violations of the
federal “Anti-Kickback” laws and laws and regulations related to “off-label”
promotional activities in connection with our marketing of Celexa, Lexapro and
other products. As part of this investigation, we received a subpoena
from the Office of Inspector General of the Federal Office of Personnel
Management requesting documents relating to Celexa and have subsequently
received further subpoenas from the United States Attorney’s Office concerning
Lexapro and other products, including Namenda and Combunox. The
subpoenas request documents relating to a broad range of our marketing and
promotional activities during the period from January 1, 1997 to the
present. In April 2006, we received an additional subpoena from the
United States Attorney’s Office for the District of Massachusetts requesting
documents concerning our manufacture and marketing of Levothroid, our
levothyroxine supplement for the treatment of hypothyroidism. We
understand that this subpoena was issued in connection with that office’s
investigation of potential civil or criminal violation of federal health laws in
connection with Levothroid. In connection with this investigation, in
February 2009 the United States Attorney’s Office filed an amended complaint
against the Company in two qui
tam lawsuits relating to our marketing practices which had been filed
under seal. The amended complaint, under the caption “United States of America ex rel.
Christopher R. Gobble, et al. v. Forest Laboratories, Inc. and Forest
Pharmaceuticals, Inc.; United States of America ex rel. Joseph Piacentile, et
al. v. Forest Laboratories, Inc.” was made publicly available in February
2009. The amended complaint details allegations of the government’s
view of Forest’s conduct and includes allegations with respect to off-label
promotion, activities deemed to be “kickbacks” and disclosure issues relating to
a failed pediatric trial of Lexapro. We are continuing to cooperate
with this investigation and to discuss these issues with the
government. During fiscal 2009, we recorded an expense of $170
million in connection with this investigation and litigation. There
can be no assurance that a negotiated resolution of these matters can be
achieved or that any such resolution will not require payments in excess of this
amount.
In March
2009, Forest was named as a defendant in two actions purportedly brought as
class actions on behalf of various persons and entities that purchased or
reimbursed the purchase of Celexa or Lexapro from 1998 to the present for use by
a minor. One such action, captioned “Universal Care, Inc., Angela
Jaeckel and Melvin M. Fullmer v. Forest Pharmaceuticals, Inc. and Forest
Laboratories, Inc.”, was brought in the United States District Court for
the Eastern District of Missouri; the other action is captioned “New Mexico UFCW Union’s and
Employers’ Health and Welfare Trust Fund v. Forest Laboratories, Inc., Forest
Pharmaceuticals, Inc., Pfizer, Inc. and Warner Lambert Company” and was
brought in the United States District Court for the Eastern District of New
York. The cases allege Federal and state law causes of action arising
from Forest’s marketing of Celexa and Lexapro. Forest intends to
vigorously defend against these actions, which are in the preliminary
stage. We have initially filed a motion to consolidate these actions,
together with any similar actions which may be filed in the future, in a
multi-district proceeding.
We
received a subpoena dated January 26, 2006 from the United States Attorney’s
Office for the District of Massachusetts requesting documents related to our
commercial relationship with Omnicare, Inc. (or Omnicare), a long-term care
pharmacy provider, including but not limited to documents concerning our
contracts with Omnicare, and rebates and other payments made by us to
Omnicare. We understand that the subpoena was issued in connection
with that office’s investigation of potential criminal violations of federal
healthcare laws by Omnicare and potentially others. We are
cooperating in this investigation.
In
September 2007, the United States Court of Appeals for the Federal Circuit
upheld the validity of our composition of matter patent covering Lexapro and the
decision of the United States District Court for the District of Delaware
granting us an injunction preventing Teva from marketing a generic version of
Lexapro. In July 2006, we and Lundbeck commenced similar patent
infringement litigation against Caraco Pharmaceutical Laboratories, Ltd., who
had filed an ANDA with the FDA seeking to market a generic equivalent to
Lexapro, in the United States District Court for the Eastern District of
Michigan under the caption Forest Laboratories, Inc. et al. v.
Caraco Pharmaceutical Laboratories, Ltd. et al. Caraco has
stipulated to infringing our patent leaving only its invalidity defenses to be
litigated. A five day bench trial originally scheduled to begin on April 27,
2009 was adjourned until June 1, 2009.
In
February 2007, Caraco filed a single-count declaratory judgment action against
us and Lundbeck in the United States District Court for the Eastern District of
Michigan for non-infringement of a different patent for Lexapro that is listed
in the FDA’s Orange Book. After Forest and Lundbeck granted Caraco an
irrevocable covenant not to sue, Chief Judge Freidman dismissed Caraco’s action
for lack of subject matter jurisdiction. On April 1, 2008, a
three-judge panel of the United States Court of Appeals for the Federal Circuit
reversed and remanded Chief Judge Freidman’s decision. Our requests
for panel rehearing and rehearing en banc at the Federal
Circuit and certiorari
at the Supreme Court were unsuccessful. Accordingly, the case is
proceeding in the district court with a trial scheduled to begin on October 27,
2009.
In
January 2009, Caraco also filed a single-count declaratory judgment action
against us and Lundbeck in the United States District Court for the Eastern
District of Michigan for non-infringement of a third patent for Lexapro that is
listed in the FDA’s Orange Book. In March 2009, Forest filed its
Answer denying Caraco’s claim and counterclaiming for patent
infringement. No case schedule or trial date has been
set.
Beginning
in January 2008, Forest and Merz, our licensor for Namenda, commenced a series
of patent infringement lawsuits in the United States District Court for the
District of Delaware and other districts, including the United States District
Court for the Eastern District of North Carolina, against several companies
(including Teva, Mylan and Barr Laboratories, Inc.) who have notified us that
they have filed ANDAs with the FDA seeking to obtain approval to market generic
versions of Namenda. The lawsuits filed in districts other than
Delaware were withdrawn after all but two defendants consented to jurisdiction
in Delaware. The cases in Delaware have been consolidated under the
caption Forest Laboratories,
Inc. et al. v. Cobalt Laboratories Inc. et al. Two defendants
have contested jurisdiction in such court and have moved to dismiss for lack of
personal jurisdiction. The magistrate judge issued a Report and
Recommendation in March 2009, finding that the cases against those defendants
should be transferred to the District of New Jersey. The issue will
now be considered by the district court judge. This action is
currently in the discovery phase, with fact discovery currently scheduled to
close on June 1, 2009 and expert discovery scheduled to be completed by
September 11, 2009. A trial date has been set for April 5,
2010.
On July
14, 2006, we were named as a defendant, together with approximately 20 other
pharmaceutical manufacturers and wholesalers in an action brought by RxUSA
Wholesale, Inc. in the United States District Court for the Eastern District of
New York under the caption RxUSA Wholesale, Inc. v. Alcon
Laboratories, et al. The action alleges various antitrust and
related claims arising out of an alleged concerted refusal by the defendant
manufacturers and wholesalers to sell prescription drugs to plaintiff, a
secondary drug wholesaler. Motions to dismiss have been filed by all
of the defendants, and those motions are now sub judice before the
court.
In April
2006, an action was commenced in the United States District Court for the
Southern District of New York against us and Lundbeck under the caption Infosint S.A. v. H. Lundbeck A/S, H.
Lundbeck Inc. and Forest Laboratories, Inc. In the action, the
plaintiff alleges that the importation and sale in the United States of
“citalopram products” by Lundbeck and us infringes certain claims of a
manufacturing process patent owned by plaintiff. The action seeks
injunctive relief as well as damages under U.S. patent laws. We
believe that the plaintiff’s claim is without merit. Further, we
believe that our license agreements with Lundbeck require Lundbeck to indemnify
us from the cost of defending this action and from any associated damages or
awards. A trial is scheduled to begin on September 28,
2009.
We have
been named in approximately 75 product liability lawsuits that remain
active. Most of the lawsuits allege that Celexa or Lexapro caused or
contributed to individuals committing or attempting
suicide. Twenty-seven of these lawsuits allege that Celexa or Lexapro
caused birth defects or persistent pulmonary hypertension in
newborns. The suits seek substantial compensatory and punitive
damages. We are vigorously defending these suits. A
multi-district proceeding (or MDL) has been established for the
suicidality-related litigation, with the federal court cases being transferred
to Judge Rodney Sippel in the United States District Court for the Eastern
District of Missouri. Except for two federal court cases, the birth
defect cases have been consolidated in Cole County Circuit Court in
Missouri.
We expect
the MDL will ease the burden of defending these cases. While
litigation is inherently subject to uncertainty and accordingly we cannot
predict or determine the outcome of this litigation, we believe there is no
merit to these actions and that the consolidated proceedings will promote the
economical and efficient resolution of these lawsuits and provide us with a
meaningful opportunity to vindicate our products. We currently
maintain $140 million of product liability coverage per “occurrence” and in the
aggregate.
We
received two subpoenas dated April 27, 2007 from the Office of the Attorney
General of the State of Delaware requesting documents relating to our use of the
“nominal price” exception to the Medicaid program’s “Best Price” rules. We
understand that comparable subpoenas have been or will be issued to other
pharmaceutical manufacturers as part of that office’s investigation of the use
of the “nominal price” exception. We have complied with the
subpoenas.
We are
also subject to various legal proceedings that arise from time to time in the
ordinary course of our business. Although we believe that the
proceedings brought against us, including the product liability cases described
above, are without merit and we have product liability and other insurance,
litigation is subject to many factors which are difficult to predict and there
can be no assurance that we will not incur material costs in the resolution of
these matters.
OF
SECURITY
HOLDERS
Not
Applicable.
ITEM 5. MARKET FOR REGISTRANT'S
COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES Market Information, Holders
and Performance Graph
The
information required by this item is incorporated by reference to the
information under the heading Stock Market Data in our Annual Report to
Stockholders for the fiscal year ended March 31, 2009 (or 2009 Annual
Report).
Dividends
We have
never paid cash dividends on our common stock. We presently intend to
retain all available funds for the development of our business, for use as
working capital and for the share repurchase program. Future dividend
policy will depend upon our earnings, capital requirements, financial condition
and other relevant factors.
Issuer Repurchases of Equity
Securities
On May
18, 2006 the Board authorized a share repurchase program (or 2007 Repurchase
Program) for up to 25 million shares of our common stock. On August
13, 2007 the Board authorized the purchase of an additional 10 million shares of
common stock. The authorizations became effective immediately and
have no set expiration dates. We expect to make the repurchases from
time to time on the open market, depending on market conditions and as permitted
by applicable securities laws (including SEC Rule 10b-18) and New York Stock
Exchange requirements. As of May 28, 2009, 29,346,700 shares have
been repurchased and we continue to have authority to purchase up to an
additional 5,653,300 shares under the 2007 Repurchase Program.
The
information required by this item is incorporated by reference to the
information under the heading Selected Financial Data in
our 2009 Annual Report.
ITEM 7. MANAGEMENT'S
DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
information required by this item is incorporated by reference to the
information under the heading Management’s Discussion and Analysis
of Financial Condition and Results of Operations in our 2009 Annual
Report.
The
information required by this item is incorporated by reference to the
information under the heading Quantitative and Qualitative
Disclosures About Market Risk in our 2009 Annual Report.
The
information required by this item is incorporated by reference to the Consolidated Financial Statements
and Notes to Consolidated Financial Statements and the related Reports of
Independent Registered Public Accounting Firm in our 2009 Annual
Report.
Not
Applicable.
Disclosure
Controls
As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of our principal executive officer
and principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (or
Exchange Act)). Based on this evaluation, our principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures are effective.
Internal
Control Over Financial Reporting
Management's
report on internal control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act), and the related report of
our independent registered public accounting firm, are included in our 2009
Annual Report under the headings Management's Report on Internal
Control Over Financial Reporting and Reports of Independent Registered Public
Accounting Firm, respectively, and are incorporated by
reference.
Changes
in Internal Control Over Financial Reporting
During
our most recent fiscal quarter, there has not occurred any change in our
internal control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
None.
In
accordance with General Instruction G(3), and except for certain of the
information called for by Items 10 and 12 which is set forth below, the
information called for by Items 10 through 14 of Part III of this Form 10-K is
incorporated by reference from Forest's definitive proxy statement to be filed
with the SEC not later than 120 days after our fiscal year ended March 31, 2009,
(or the Proxy Statement) pursuant to Regulation 14A promulgated under the
Securities Exchange Act of 1934 in connection with Forest's 2009 Annual Meeting
of Stockholders.
The
information required by this item will be incorporated by reference from the
Proxy Statement under the headings “Election of Directors,” “Named Executive
Officers of Forest,” “Section 16(a) Beneficial Ownership Reporting Compliance”
and “Corporate Governance”.
Code
of Ethics
We have
adopted a written code of business conduct and ethics that applies to our Chief
Executive Officer, Chief Financial Officer and all of our officers and employees
and can be found on our website, which is located at www.frx.com under the
"Investors" link. We will also provide a copy of our code of ethics
to any person without charge upon his or her request. Any such
request should be directed to our Corporate Secretary at 909 Third Avenue, New
York, New York 10022. We intend to make all required disclosures
concerning any amendments to or waivers from our code of business conduct and
ethics on our website.
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
following sets forth certain information as of March 31, 2009 with respect to
our compensation plans under which Forest securities may be issued:
Equity
Compensation Plan Information
|
Plan
category
|
Number
of securities to be issued upon exercise of outstanding
options
|
Weighted-average
exercise price of outstanding options
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in first
column)
|
|
Equity
compensation plans approved by security holders
|
18,853,356
|
$38.58
|
6,292,990
|
|
Equity
compensation plans not approved by security holders
|
|
N/A
|
|
|
Total
|
18,853,356
|
$38.58
|
6,292,990
|
Additional
information required by this item is incorporated by reference to the section
entitled “Security Ownership of Principal Stockholders and Management” in the
Proxy Statement.
|
|
|
|
|
EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
|
|
|
|
|
(a)
|
1.
|
Financial
statements. The following consolidated financial statements of
Forest Laboratories, Inc. and its subsidiaries are incorporated by
reference to the 2009 Annual Report, as provided in Item 8
hereof:
|
|
|
Management's
report on internal control over financial reporting
|
|
|
|
|
|
Reports
of Independent Registered Public Accounting Firm
|
|
|
|
|
|
Consolidated
balance sheets –
March
31, 2009 and 2008
|
|
|
|
|
|
Consolidated
statements of income –
years
ended March 31, 2009, 2008 and 2007
|
|
|
|
|
|
Consolidated
statements of comprehensive income –
years
ended March 31, 2009, 2008 and 2007
|
|
|
|
|
|
Consolidated
statements of stockholders' equity –
years
ended March 31, 2009, 2008 and 2007
|
|
|
|
|
|
Consolidated
statements of cash flows –
years
ended March 31, 2009, 2008 and 2007
|
|
|
|
|
|
Notes
to consolidated financial statements
|
|
|
2.
|
Financial
statement schedules. The following consolidated financial
statement schedules of Forest Laboratories, Inc. and its subsidiaries are
included herein:
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
S-1
|
|
Schedule
II
|
Valuation
and Qualifying Accounts
|
S-2
|
|
|
|
|
All
other schedules for which provision is made in the applicable accounting
regulations of the
Securities
and Exchange Commission are not required under the related instructions or
are
inapplicable,
and therefore have been omitted.
|
|
|
|
|
|
|
|
|
|
3.
|
Exhibits:
|
|
|
|
|
|
|
|
|
|
|
(3)(a)
|
Articles
of Incorporation of Forest, as amended and
restated. Incorporated by reference to Forest’s Quarterly
Report on Form 10-Q for the Quarter ended September 30,
2008.
|
|
|
|
|
|
|
|
|
|
|
(3)(b)
|
Bylaws
of Forest, as amended. Incorporated by reference to Forest's
Current Report on Form 8-K dated March 2, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.1
|
Benefit
Continuation Agreement dated as of December 1, 1989 between Forest and
Howard Solomon. Incorporated by reference to Forest's Annual
Report on Form 10-K for the fiscal year ended March 31, 1990 (or 1990
l0-K).
|
|
|
|
|
|
|
10.2
|
Benefit
Continuation Agreement dated as of May 27, 1990 between Forest and
Kenneth E. Goodman. Incorporated by reference to the 1990
10-K.
|
|
|
|
|
|
|
10.3
|
Amended
and Restated Change of Control Employment Agreement between Forest and
Howard Solomon dated October 29, 2008. Incorporated by
reference to Forest’s Quarterly Report on Form 10-Q for the Quarter ended
December 31, 2008 (or December 31, 2008 10-Q).
|
|
|
|
|
|
|
10.4
|
Amended
and Restated Change of Control Employment Agreement between Forest and
Elaine Hochberg dated October 29, 2008. Incorporated by
reference to the December 31, 2008 10-Q.
|
|
|
|
|
|
|
10.5
|
Letter
Agreement dated as of September 6, 2004 between Forest and Francis I.
Perier, Jr. Incorporated by reference to Forest's Current
Report on Form 8-K dated September 30, 2004.
|
|
|
|
|
|
|
10.6
|
Amended
and Restated Change of Control Employment Agreement between Forest and
Francis I. Perier, Jr. dated October 29, 2008. Incorporated by
reference to the December 31, 2008 10-Q.
|
|
|
|
|
|
|
10.7
|
Letter
Agreement dated as of January 30, 2006 between Forest and Herschel S.
Weinstein. Incorporated by reference to Forest’s Annual Report
on Form 10-K for the fiscal year ended March 31, 2006.
|
|
|
|
|
|
|
10.8
|
Amended
and Restated Change of Control Employment Agreement between Forest and
Herschel Weinstein dated October 29, 2008. Incorporated by
reference to the December 31, 2008 10-Q.
|
|
|
|
|
|
|
10.9
|
Letter
Agreement dated September 5, 2006 between Forest and Dr. Lawrence S.
Olanoff. Incorporated by reference to Forest’s Quarterly Report
on Form 10-Q for the Quarter ended September 30, 2006.
|
|
|
|
|
|
|
10.10
|
Amended
and Restated Change of Control Employment Agreement between Forest and
Lawrence S. Olanoff, M.D., Ph.D dated October 29,
2008. Incorporated by reference to the December 31, 2008
10-Q.
|
|
|
|
|
|
|
10.11
|
Letter
Agreement dated June 15, 2007 between Forest and Dr. Marco
Taglietti.
|
|
|
|
|
|
|
10.12
|
Amended
and Restated Change of Control Employment Agreement between Forest and
Marco Taglietti, M.D. dated October 29, 2008. Incorporated by
reference to the December 31, 2008 10-Q.
|
|
|
|
|
|
|
10.13
|
Amended
and Restated Change of Control Employment Agreement between Forest and
Frank Murdolo dated October 29, 2008. Incorporated by reference
to the December 31, 2008 10-Q.
|
|
|
|
|
|
|
10.14
|
Amended
and Restated Change of Control Employment Agreement between Forest and
David Solomon dated October 29, 2008. Incorporated by reference
to the December 31, 2008 10-Q.
|
|
|
|
|
|
|
10.15
|
Amended
and Restated Change of Control Employment Agreement between Forest and
Raymond Stafford dated October 29, 2008. Incorporated by
reference to the December 31, 2008 10-Q.
|
|
|
|
|
|
|
10.16
|
1998
Stock Option Plan of Forest Laboratories, Inc. Incorporated by reference
to Forest's Proxy Statement for the fiscal year ended March 31,
1998.
|
|
|
|
|
|
|
10.17
|
2000
Stock Option Plan of Forest Laboratories, Inc. Incorporated by
reference to Forest's Proxy Statement for the fiscal year ended March 31,
2000.
|
|
|
|
|
|
|
10.18
|
2004
Stock Option Plan of Forest Laboratories, Inc. Incorporated by
reference to Forest's Proxy Statement for the fiscal year ended March 31,
2004.
|
|
|
|
|
|
|
10.19
|
2007
Equity Incentive Plan of Forest Laboratories, Inc. Incorporated
by reference to Forest’s Proxy Statement for the fiscal year ended March
31, 2007.
|
|
|
|
|
|
|
10.20
|
Form
of Director Restricted Stock Agreement under the 2007 Equity Incentive
Plan of Forest Laboratories, Inc. Incorporated by reference to
Forest’s Form S-8 on Registration Statement No. 333-145415, dated August
13, 2007.
|
|
|
|
|
|
|
10.21
|
Form
of Director Stock Option Agreement under the 2007 Equity Incentive Plan of
Forest Laboratories, Inc. Incorporated by reference to Forest’s
Quarterly Report on Form 10-Q for the Quarter ended September 30, 2007 (or
September 30, 2007 10-Q).
|
|
|
|
|
|
|
10.22
|
Form
of Employee Restricted Stock Agreement (Time-Based) under the 2007 Equity
Incentive Plan of Forest Laboratories, Inc. Incorporated by
reference to Forest’s Annual Report on Form 10-K for the fiscal year ended
March 31, 2008 (or 2008 10-K).
|
|
|
|
|
|
|
10.23
|
Form
of Employee Stock Option Agreement under the 2007 Equity Incentive Plan of
Forest Laboratories, Inc. Incorporated by reference to
September 30, 2007 10-Q.
|
|
|
|
|
|
|
10.24
|
Co-Promotion
Agreement dated December 10, 2001 by and between Sankyo Pharma Inc. and
Forest Laboratories, Inc. Incorporated by reference to Forest's
Annual Report on Form 10-K for the fiscal year ended March 31, 2002 (or
2002 10-K).*
|
|
|
|
|
|
|
10.25
|
S-Enantiomer
License Agreement dated May 29, 2002 by and between Forest Laboratories
Ireland Limited and H. Lundbeck A/S. Incorporated by reference
to the 2002 10-K.*
|
|
|
|
|
|
|
10.26
|
S-Enantiomer
Supply Agreement dated May 29, 2002 by and between Forest Laboratories
Ireland Limited and H. Lundbeck A/S. Incorporated by reference
to the 2002 10-K.*
|
|
|
|
|
|
|
10.27
|
License
and Cooperation Agreement dated June 28, 2000 by and between Merz &
Co. GmbH and Forest Laboratories Ireland Limited. Incorporated
by reference to Forest's Annual Report on Form 10-K for the fiscal year
ended March 31, 2004.*
|
|
|
|
|
|
|
10.28
|
Settlement
Agreement by and between Forest Laboratories, Inc., Forest Laboratories
Holdings Limited and H. Lundbeck A/S and Alphapharm Pty Ltd. effective
October 3, 2005. Incorporated by reference to Forest’s
Quarterly Report on Form 10-Q for the fiscal quarter ended December 31,
2005.*
|
|
|
|
|
|
|
10.29
|
Agreement
and Plan of Merger dated December 13, 2006 by and among Forest
Laboratories, Inc., FL Acquisition Corp., Cerexa, Inc. and Dennis Podlesak
and Eckard Weber, M.D., as Shareholders’ Agents. Incorporated
by reference to Forest’s Quarterly Report on Form 10-Q for the quarter
ended December 31, 2006.*
|
|
|
|
|
|
|
10.30
|
Nebivolol
Development and Commercialization Agreement by and between Forest
Laboratories Holdings Limited and Mylan Inc. dated as of January 6,
2006. Incorporated by reference to the 2008
10-K.*
|
|
|
|
|
|
|
10.31
|
Amendment
Agreement, dated as of February 27, 2008, by and between Forest
Laboratories Holdings Limited and Mylan Inc. to that certain Nebivolol
Development and Commercialization Agreement dated as of January 6,
2006. Incorporated by reference to the 2008
10-K.
|
|
|
|
|
|
|
10.32
|
Credit
Agreement, dated December 7, 2007, by and among Forest Laboratories, Inc.,
Forest Laboratories Holdings Limited, Forest Laboratories Ireland Limited,
Forest Finance B.V., Forest Laboratories UK Limited, the lenders party
thereto, and JPMorgan Chase Bank, N.A. Incorporated by
reference to Forest’s Current Report on Form 8-K dated December 7,
2007.
|
|
|
|
|
|
|
10.33
|
License
and Collaboration Agreement (the “Cypress License”) dated January 9, 2004
between the Registrant and Cypress Bioscience, Inc. (“Cypress”) filed as
Exhibit 10.26 to Cypress’s Annual Report on the Form 10-K of Cypress for
the year ended December 31, 2003 (or Cypress 2003
10-K).*
|
|
|
|
|
|
|
10.34
|
Side
Letter dated January 9, 2004 among the Registrant, Cypress and Pierre
Fabre Medicament filed as Exhibit 10.27 to the Cypress 2003
10-K.*
|
|
|
|
|
|
|
10.35
|
Letter
Agreement dated January 9, 2004 among the Registrant, Cypress and Pierre
Fabre Medicament filed as Exhibit 10.28 to the Cypress 2003
10-K.*
|
|
|
|
|
|
|
10.36
|
Amendment
to the Cypress License filed as Exhibit 10.1 to Cypress’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2005*
|
|
|
|
|
|
|
13
|
Portions
of the Registrant's 2009 Annual Report to Stockholders.
|
|
|
|
|
|
|
21
|
List
of Subsidiaries.
|
|
|
|
|
|
|
23
|
Consent
of Independent Registered Public Accounting Firm.
|
|
|
|
|
|
|
31.1
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
|
31.2
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
|
32.1
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
|
32.2
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
|
101.INS
|
XBRL
Instance Document**
|
|
|
|
|
|
|
101.SCH
|
XBRL
Taxonomy Extension Schema Document**
|
|
|
|
|
|
|
101.PRE
|
XBRL
Taxonomy Presentation Linkbase Document**
|
|
|
|
|
|
|
101.CAL
|
XBRL
Taxonomy Calculation Linkbase Document**
|
|
|
|
|
|
|
101.LAB
|
XBRL
Taxonomy Label Linkbase Document**
|
|
|
|
|
|
|
101.DEF
|
XBRL
Taxonomy Definition Linkbase Document**
|
|
|
|
|
|
|
|
*Confidential
treatment has been granted as to certain portions of these
Exhibits.
|
|
|
|
|
|
|
|
**Attached
as Exhibit 101 to this Annual Report on Form 10-K are the following
materials, formatted in eXtensible Business Reporting Language ("XBRL"):
(i)
Consolidated Balance Sheets – March 31, 2009 and 2008, (ii) Consolidated
Statements of Income – years ended March 31, 2009, 2008 and 2007, (iii)
Consolidated Statements of Comprehensive Income – years ended March 31,
2009, 2008 and 2007, (iv) Consolidated Statements of Stockholders’ Equity
– years ended March 31, 2009, 2008 and 2007, (v) Consolidated Statements
of Cash Flows – years ended March 31, 2009, 2008 and 2007 and
(vi) the Notes to Consolidated Financial Statements.
Users
of this data are advised pursuant to Rule 401 of Regulation S-T that the
financial and other information contained in the XBRL documents is
unaudited and these are not the official publicly filed financial
statements of the Company. The purpose of submitting these XBRL
formatted documents is to test the related format and technology and, as a
result, investors should continue to rely on the official filed version of
the furnished documents and not rely on this information in making
investment decisions.
In
accordance with Rule 402 of Regulation S-T, the information in Exhibit 101
of this Annual Report on Form 10-K shall not be deemed “filed” for the
purposes of Section 18 of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), or otherwise subject to the liability of that
section, and shall not be incorporated by reference into any registration
statement or other document filed under the Securities Act of 1933, as
amended, or the Exchange Act, except as shall be expressly set forth by
specific references in such filing.
|
SIGNATURES
Pursuant
to the requirements of Section 13 and 15(d) of the Securities Exchange Act of
1934, Forest has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 29,
2009
|
|
FOREST
LABORATORIES, INC.
By: /s/Howard
Solomon
Howard
Solomon,
Chairman
of the Board,
Chief
Executive Officer
and
Director
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of Forest and in the capacities
and on the dates indicated.
|
PRINCIPAL
EXECUTIVE
OFFICERS:
|
|
/s/ Howard
Solomon
Howard
Solomon
|
Chairman
of the
Board,
Chief
Executive
Officer
and
Director
|
May 29,
2009
|
|
/s/ Lawrence S.
Olanoff
Lawrence
S. Olanoff
|
President,
Chief
Operating
Officer
and
Director
|
May 29,
2009
|
|
PRINCIPAL
FINANCIAL
AND
ACCOUNTING OFFICER:
|
|
/s/ Francis I. Perier,
Jr.
Francis
I. Perier, Jr.
|
Senior
Vice President -
Finance
and Chief
Financial
Officer
|
May 29,
2009
|
|
DIRECTORS:
|
|
|
|
/s/ Nesli
Basgoz
Nesli
Basgoz
|
Director
|
May 29,
2009
|
|
/s/ William J. Candee,
III
William
J. Candee, III
|
Director
|
May 29,
2009
|
|
/s/ George S.
Cohan
George S. Cohan
|
Director
|
May 29,
2009
|
|
/s/ Dan L.
Goldwasser
Dan
L. Goldwasser
|
Director
|
May 29,
2009
|
|
/s/ Kenneth E.
Goodman
Kenneth
E. Goodman
|
Director
|
May 29,
2009
|
|
/s/ Lester B.
Salans
Lester
B. Salans
|
Director
|
May 29,
2009
|
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders
Forest
Laboratories, Inc.
New York,
New York
The
audits referred to in our report dated May 28, 2009 relating to the consolidated
financial statements of Forest Laboratories Inc. and Subsidiaries, which is
contained in Item 8 of this Form 10-K, also included the audit of the
financial statement schedule listed in the accompanying index. This
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our
opinion such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
/s/ BDO Seidman,
LLP
BDO
Seidman, LLP
New York,
New York
May 28,
2009
S-1
|
|
|
|
|
|
|
|
|
|
|
FOREST
LABORATORIES, INC. AND SUBSIDIARIES
VALUATION
AND QUALIFYING ACCOUNTS
|
|
|
Column A
|
|
Column B
|
|
Column C
|
|
Column D
|
|
Column E
|
|
|
Description
|
|
Balance
at beginning of
period
|
|
Additions
|
|
Deductions
|
|
Balance
at end of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$19,882,000
|
|
$ 618,000
|
|
$ 1,989,000
|
(i)
|
$18,511,000
|
|
|
Allowance
for cash discounts
|
|
11,815,000
|
|
88,388,000
|
|
88,328,000
|
(ii)
|
11,875,000
|
|
|
Inventory
reserve
|
|
18,770,000
|
|
1,817,000
|
|
6,414,000
|
(i)
|
14,173,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$20,033,000
|
|
$ 906,000
|
|
$ 1,057,000
|
(i)
|
$19,882,000
|
|
|
Allowance
for cash discounts
|
|
11,237,000
|
|
84,722,000
|
|
84,144,000
|
(ii)
|
11,815,000
|
|
|
Inventory
reserve
|
|
22,165,000
|
|
5,100,000
|
|
8,495,000
|
(i)
|
18,770,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$18,941,000
|
|
$ 1,280,000
|
|
$ 188,000
|
(i)
|
$20,033,000
|
|
|
Allowance
for cash discounts
|
|
11,157,000
|
|
77,316,000
|
|
77,236,000
|
(ii)
|
11,237,000
|
|
|
Inventory
reserve
|
|
12,004,000
|
|
11,536,000
|
|
1,375,000
|
(i)
|
22,165,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) Represents
actual amounts written off.
|
|
|
|
|
|
|
|
|
(ii) Represents
cash discounts given.
|
|
|
|
|
|
|
|
S-2
FOREST LABORATORIES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL
STATEMENTS
YEARS ENDED MARCH 31, 2009,
2008 AND 2007
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended. Our internal control
over financial reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles in the United States of America. Our internal
control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of our assets; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures are being made only in
accordance with authorizations of Management and the Board; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect
on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management
assessed the effectiveness of our internal control over financial reporting as
of March 31, 2009. In making this assessment, Management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework. Based on
our assessment and those criteria, Management believes that we maintained
effective internal control over financial reporting as of March 31,
2009.
Our
independent registered public accounting firm has issued an attestation report
on Management's assessment of our internal control over financial reporting
which is included herein.
/s/ Howard
Solomon
Howard
Solomon
Chairman
and
Chief
Executive Officer
/s/ Francis I. Perier,
Jr.
Francis
I. Perier, Jr.
Senior
Vice President-Finance and
Chief
Financial Officer
May 29,
2009
Board of
Directors and Stockholders
Forest
Laboratories, Inc.
New York,
New York
We have
audited Forest Laboratories, Inc. and Subsidiaries’ internal control over
financial reporting as of March 31, 2009, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Forest Laboratories, Inc. and
Subsidiaries’ management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Item 9A,
“Internal Control Over Financial Reporting.” Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Forest Laboratories, Inc. and Subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of March 31,
2009 based on the COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Forest
Laboratories, Inc. and Subsidiaries as of March 31, 2009 and March 31,
2008 and the related consolidated statements of income, comprehensive
income, stockholders' equity, and cash flows for each of the three years in the
period ended March 31, 2009, and our report dated May 28, 2009 expressed an
unqualified opinion thereon.
/s/ BDO Seidman,
LLP
BDO
Seidman, LLP
New York,
New York
May 28,
2009
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders
Forest
Laboratories, Inc.
New York,
New York
We have
audited the accompanying consolidated balance sheets of Forest Laboratories,
Inc. and Subsidiaries as of March 31, 2009 and 2008, and the related
consolidated statements of income, comprehensive income, stockholders’ equity,
and cash flows for each of the three years in the period ended March 31,
2009. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Forest Laboratories, Inc.
and Subsidiaries at March 31, 2009 and 2008, and the results of its operations
and its cash flows for each of the three years in the period ended March 31,
2009, in conformity with
accounting principles generally accepted in the United States of
America.
As
discussed in Note 1 to the consolidated financial statements, effective April 1,
2007 Forest Laboratories, Inc. and Subsidiaries adopted the provisions of
Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes – an interpretation of FASB Statement No.
109”.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Forest Laboratories, Inc. and Subsidiaries'
internal control over financial reporting as of March 31, 2009, based on
criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our
report dated May 28, 2009 expressed an unqualified opinion thereon.
/s/ BDO Seidman,
LLP
BDO
Seidman, LLP
New York,
New York
May 28,
2009
(In thousands)
|
|
|
MARCH 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
(including cash equivalent investments of $1,337,871 in 2009 and $833,018
in 2008)
|
|
$ |
1,338,905 |
|
|
$ |
833,052 |
|
|
Marketable
securities
|
|
|
1,242,017 |
|
|
|
1,073,117 |
|
|
Accounts
receivable, less allowance for doubtful accounts of $18,511 in 2009 and
$19,882 in 2008
|
|
|
449,444 |
|
|
|
445,987 |
|
|
Inventories,
net
|
|
|
393,527 |
|
|
|
425,138 |
|
|
Deferred
income taxes
|
|
|
217,811 |
|
|
|
226,095 |
|
|
Other
current assets
|
|
|
144,250 |
|
|
|
33,260 |
|
|
Total
current assets
|
|
|
3,785,954 |
|
|
|
3,036,649 |
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
securities
|
|
|
449,793 |
|
|
|
534,480 |
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment:
|
|
|
|
|
|
|
|
|
|
Land
and buildings
|
|
|
309,285 |
|
|
|
309,474 |
|
|
Machinery,
equipment and other
|
|
|
276,754 |
|
|
|
257,857 |
|
|
|
|
|
586,039 |
|
|
|
567,331 |
|
|
Less:
accumulated depreciation
|
|
|
240,104 |
|
|
|
217,294 |
|
|
|
|
|
345,935 |
|
|
|
350,037 |
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
14,965 |
|
|
|
14,965 |
|
|
License
agreements, product rights and other intangibles, net
|
|
|
497,897 |
|
|
|
527,787 |
|
|
Deferred
income taxes
|
|
|
100,758 |
|
|
|
59,778 |
|
|
Other
assets
|
|
|
1,506 |
|
|
|
1,671 |
|
|
|
|
|
615,126 |
|
|
|
604,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,196,808 |
|
|
$ |
4,525,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
FOREST
LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except for par values)
|
|
|
MARCH 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
117,192 |
|
|
$ |
223,720 |
|
|
Accrued
expenses
|
|
|
700,636 |
|
|
|
387,105 |
|
|
Total
current liabilities
|
|
|
817,828 |
|
|
|
610,825 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
|
Income
tax liabilities
|
|
|
264,389 |
|
|
|
198,410 |
|
|
Deferred
income taxes
|
|
|
|
|
|
|
815 |
|
|
|
|
|
264,389 |
|
|
|
199,225 |
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
|
Series
preferred stock, $1.00 par; shares authorized 1,000; no shares issued
or outstanding
|
|
|
|
|
|
|
|
|
|
Common
stock $.10 par; shares authorized 1,000,000; issued 422,268 shares in 2009
and 421,421 shares in 2008
|
|
|
42,227 |
|
|
|
42,142 |
|
|
Additional
paid-in capital
|
|
|
1,491,239 |
|
|
|
1,434,172 |
|
|
Retained
earnings
|
|
|
6,379,236 |
|
|
|
5,611,493 |
|
|
Accumulated
other comprehensive (loss) income
|
|
|
( 47,145 |
) |
|
|
34,592 |
|
|
Treasury
stock, at cost (120,653 shares in 2009 and 110,014 shares in
2008)
|
|
|
( 3,750,966 |
) |
|
|
( 3,407,082 |
) |
|
|
|
|
4,114,591 |
|
|
|
3,715,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,196,808 |
|
|
$ |
4,525,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except per share data)
|
|
|
YEARS ENDED MARCH 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
3,636,055 |
|
|
$ |
3,501,802 |
|
|
$ |
3,183,324 |
|
|
Contract
revenue
|
|
|
208,999 |
|
|
|
216,500 |
|
|
|
176,943 |
|
|
Interest
income
|
|
|
74,410 |
|
|
|
108,680 |
|
|
|
80,200 |
|
|
Other
income
|
|
|
3,318 |
|
|
|
9,347 |
|
|
|
1,318 |
|
|
|
|
|
3,922,782 |
|
|
|
3,836,329 |
|
|
|
3,441,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
816,680 |
|
|
|
800,114 |
|
|
|
745,602 |
|
|
Selling,
general and administrative
|
|
|
1,474,274 |
|
|
|
1,154,845 |
|
|
|
1,046,336 |
|
|
Research
and development
|
|
|
661,294 |
|
|
|
670,973 |
|
|
|
941,003 |
|
|
|
|
|
2,952,248 |
|
|
|
2,625,932 |
|
|
|
2,732,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income tax expense
|
|
|
970,534 |
|
|
|
1,210,397 |
|
|
|
708,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
202,791 |
|
|
|
242,464 |
|
|
|
254,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
767,743 |
|
|
$ |
967,933 |
|
|
$ |
454,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
2.53 |
|
|
$ |
3.08 |
|
|
$ |
1.43 |
|
|
Diluted
|
|
$ |
2.52 |
|
|
$ |
3.06 |
|
|
$ |
1.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
303,609 |
|
|
|
314,660 |
|
|
|
318,539 |
|
|
Diluted
|
|
|
304,400 |
|
|
|
316,133 |
|
|
|
322,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(In
thousands)
|
|
|
YEARS ENDED MARCH 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
767,743 |
|
|
$ |
967,933 |
|
|
$ |
454,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation (losses) gains
|
|
|
( 36,448 |
) |
|
|
25,815 |
|
|
|
13,753 |
|
|
Unrealized
(losses) gains on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding (loss) gain arising during the period, net of tax
|
|
|
( 45,289 |
) |
|
|
( 13,102 |
) |
|
|
1,364 |
|
|
Other
comprehensive (loss) income
|
|
|
( 81,737 |
) |
|
|
12,713 |
|
|
|
15,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
686,006 |
|
|
$ |
980,646 |
|
|
$ |
469,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS
ENDED MARCH 31, 2009, 2008 AND 2007
(In
thousands)
|
|
|
Common stock
|
|
|
Additional
paid-in
|
|
|
Retained
|
|
|
Accumulated
other comprehensive
|
|
|
Treasury stock
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
earnings
|
|
|
income (loss)
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2006
|
|
|
412,124 |
|
|
$ |
41,212 |
|
|
$ |
1,023,079 |
|
|
$ |
4,203,253 |
|
|
$ |
6,762 |
|
|
|
90,784 |
|
|
$ |
2,576,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued upon exercise of stock options
|
|
|
8,571 |
|
|
|
857 |
|
|
|
212,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
stock acquired from employees upon exercise of stock
options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44 |
|
|
|
1,979 |
|
|
Purchase
of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,315 |
|
|
|
472,279 |
|
|
Tax
benefit related to stock options exercised by employees
|
|
|
|
|
|
|
|
|
|
|
78,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
40,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,117 |
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
454,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2007
|
|
|
420,695 |
|
|
|
42,069 |
|
|
|
1,354,264 |
|
|
|
4,657,356 |
|
|
|
21,879 |
|
|
|
101,143 |
|
|
|
3,050,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption
of new accounting standard
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( 13,796 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued upon exercise of stock options and vesting of restricted
stock
|
|
|
726 |
|
|
|
73 |
|
|
|
26,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,871 |
|
|
|
356,327 |
|
|
Tax
benefit related to stock options exercised by employees
|
|
|
|
|
|
|
|
|
|
|
11,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
42,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,713 |
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
967,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2008
|
|
|
421,421 |
|
|
|
42,142 |
|
|
|
1,434,172 |
|
|
|
5,611,493 |
|
|
|
34,592 |
|
|
|
110,014 |
|
|
|
3,407,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued upon exercise of stock options and vesting of restricted
stock
|
|
|
847 |
|
|
|
85 |
|
|
|
10,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
stock acquired from employees upon exercise of stock options and vesting
of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
482 |
|
|
|
11,782 |
|
|
Purchase
of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,157 |
|
|
|
332,102 |
|
|
Tax
benefit related to stock options exercised by employees
|
|
|
|
|
|
|
|
|
|
|
2,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
44,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(81,737 |
) |
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
767,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2009
|
|
|
422,268 |
|
|
$ |
42,227 |
|
|
$ |
1,491,239 |
|
|
$ |
6,379,236 |
|
|
$ |
(47,145 |
) |
|
|
120,653 |
|
|
$ |
3,750,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
YEARS ENDED MARCH 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
767,743 |
|
|
$ |
967,933 |
|
|
$ |
454,103 |
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
43,266 |
|
|
|
47,101 |
|
|
|
45,444 |
|
|
Amortization,
impairments and write-offs
|
|
|
53,241 |
|
|
|
44,646 |
|
|
|
55,699 |
|
|
Stock-based
compensation expense
|
|
|
44,103 |
|
|
|
42,257 |
|
|
|
40,770 |
|
|
Deferred
income tax benefit and other non-cash tax items
|
|
|
( 26,770 |
) |
|
|
( 21,477 |
) |
|
|
( 84,919 |
) |
|
Foreign
currency transaction gain
|
|
|
( 2,095 |
) |
|
|
( 2,051 |
) |
|
|
( 779 |
) |
|
Net
change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
(increase) in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
( 3,457 |
) |
|
|
( 63,332 |
) |
|
|
( 16,117 |
) |
|
Inventories,
net
|
|
|
31,611 |
|
|
|
9,025 |
|
|
|
201,556 |
|
|
Other
current assets
|
|
|
( 110,990 |
) |
|
|
( 6,408 |
) |
|
|
( 6,690 |
) |
|
Other
assets
|
|
|
165 |
|
|
|
7,811 |
|
|
|
( 8,225 |
) |
|
Increase
in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
( 106,528 |
) |
|
|
69,106 |
|
|
|
13,703 |
|
|
Accrued
expenses
|
|
|
313,531 |
|
|
|
54,110 |
|
|
|
90,205 |
|
|
Income
tax liabilities
|
|
|
65,979 |
|
|
|
44,615 |
|
|
|
102,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
1,069,799 |
|
|
|
1,193,336 |
|
|
|
887,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
( 40,629 |
) |
|
|
( 34,888 |
) |
|
|
( 29,987 |
) |
|
Purchase
of marketable securities
|
|
|
( 2,236,142 |
) |
|
|
( 3,141,953 |
) |
|
|
( 2,559,653 |
) |
|
Redemption
of marketable securities
|
|
|
2,151,929 |
|
|
|
2,983,699 |
|
|
|
2,018,325 |
|
|
Purchase
of license agreements, product rights and other
intangibles
|
|
|
( 25,000 |
) |
|
|
( 415,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
( 149,842 |
) |
|
|
( 608,142 |
) |
|
|
( 571,315 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
proceeds from common stock options exercised by employees under stock
option plans
|
|
|
10,630 |
|
|
|
26,655 |
|
|
|
210,920 |
|
|
Tax
benefit realized from the exercise of stock options by
employees
|
|
|
2,419 |
|
|
|
1,755 |
|
|
|
80,225 |
|
|
Purchase
of treasury stock
|
|
|
( 343,884 |
) |
|
|
( 356,327 |
) |
|
|
( 472,279 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
|
( 330,835 |
) |
|
|
( 327,917 |
) |
|
|
( 181,134 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
( 83,269 |
) |
|
|
12,112 |
|
|
|
14,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents
|
|
|
505,853 |
|
|
|
269,389 |
|
|
|
149,084 |
|
|
Cash
and cash equivalents, beginning of year
|
|
|
833,052 |
|
|
|
563,663 |
|
|
|
414,579 |
|
|
Cash
and cash equivalents, end of year
|
|
$ |
1,338,905 |
|
|
$ |
833,052 |
|
|
$ |
563,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
266,401 |
|
|
$ |
226,022 |
|
|
$ |
135,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant
accounting policies (In
thousands, except for estimated useful lives which are stated in
years):
Basis of
consolidation: The consolidated financial statements include the accounts
of Forest Laboratories, Inc. (or the Company) and its subsidiaries, all of which
are wholly-owned. All significant intercompany accounts and
transactions have been eliminated.
Estimates and
assumptions: The preparation of financial statements in conformity with
generally accepted accounting principles (GAAP) requires the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and of revenues and expenses during the reporting
period. Estimates are made when accounting for sales allowances,
returns, rebates and other pricing adjustments, depreciation, amortization, tax
assets and liabilities and certain contingencies. The Company is
subject to risks and uncertainties, which may include but are not limited to
competition, federal or local legislation and regulations, litigation and
overall changes in the healthcare environment that may cause actual results to
vary from estimates. The Company reviews all significant estimates
affecting the financial statements on a recurring basis and records the effect
of any adjustments when necessary.
Reclassifications:
Certain amounts as previously reported have been reclassified to conform
to current year classifications.
Foreign currency
translation: The
statements of earnings of the Company’s foreign subsidiaries are translated into
U.S. dollars using average exchange rates. The net assets of the
Company’s foreign subsidiaries are translated into U.S. dollars using current
exchange rates. The U.S. dollar effects that arise from translating
the net assets of these subsidiaries at changing rates are recorded in the
foreign currency translation adjustment account, which is included in
Accumulated other comprehensive income.
Cash
equivalents: Cash equivalents consist of short-term, highly liquid
investments purchased with original maturities of three months or less and are
readily convertible into cash at par value (cost).
Inventories:
Inventories are stated at the lower of cost or market, with cost determined on
the first-in, first-out basis.
Pre-launch
inventories: The Company may scale-up and make commercial quantities of
certain of its product candidates prior to the date it anticipates that such
products will receive final FDA approval. The scale-up and commercial
production of pre-launch inventories involves the risk that such products may
not be approved for marketing by the FDA on a timely basis, or
ever. This risk notwithstanding, the Company plans to continue to
scale-up and build pre-launch inventories of certain products that have not yet
received final governmental approval when the Company believes that such action
is appropriate in relation to the commercial value of the product launch
opportunity. As of fiscal years ended March 31, 2009 and 2008, the
Company had no such pre-launch inventory quantities.
Marketable
securities: Marketable securities, which are all accounted for as
available-for-sale, are stated at fair value based on quoted market prices in
accordance with Statement of Financial Accounting Standards No. 115, “Accounting
for Certain Investments in Debt and Equity Securities”, and consist of high
quality investments.
Accounts
receivable and credit policies: The carrying amount of
accounts receivable is reduced by a valuation allowance that reflects
Management's best estimate of the amounts that will not be
collected. In addition to reviewing delinquent accounts receivable,
Management considers many factors in estimating its general allowance, including
historical data, experience, customer types, credit worthiness and economic
trends. From time to time, Management may adjust its assumptions for
anticipated changes in any of those or other factors expected to affect
collectability.
Property, plant
and equipment and depreciation: Property, plant and
equipment are stated at cost. Depreciation is provided primarily by
the straight-line method over the following estimated useful lives:
|
|
|
Years
|
|
Buildings
and improvements
|
|
10-50
|
|
Machinery,
equipment and other
|
|
3-10
|
Leasehold
improvements are depreciated over the lesser of the useful life of the assets or
the lease term. Included in property, plant and equipment in fiscal 2009 is
construction in progress of $7,566 for facility expansions at various locations
necessary to support the Company’s current and future
operations. Projects currently in-process or under evaluation are
estimated to cost approximately $8,300 to complete.
Goodwill:
The Company has made acquisitions in the past that include
goodwill. Goodwill is not amortized but is subject to an annual
impairment test based on its estimated fair value.
Revenue
recognition: Revenues are recorded in the period the merchandise is
shipped. As is typical in the pharmaceutical industry, gross product
sales are subject to a variety of deductions, primarily representing rebates and
discounts to government agencies, wholesalers and managed care
organizations. These deductions represent estimates of the related
liabilities and, as such, judgment is required when estimating the impact of
these sales deductions on gross sales for a reporting period. If
estimates are not representative of actual future settlement, results could be
materially affected. Provisions for estimated sales allowances,
returns, rebates and other pricing adjustments are accrued at the time revenues
are recognized as a direct reduction of such revenue.
The
accruals are estimated based on available information, including third party
data, regarding the portion of sales on which rebates and discounts can be
earned, adjusted as appropriate for specific known events and the prevailing
contractual discount rate. Provisions are reflected either as a
direct reduction to accounts receivable or, to the extent that they are due to
entities other than customers, as accrued expense. Adjustments to
estimates are recorded when customer credits are issued or payments are made to
third parties.
Deductions
for chargebacks (primarily discounts to group purchasing organizations and
federal government agencies) closely approximate actual as these deductions are
settled generally within 2-3 weeks of incurring the liability.
Sales
incentives are generally given in connection with a new product
launch. These sales incentives are recorded as a reduction of
revenues and are based on terms fixed at the time goods are
shipped. New product launches may result in expected temporary
increases in wholesaler inventories, which are closely monitored and
historically have not resulted in increased product returns.
Shipping and
handling costs: Presently, the Company does not charge its customers for
any freight costs. The amounts of such costs are included in selling,
general and administrative expense and are not material.
Research and
development: Expenditures for research and development, including
licensing fees and milestone payments (or license payments) associated with
development products that have not yet been approved by the FDA, are charged to
expense as incurred. Once a product receives approval, subsequent
license payments are recorded as an asset and classified as License agreements,
product rights and other intangibles, net.
Savings and
profit sharing plan: Substantially all non-bargaining unit employees of
the Company's domestic subsidiaries may participate in the savings and profit
sharing plan after becoming eligible (as defined). Profit sharing
contributions are primarily at the discretion of the Company. The
savings plan contributions include a matching contribution made by the
Company. Savings and profit sharing contributions amounted to
approximately $34,200, $32,100 and $29,500 for fiscal years 2009, 2008 and 2007,
respectively.
Earnings per
share: Basic earnings per share includes no dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted earnings per
share reflect, in periods in which they have a dilutive effect, the effect of
common shares issuable upon exercise of stock options and vesting of restricted
stock. The weighted average number of diluted common shares
outstanding is reduced by the treasury stock method which, in accordance with
Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”
(or SFAS 123R) takes into consideration the compensation cost attributed to
future services not yet recognized.
Accumulated other
comprehensive income: Other comprehensive income (loss) refers to
revenues, expenses, gains and losses that under GAAP are excluded from net
income as these amounts are recorded directly as an adjustment to stockholders'
equity. Accumulated other comprehensive income is comprised of the
cumulative effects of foreign currency translation and unrealized gains (losses)
on securities which amounted to approximately $11,332 and ($58,477) at March 31,
2009 and $47,780 and ($13,188) at March 31, 2008, respectively.
Income
taxes: The Company accounts for income taxes using the liability
method. Under the liability method, deferred income taxes are
provided on the differences in bases of assets and liabilities between financial
reporting and tax returns using enacted tax rates.
Effective
April 1, 2007, the Company adopted the provisions of Financial Accounting
Standards Board (or FASB) Interpretation No. 48 (or FIN 48), “Accounting for
Uncertainty in Income Taxes – an interpretation of FASB Statement No.
109.” Pursuant to FIN 48, the Company must recognize the tax benefit
from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on
the technical merits of the position. The tax benefits recognized in
the financial statements from such a position are measured based on the largest
benefit that has a greater than 50 percent likelihood of being realized upon
ultimate resolution. See Note 15 for further discussion of the impact
of adopting FIN 48.
Long-lived
assets: Long-lived assets, such as intangible assets, property and
equipment and certain sundry assets, are evaluated for impairment periodically
or when events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable through the estimated undiscounted future cash
flows from the use of these assets. When any such impairment exists,
the related assets will be written down to fair value.
Fair value of
financial instruments: The carrying amounts of
cash, accounts receivable, accounts payable, accrued expenses and income taxes
payable are reasonable estimates of their fair value because of the maturity of
these items.
Stock-based
compensation: The Board of Directors awards stock options and
restricted stock to employees and non-employee directors. The fair
value for stock options is calculated using the Black-Scholes valuation model
and restricted stock is accounted for at fair value based upon the average high
and low stock price on the date of grant. These compensation costs
are amortized on an even basis (net of estimated forfeitures) over the requisite
service period. The Company has never granted options below market
price on the date of grant.
In fiscal
2007, the Company elected to adopt the modified prospective application method
provided by SFAS 123R, and accordingly, compensation expense of $44,103 ($35,583
net of tax), $42,257 ($35,423 net of tax) and $40,770 ($34,229 net of tax) was
recorded to cost of sales, selling, general and administrative and research and
development for the fiscal years ended March 31, 2009, 2008 and 2007,
respectively. Total compensation cost related to non-vested stock
based awards not yet recognized as of March 31, 2009 was $98,644 pre-tax and the
weighted-average period over which the cost is expected to be recognized is
approximately 2.8 years.
The
following weighted-average assumptions were used in determining the fair values
of stock options using the Black-Scholes model:
|
Years
ended March 31,
|
|
2009
|
|
2008
|
|
2007
|
|
Expected
dividend yield
|
|
0%
|
|
0%
|
|
0%
|
|
Expected
stock price volatility
|
|
34.17%
|
|
31.15%
|
|
29.63%
|
|
Risk-free
interest rate
|
|
2.8%
|
|
4.2%
|
|
4.8%
|
|
Expected
life of options (years)
|
|
6
|
|
6
|
|
5
|
The
Company has never declared a cash dividend. The expected stock price
volatility is based on implied volatilities from traded options on the Company’s
stock as well as historical volatility. The risk-free interest rate
is based on the U.S. Treasury yield curve in effect at the time of grant in
conjunction with considering the expected life of options. The
expected life is based on vesting and represents the period of time that granted
options are expected to be outstanding.
Recent accounting
standards: In November 2008, the Securities and Exchange
Commission (SEC) released a proposed roadmap regarding the potential use by U.S.
issuers of financial statements prepared in accordance with International
Financial Reporting Standards (IFRS). IFRS is a comprehensive series
of accounting standards published by the International Accounting Standards
Board. Under the proposed roadmap, the Company may be required to
prepare financial statements in accordance with IFRS as early as fiscal
2015. The SEC will make a determination in 2011 regarding the
mandatory adoption of IFRS. The Company is currently assessing the
impact that this potential change would have on its consolidated financial
statements.
In April
2008, the FASB issued FASB Staff Position (FSP) No. 142-3, “Determination of the
Useful Life of Intangible Assets” (or FSP 142-3). FSP 142-3 amends
the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under Statement of Financial Accounting Standards No. 142, “Goodwill and Other
Intangible Assets.” FSP 142-3 is effective as of the beginning of
fiscal 2010. The requirement for determining useful lives must be
applied prospectively to intangible assets acquired after the effective date and
the disclosure requirements must be applied prospectively to all intangible
assets recognized as of, and subsequent to, the effective date. The
Company is currently evaluating the impact of adopting FSP 142-3.
In March
2008, the FASB issued SFAS
No. 161, “Disclosures about Derivative Instruments and Hedging Activities - An
Amendment of FASB Statement No. 133” (or SFAS 161). SFAS 161 became
effective on January 1, 2009. This statement revises the requirements
for the disclosure of derivative instruments and hedging activities that include
the reasons a company uses derivative instruments, how derivative instruments
and related hedged items are accounted for under SFAS 133 and how derivative
instruments and related hedged items affect a company’s financial position,
financial performance and cash flows. The implementation of SFAS 161
was not material to the Company’s consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (or SFAS 141(R)) which is a revision of SFAS 141. SFAS
141(R) requires an acquirer in a business combination to measure all assets
acquired, the liabilities assumed and any noncontrolling interest in the
acquiree at their fair values on the date of acquisition with limited
exceptions. This Statement also requires the acquirer in a business
combination achieved in stages to recognize the identifiable assets and
liabilities, as well as the noncontrolling interest in the acquiree, at the full
amounts of their fair values. SFAS 141(R) will further require that
acquired in-process research and development (or IPR&D) as of the
acquisition date is to be capitalized at fair value. Assets acquired
and liabilities assumed arising from contingencies at the acquisition date are
to be measured at their fair value and acquisition costs generally will be
expensed as incurred. This statement is effective for business
combinations for which the acquisition date is on or after April 1,
2009. This Statement will affect the Company’s accounting for any
future acquisitions.
In
December 2007, the FASB ratified the consensus reached by the Emerging Issues
Task Force (EITF) on Issue No. 07-1, “Accounting for Collaborative Arrangements”
(or EITF 07-1). This Issue defines a collaborative arrangement,
establishes reporting requirements and clarifies the manner in which revenues,
costs and sharing payments between parties and with third parties be presented
in the consolidated statements of income. This Issue is effective as
of the beginning of fiscal 2010. The Company is currently evaluating the
impact of adopting EITF 07-1.
In June
2007, the FASB ratified the consensus reached by the EITF on Issue No. 07-3,
“Accounting for Nonrefundable Advance Payments for Goods or Services Received
for Use in Future Research and Development Activities” (or EITF
07-3). Nonrefundable advance payments for goods or services that will
be used or rendered for future research and development activities should be
deferred and capitalized. Such amounts should be recognized as an expense
when the related goods are delivered or services are performed, or when the
goods or services are no longer expected to be provided. The Company’s
adoption of EITF 07-3 in fiscal 2009 did not have a material effect on the
Company’s consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157 (or SFAS 157), “Fair Value
Measurements” which the Company adopted as of the beginning of fiscal
2009. This pronouncement defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value
measurements. The implementation of SFAS 157 was not material to the
Company’s consolidated financial statements.
In
February 2008, the FASB issued FSP FAS 157-2 which delays the effective date of
SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). This FSP partially defers the
effective date of SFAS 157 to the beginning of fiscal 2010, and interim periods
within those fiscal years for items within the scope of this FSP. The
Company is currently evaluating the impact of adopting FSP FAS 157-2 and does
not anticipate a material effect.
In
October 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active.” FSP 157-3
clarifies the application of SFAS 157 in a market that is not active and
provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. FSP 157-3 was effective upon issuance, including prior periods for
which financial statements have not been issued. The Company’s adoption of
FSP 157-3 did not have a material effect on the Company’s consolidated financial
statements.
In
February 2007, the FASB issued SFAS No. 159 (or SFAS 159), “The Fair Value
Option for Financial Assets and Financial Liabilities” which permits an entity
to measure certain financial assets and financial liabilities at fair
value. The purpose of SFAS 159 is to improve financial reporting by
allowing entities to mitigate volatility in reported earnings caused by the
measurement of related assets and liabilities using different attributes,
without having to apply complex hedge accounting provisions. Under SFAS 159,
entities that elect the fair value option (by instrument) will report unrealized
gains and losses in earnings at each subsequent reporting date. The
fair value option election is irrevocable, unless a new election date
occurs. SFAS 159 establishes presentation and disclosure requirements
to help financial statement users understand the effect of the entity’s election
on its earnings, but does not eliminate disclosure requirements of other
accounting standards. Assets and liabilities that are measured at
fair value must be displayed on the face of the balance sheet. SFAS
159 became effective as of the beginning of fiscal 2009. The Company
chose not to elect the fair value option for its financial instruments other
than those already measured at fair value in accordance with SFAS
157. As a result, the adoption of this Statement did not have an
impact on the Company’s consolidated financial statements.
In June
2008, the FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities”
(or FSP EITF 03-6-1). FSP EITF 03-6-1
addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting, and therefore need to be included in
the computation of earnings per share under the two-class method as described in
SFAS No. 128, “Earnings per
Share.” Under the guidance
in FSP EITF 03-6-1, unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and need to be included in the computation
of earnings per share pursuant to the two-class method. FSP EITF
03-6-1 is effective as of the beginning of fiscal 2010. The Company
is currently evaluating the impact of adopting FSP EITF 03-6-1.
2. Net income per share
(In
thousands):
A
reconciliation of shares used in calculating basic and diluted net income per
share follows:
|
Years
ended March 31,
|
|
2009
|
|
2008
|
|
2007
|
|
Basic
|
|
303,609
|
|
314,660
|
|
318,539
|
|
Effect
of assumed conversion of employee stock options and restricted
stock
|
|
791
|
|
1,473
|
|
4,242
|
|
Diluted
|
|
304,400
|
|
316,133
|
|
322,781
|
Options
to purchase approximately 16,571, 12,312 and 6,000 shares of common stock at
exercise prices ranging from $20.55 to $76.66 per share were outstanding during
a portion of fiscal years 2009, 2008 and 2007, respectively, but were not
included in the computation of diluted earnings per share because they were
anti-dilutive. These options expire through 2019.
3. Business operations
(In
thousands):
The
Company and its principal operating subsidiaries, which are located in the
United States, Ireland and the United Kingdom, manufacture and market ethical
pharmaceutical products and other healthcare products. The Company
operates in only one segment. Sales are made primarily in the United
States and European markets. The net sales and long-lived assets for
the years ended March 31, 2009, 2008 and 2007, are from the Company's or one of
its subsidiaries' country of origin, as follows:
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Net
sales
|
|
|
Long-lived
assets
|
|
|
Net
sales
|
|
|
Long-lived
assets
|
|
|
Net
sales
|
|
|
Long-lived
assets
|
|
|
United
States
|
|
$ |
3,567,989 |
|
|
$ |
333,345 |
|
|
$ |
3,433,233 |
|
|
$ |
371,442 |
|
|
$ |
3,121,091 |
|
|
$ |
410,211 |
|
|
Ireland
|
|
|
19,926 |
|
|
|
520,548 |
|
|
|
17,729 |
|
|
|
513,559 |
|
|
|
13,680 |
|
|
|
121,610 |
|
|
United
Kingdom
|
|
|
48,140 |
|
|
|
6,410 |
|
|
|
50,840 |
|
|
|
9,459 |
|
|
|
48,553 |
|
|
|
10,761 |
|
|
|
|
$ |
3,636,055 |
|
|
$ |
860,303 |
|
|
$ |
3,501,802 |
|
|
$ |
894,460 |
|
|
$ |
3,183,324 |
|
|
$ |
542,582 |
|
Net sales
exclude sales between the Company and its subsidiaries.
Net sales
by therapeutic class are as follows:
|
Years
ended March 31,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Central
nervous system (CNS)
|
|
$ |
3,268,561 |
|
|
$ |
3,137,878 |
|
|
$ |
2,794,685 |
|
|
Cardiovascular
|
|
|
94,359 |
|
|
|
35,616 |
|
|
|
50,199 |
|
|
Other
|
|
|
273,135 |
|
|
|
328,308 |
|
|
|
338,440 |
|
|
|
|
$ |
3,636,055 |
|
|
$ |
3,501,802 |
|
|
$ |
3,183,324 |
|
The
Company's CNS franchise consisting of Lexapro®, Celexa® and Namenda® accounted
for 90% of the Company's net sales for the years ended March 31, 2009 and 2008
and 88% for 2007.
The
following illustrates net sales to the Company’s principal
customers:
|
|
2009
|
|
2008
|
|
2007
|
|
McKesson
Drug Company
|
37%
|
|
38%
|
|
37%
|
|
Cardinal
Health, Inc.
|
33%
|
|
30%
|
|
27%
|
|
AmeriSource
Bergen Corporation
|
19%
|
|
15%
|
|
13%
|
4. Accounts receivable
(In
thousands):
Accounts
receivable, net, consists of the following:
|
March
31,
|
|
2009
|
|
|
2008
|
|
|
Trade
|
|
$ |
351,697 |
|
|
$ |
377,779 |
|
|
Other
|
|
|
97,747 |
|
|
|
68,208 |
|
|
|
|
$ |
449,444 |
|
|
$ |
445,987 |
|
5. Inventories
(In
thousands):
Inventories,
net of reserves for obsolescence, consist of the following:
|
March
31,
|
|
2009
|
|
|
2008
|
|
|
Raw
materials
|
|
$ |
126,292 |
|
|
$ |
234,288 |
|
|
Work
in process
|
|
|
982 |
|
|
|
1,360 |
|
|
Finished
goods
|
|
|
266,253 |
|
|
|
189,490 |
|
|
|
|
$ |
393,527 |
|
|
$ |
425,138 |
|
6. Acquisitions
(In
thousands):
On
January 10, 2007, the Company acquired Cerexa, Inc. (or Cerexa), a
biopharmaceutical company based in Oakland, California for approximately
$494,000 in a merger pursuant to which Cerexa became a wholly-owned subsidiary
of the Company. The Company acquired worldwide development and marketing
rights (excluding Japan) to ceftaroline acetate (or ceftaroline), a next
generation, broad-spectrum, hospital-based injectable cephalosporin
antibiotic. The acquisition of Cerexa also included a second
development-stage hospital-based antibiotic, ME1036, which had shown activity
against both aerobic and anaerobic gram-positive and gram-negative bacteria in
preclinical studies. The Company has discontinued development of the
ME1036 compound. The rights to
ceftaroline and ME1036 are in-licensed by Cerexa on an exclusive basis from
Takeda Pharmaceutical Company and Meiji Seika Kaisha, Ltd., respectively.
The Company will be obligated to pay an additional $100,000 in the event that
annual United States sales of ceftaroline exceed $500,000 during the five year
period following product launch. The acquisition was accounted for
under the purchase method of accounting and accordingly, Cerexa’s results of
operations are included in the accompanying consolidated financial statements
from the acquisition date.
Of the
$494,000 purchase price, $476,000 was assigned as in-process research and
development (or IPR&D). Substantially all of this charge
represented the value assigned to ceftaroline, which had completed a Phase II
clinical trial program in patients with complicated skin and skin structure
infections (or cSSSI). Ceftaroline is being developed initially for
the cSSSI indication and the treatment of community acquired pneumonia (or
CAP). Phase III studies of ceftaroline for cSSSI began in February
2007. ME1036 was still in preclinical development at the acquisition
date. These compounds had not yet achieved regulatory approval for
marketing and consequently, the IPR&D was taken as a charge against income
during the fourth quarter of fiscal 2007. This charge was not
deductible for tax purposes.
In order
to determine the estimated fair value of IPR&D, the “income method” was
utilized. This method applies a probability weighting to the
estimated future net cash flows that are derived from projected sales revenues
and estimated costs. These projections are based on factors such as
relevant market size, patent protection, historical pricing of similar products
and expected industry trends. The estimated future net cash flows
were then discounted to the present value using a discount rate of
16%. This analysis was performed for each compound
independently.
For
purposes of applying the income method, the projected launch dates following FDA
approval were estimated for ceftaroline and ME1036, at which times the Company
would expect the resulting products to generate cash flows. The cost
to complete these development programs will depend on whether these programs are
brought to their final stages of development and are ultimately submitted to the
FDA for approval. All internal and external research and development
expenses are expensed as incurred. All of the development programs
are subject to the normal risks and uncertainties associated with demonstrating
the safety and efficacy required to obtain FDA or other regulatory
approvals.
In June
2008, the Company reported positive results from two globally conducted,
multi-center Phase III studies of ceftaroline for cSSSI. Two Phase
III studies for CAP are ongoing and results of those studies are expected by the
second quarter of calendar 2009. The data from these two indications,
if supportive, will serve as the planned submission package to the FDA for
initial marketing approval, anticipated to be filed around the end of calendar
2009.
7. Fair value measurements (In thousands):
In the
first quarter of fiscal 2009, the Company adopted SFAS 157, “Fair Value
Measurements.” This pronouncement defines fair value, establishes a
framework for measuring fair value under GAAP and requires expanded disclosures
about fair value measurements. SFAS 157 does not require any new fair
value measurements, but rather generally applies to other accounting
pronouncements that require or permit fair value measurements. SFAS
157 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement, and defines fair value as the price that would be
received to sell an asset or transfer a liability in an orderly transaction
between market participants at the measurement date. SFAS 157
discusses valuation techniques, such as the market approach (comparable market
prices), the income approach (present value of future income or cash flow) and
the cost approach (cost to replace the service capacity of an asset or
replacement cost). These valuation techniques are based upon
observable and unobservable inputs. Observable inputs reflect market
data obtained from independent sources, while unobservable inputs reflect the
Company’s market assumptions. SFAS 157 utilizes a fair value
hierarchy that prioritizes inputs to fair value measurement techniques into
three broad levels. The following is a brief description of those
three levels:
|
|
Level
1:
|
Observable
inputs such as quoted prices for identical assets or liabilities in active
markets.
|
|
|
|
|
|
|
Level
2:
|
Observable
inputs other than quoted prices that are directly or indirectly observable
for the asset or liability, including quoted prices for similar assets or
liabilities in active markets; quoted prices for similar or identical
assets or liabilities in markets that are not active; and model-derived
valuations whose inputs are observable or whose significant value drivers
are observable.
|
|
|
|
|
|
|
Level
3:
|
Unobservable
inputs that reflect the reporting entity’s own
assumptions.
|
The
Company’s financial assets adjusted to fair value at March 31, 2009 are its
commercial paper investments included in cash and cash equivalents, money market
accounts, municipal bonds and notes, variable rate demand notes, floating rate
notes and auction rate securities (or ARS). These assets are subject
to the measurement and disclosure requirements of SFAS 157. The Company
adjusts the value of these instruments to fair value each reporting
period. No adjustment to retained earnings resulted from the adoption of
SFAS 157.
The
following table presents the level within the fair value hierarchy at which the
Company’s financial assets are carried at fair value and measured on a recurring
basis:
|
Description
|
|
Fair
value at
March 31, 2009
|
|
|
Quoted
prices in active markets for identical assets
(Level 1)
|
|
|
Significant
other observable market inputs
(Level 2)
|
|
|
Unobservable
market inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market accounts
|
|
$ |
1,144,662 |
|
|
$ |
1,144,662 |
|
|
|
|
|
|
|
|
Municipal
bonds and notes
|
|
|
218,246 |
|
|
|
|
|
|
$ |
218,246 |
|
|
|
|
|
Commercial
paper
|
|
|
969,446 |
|
|
|
411,530 |
|
|
|
557,916 |
|
|
|
|
|
Variable
rate demand notes
|
|
|
158,309 |
|
|
|
|
|
|
|
158,309 |
|
|
|
|
|
Floating
rate notes
|
|
|
367,747 |
|
|
|
|
|
|
|
367,747 |
|
|
|
|
|
|
Auction
rate securities
|
|
|
36,839 |
|
|
|
|
|
|
|
|
|
|
$ |
36,839 |
|
As of
March 31, 2009, the Company has determined the value of the ARS portfolio based
upon a discounted cash flow model. The assumptions used in the
valuation model include estimates for interest rates, timing and the amount of
cash flows and expected holding periods for the ARS. As a result of
this analysis, for the year ended March 31, 2009, the Company recorded a
temporary impairment loss of $1,906 relating to the ARS
portfolio. The following table presents a reconciliation of the Level
3 investments measured at fair value on a recurring basis using unobservable
inputs:
|
|
|
Year
Ended March 31, 2009
|
|
|
Balance
at March 31, 2008
|
|
$ |
|
|
|
Transfers
to Level 3
|
|
|
38,795 |
|
|
Sales
|
|
|
( 50 |
) |
|
Gains
and losses reported in Accumulated other comprehensive
income
|
|
|
( 1,906 |
) |
|
Balance
at March 31, 2009
|
|
$ |
36,839 |
|
There
were no purchases or material realized gains or losses within the Level 3 ARS
during the year ended March 31, 2009.
Money
market accounts are included in cash and cash equivalents on the accompanying
balance sheets and are classified as Level 1 assets. Certain commercial
paper investments are also classified as Level 1 assets because they consist of
publicly traded securities which are priced and actively traded on a daily
basis.
Certain
of the Company’s commercial paper and all of the Company’s variable rate demand
notes, municipal bonds and notes and floating rate notes are based on Level 2
inputs in the SFAS 157 fair value hierarchy.
The
Company holds investments in ARS amounting to $36,839 (with underlying
maturities from 22.8 to 33.2 years) of which $23,500 are collateralized by
student loans. Substantially all such collateral in the aggregate is
guaranteed by the U.S. government under the Federal Family Education Loan
Program. The balance of the ARS investments of $13,339 are issued by
local municipal governments. Liquidity for these securities was
normally dependent on an auction process that resets the applicable interest
rate at pre-determined intervals, ranging from 7 to 35
days. Beginning in February 2008, the auctions for the ARS held by
the Company and others were unsuccessful, requiring the Company to continue to
hold them beyond their typical auction reset dates. Auctions fail
when there is insufficient demand. However, this does not represent a
default by the issuer of the security. Upon an auction’s failure, the
interest rates reset based on a formula contained in the security. The
rate is generally equal to or higher than the current market rate for similar
securities. The securities will continue to accrue interest and be
auctioned until one of the following occurs: the auction succeeds;
the issuer calls the securities; or the securities mature.
The
Company classifies the ARS as non-current assets held for sale under the heading
“Marketable securities” in the Company’s balance sheets at fair
value. During the year ended March 31, 2009, the Company changed the
classification of the ARS portfolio from Level 2 to Level 3 within the fair
value hierarchy due to the lack of observable inputs and continued absence of
trading activity.
8. Marketable securities
(In
thousands):
Available-for-sale
debt securities consist of the following:
|
|
|
March 31,
2009
|
|
|
|
|
Estimated
fair value
|
|
|
Gains
in accumulated other comprehensive income
|
|
|
Losses
in accumulated other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Variable
rate demand notes
|
|
$ |
158,309 |
|
|
|
|
|
|
|
|
Municipal
bonds and notes
|
|
|
145,845 |
|
|
$ |
1,269 |
|
|
|
|
|
Commercial
paper
|
|
|
856,349 |
|
|
|
3,156 |
|
|
|
|
|
Floating
rate notes
|
|
|
81,514 |
|
|
|
|
|
|
$ |
( 1,287 |
) |
|
Total
current securities
|
|
|
1,242,017 |
|
|
|
4,425 |
|
|
|
( 1,287 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
bonds and notes
|
|
|
72,401 |
|
|
|
609 |
|
|
|
|
|
|
Commercial
paper
|
|
|
54,320 |
|
|
|
|
|
|
|
( 463 |
) |
|
Auction
rate notes
|
|
|
36,839 |
|
|
|
|
|
|
|
|
|
|
Floating
rate notes
|
|
|
286,233 |
|
|
|
|
|
|
|
( 68,503 |
) |
|
Total
noncurrent securities
|
|
|
449,793 |
|
|
|
609 |
|
|
|
( 68,966 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale debt securities
|
|
$ |
1,691,810 |
|
|
$ |
5,034 |
|
|
$ |
(70,253 |
) |
|
|
|
March 31,
2008
|
|
|
|
|
Estimated
fair value
|
|
|
Gains
in accumulated other comprehensive income
|
|
|
Losses
in accumulated other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Variable
rate demand notes
|
|
$ |
307,045 |
|
|
$ |
10 |
|
|
|
|
|
Municipal
bonds and notes
|
|
|
59,144 |
|
|
|
309 |
|
|
|
|
|
Commercial
paper
|
|
|
684,506 |
|
|
|
3,393 |
|
|
|
|
|
Floating
rate notes
|
|
|
22,422 |
|
|
|
|
|
|
$ |
( 506 |
) |
|
Total
current securities
|
|
|
1,073,117 |
|
|
|
3,712 |
|
|
|
( 506 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
bonds and notes
|
|
|
70,009 |
|
|
|
798 |
|
|
|
|
|
|
Auction
rate notes
|
|
|
55,340 |
|
|
|
|
|
|
|
|
|
|
Floating
rate notes
|
|
|
409,131 |
|
|
|
|
|
|
|
( 18,297 |
) |
|
Total
noncurrent securities
|
|
|
534,480 |
|
|
|
798 |
|
|
|
( 18,297 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale debt securities
|
|
$ |
1,607,597 |
|
|
$ |
4,510 |
|
|
$ |
(18,803 |
) |
Proceeds
from the sales of available-for-sale debt securities were $2,151,929 and
$2,983,699 during fiscal years 2009 and 2008, respectively. Gross
realized gains on those sales during fiscal years 2009 and 2008 were $20,077 and
$22,318, respectively. For purposes of determining gross realized
gains and losses, the cost of securities is based on average
cost. Net unrealized holding losses on available-for-sale debt
securities in the amount of $65,219 and $14,293 for the years ended March 31,
2009 and March 31, 2008, respectively, have been included in Stockholders’
equity: Accumulated other comprehensive income.
Contractual
maturities of available-for-sale debt securities at March 31, 2009, are as
follows:
|
|
|
Estimated
fair value
|
|
|
Within
one year
|
|
$ |
1,242,017 |
|
|
1-5
years
|
|
|
360,327 |
|
|
5-10
years
|
|
|
44,007 |
|
|
After
10 years
|
|
|
45,459 |
|
|
|
|
$ |
1,691,810 |
|
Actual
maturities may differ from contractual maturities because some borrowers have
the right to call or prepay obligations with or without call
penalties.
The
Company currently invests funds in variable rate demand notes that have major
bank liquidity agreements, municipal bonds and notes, commercial paper including
money market instruments, auction rate securities and floating rate
notes. Certain securities are subject to a hard-put option(s) where
the principal amount is contractually assured by the issuer and any resistance
to the exercise of these options would be deemed as a default by the
issuer. Such a potential default would be reflected in the issuer’s
respective credit rating, for which the Company maintains investment grade
requirements pursuant to its corporate investment guidelines. While
the Company believes its investments that have net unrealized losses are
temporary, further declines in the value of these investments may be deemed
other-than-temporary if the credit and capital markets were to continue to
deteriorate in future periods. The Company has the ability and
intends to hold its investments until a recovery of fair value, which may be at
maturity. Therefore, the Company does not consider these investments
to be other-than-temporarily impaired and will continue to monitor global market
conditions to minimize the uncertainty of impairments in future
periods.
9. Intangible assets and
license agreements (In
thousands, except amortization periods which are stated in years):
License
agreements, product rights and other intangibles consist of the
following:
|
|
|
|
|
|
March
31, 2009
|
|
|
March
31, 2008
|
|
|
|
|
Weighted
average amortization period
|
|
|
Gross
carrying amount
|
|
|
Accumulated
amortization
|
|
|
Gross
carrying amount
|
|
|
Accumulated
amortization
|
|
|
Amortized
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
agreements
|
|
|
12 |
|
|
$ |
196,300 |
|
|
$ |
110,643 |
|
|
$ |
191,300 |
|
|
$ |
95,374 |
|
|
Product
rights
|
|
|
11 |
|
|
|
68,206 |
|
|
|
35,394 |
|
|
|
71,350 |
|
|
|
29,963 |
|
|
Buy-out
of royalty agreements
|
|
|
11 |
|
|
|
465,061 |
|
|
|
91,274 |
|
|
|
465,061 |
|
|
|
82,768 |
|
|
Trade
names
|
|
|
20 |
|
|
|
34,190 |
|
|
|
28,573 |
|
|
|
34,190 |
|
|
|
26,076 |
|
|
Non-compete
agreements
|
|
|
13 |
|
|
|
16,000 |
|
|
|
16,000 |
|
|
|
16,000 |
|
|
|
16,000 |
|
|
Other
|
|
|
1 |
|
|
|
3,921 |
|
|
|
3,897 |
|
|
|
3,921 |
|
|
|
3,854 |
|
|
Total
|
|
|
11 |
|
|
$ |
783,678 |
|
|
$ |
285,781 |
|
|
$ |
781,822 |
|
|
$ |
254,035 |
|
Amortization
of license agreements, product rights and other intangibles was charged to
selling, general and administrative expense for fiscal years ended March 2009,
2008 and 2007 and amounted to approximately $53,241, $44,646 and $54,736,
respectively. Future annual amortization expense expected is as
follows:
|
Years
ending March 31,
|
|
|
|
|
2010
|
|
$ |
30,675 |
|
|
2011
|
|
|
22,397 |
|
|
2012
|
|
|
38,186 |
|
|
2013
|
|
|
42,020 |
|
|
2014
|
|
|
42,303 |
|
|
|
|
$ |
175,581 |
|
In
January 2009, the Company received marketing approval for Savella™, its
selective serotonin and norepinephrine dual reuptake inhibitor for the
management of fibromyalgia. Upon approval, the Company paid Cypress
Bioscience, Inc., its licensor for the product, $25,000. This
milestone payment is currently being amortized using the straight-line method
over the useful life of the product and is being recorded to selling, general
and administrative expense.
In fiscal
2009, the Company entered into two license agreements: the first was with
Phenomix Corporation to co-develop and co-promote dutogliptin, a proprietary
orally administered, small molecule dipeptidyl-peptidase-4 (DPP-4) inhibitor
that is being developed for Type II diabetes. The second was with
Pierre Fabre Medicament to develop and commercialize F2695, a propriety
selective norepinephrine and serotonin reuptake inhibitor that is being
developed for the treatment of depression and other central nervous system
disorders. Pursuant to each of these agreements, the Company paid an
upfront license fee of $75,000 to each partner. These fees were
recorded to research and development expense since these products are in the
early stages of development.
In fiscal
2008, the Company made a milestone payment of $20,000 to Daiichi Sankyo (or
Sankyo) for the co-promotion rights to Azor®. In May 2008 the Company
and Sankyo terminated this co-promotion agreement for Azor, effective July 1,
2008. As a result of terminating the agreement, the Company recorded
a one-time charge of approximately $44,100 to selling, general and
administrative expense which was comprised of a termination fee of approximately
$26,600 and $17,500 related to the unamortized portion of the initial upfront
payment.
In
December 2007, the Company received marketing approval from the FDA for
Bystolic®, its beta-blocker for the treatment of hypertension. Upon
approval, the Company paid Mylan Inc. (or Mylan), its licensor for the product,
$25,000. This milestone payment is currently being amortized using
the straight-line method over the useful life of the product and is being
recorded to selling, general and administrative expense. In February
2008, the Company and Mylan amended their agreement which terminated Mylan’s
further commercial rights for Bystolic and reduced the Company’s future payment
obligations to Mylan. Pursuant to the amendment, the Company paid
Mylan $370,000 and remains obligated to pay Mylan its original contractual
royalties for a period of three years after which the royalty rate will be
reduced. The payment will be amortized over its useful life,
beginning in the fourth quarter of fiscal 2011 through patent expiry in fiscal
2022. Amortization will be recorded in proportion to revenues, based
on forecasted sales reconciled periodically. This amount was recorded
to Buy-out of royalty agreements.
In fiscal
2008, the Company entered into two license agreements: the first was with
Ironwood Pharmaceuticals, Inc. (or Ironwood) for their first-in-class compound
linaclotide, currently being developed for the treatment of constipation
predominant irritable bowel syndrome and chronic constipation. The
second was with Novexel, S.A. (or Novexel) for the development of Novexel’s
novel intravenous beta-lactamase inhibitor, NXL104 in combination with the
Company’s ceftaroline. Pursuant to these agreements, the Company paid
upfront license fees of $70,000 to Ironwood and $110,000 to Novexel. These
upfront payments were recorded to research and development expense since these
products are in the early stages of development.
Also in
fiscal 2008, the Company determined that certain license agreements and product
rights were impaired due to a significant reduction in sales of those products
because of heightened competition which amounted to $5,080. All
impairments were included in amortization expense.
10. Accrued expenses
(In
thousands):
Accrued
expenses consist of the following:
|
March
31,
|
|
2009
|
|
|
2008
|
|
|
Managed
care and Medicaid rebates
|
|
$ |
213,384 |
|
|
$ |
173,705 |
|
|
Employee
compensation and other benefits
|
|
|
101,041 |
|
|
|
111,129 |
|
|
Clinical
research and development costs
|
|
|
51,085 |
|
|
|
65,608 |
|
|
Reserve
for USAO investigation (see Note 14)
|
|
|
170,000 |
|
|
|
|
|
|
Other
|
|
|
165,126 |
|
|
|
36,663 |
|
|
|
|
$ |
700,636 |
|
|
$ |
387,105 |
|
11. Debt facility
(In
thousands):
On
December 7, 2007, the Company established a $500,000 revolving credit facility
for the purpose of providing additional financial liquidity for the financing of
business development and corporate strategic initiatives. The
facility can be increased up to $750,000 based upon agreement with the
participating lenders and expires on December 7, 2012. As of May 28,
2009, the Company has not drawn any funds from the available
credit. The utilization of the revolving credit facility is subject
to the adherence to certain financial covenants such as leverage and interest
coverage ratios.
12. Commitments
(In
thousands):
Leases: The
Company leases manufacturing, office and warehouse facilities, equipment and
automobiles under operating leases expiring through fiscal 2018. Rent
expense approximated $35,857, $34,630 and $33,149 for fiscal years ended March
31, 2009, 2008 and 2007, respectively. Future minimum rental payments
under noncancellable leases are as follows:
|
Years
ending March 31,
|
|
|
|
|
2010
|
|
$ |
35,438 |
|
|
2011
|
|
|
28,605 |
|
|
2012
|
|
|
19,162 |
|
|
2013
|
|
|
13,310 |
|
|
2014
|
|
|
12,249 |
|
|
Thereafter
|
|
|
36,469 |
|
|
|
|
$ |
145,233 |
|
Royalty agreements: The
Company has royalty agreements on certain of its licensed
products. Royalties are paid based on a percentage of sales, as
defined. For fiscal years ended March 31, 2009, 2008 and 2007,
royalty expense amounted to $616, $1,071 and $4,742, respectively.
License agreements: The
Company has entered into several license and collaboration agreements for
products currently under development. Pursuant to these agreements,
the Company may be obligated in future periods to make additional milestone
payments totaling approximately $966,000. These milestone payments
become due and are payable only upon the achievement of certain research and
development (approximately $460,000) and regulatory approval (approximately
$506,000) milestones. The specific timing of such milestones cannot
be predicted and depend upon future clinical developments as well as regulatory
agency actions which cannot be predicted with certainty (including actions which
may never occur). Further, under the terms of certain licensing
agreements, the Company may be obligated to pay commercial milestones contingent
upon the achievement of specific sales levels. Due to the long-range
nature of such commercial milestone amounts, they are neither probable at this
time nor predictable.
Inventory purchase commitments:
The Company has inventory purchase commitments of $112,256 as of March
31, 2009.
13. Stockholders' equity
(In thousands, except
per share data):
In August
2007, the stockholders of the Company voted to adopt the 2007 Equity Incentive
Plan (or the 2007 Plan) which replaces and supersedes all prior stock option
plans. Under the 2007 Plan, 13,950 shares were authorized to be
issued to employees of the Company and its subsidiaries at prices not less than
the fair market value of the common stock at the date of grant. The
2007 Plan provides for the granting of incentive and nonqualified stock options,
restricted stock, stock appreciation rights and stock equivalent
units. These awards generally vest in three to five
years. Stock option grants may be exercisable for up to ten years
from the date of issuance.
The
following table summarizes information about stock options outstanding at March
31, 2009:
| |
|
|
Options
outstanding
|
|
|
Options
exercisable
|
|
|
Range
of exercise prices
|
|
|
Number
outstanding
|
|
|
Weighted
average remaining contractual life
(in
years)
|
|
|
Weighted
average exercise price
|
|
|
Number
exercisable
|
|
|
Weighted
average exercise price
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ |
12.29 to $30.00 |
|
|
|
3,283 |
|
|
|
6.2 |
|
|
$ |
19.86 |
|
|
|
1,288 |
|
|
$ |
13.35 |
|
|
30.01 to 50.00
|
|
|
|
12,564 |
|
|
|
4.2 |
|
|
|
39.74 |
|
|
|
7,448 |
|
|
|
39.55 |
|
|
50.01 to 76.66
|
|
|
|
3,006 |
|
|
|
4.0 |
|
|
|
54.18 |
|
|
|
1,739 |
|
|
|
55.99 |
|
| |
|
|
|
|
18,853 |
|
|
|
4.5 |
|
|
|
38.58 |
|
|
|
10,475 |
|
|
|
39.05 |
|
Transactions
under the stock option plan are summarized as follows:
|
|
|
Shares
|
|
|
Weighted
average exercise price
|
|
|
Weighted
average remaining contractual life (in years)
|
|
|
Aggregate
intrinsic value
|
|
|
Stock
options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2006 (at $4.55 to $76.66 per share)
|
|
|
24,065 |
|
|
$ |
33.98 |
|
|
|
|
|
|
|
|
Granted
(at $38.94 to $51.54 per share)
|
|
|
3,859 |
|
|
|
49.35 |
|
|
|
|
|
|
|
|
Exercised
(at $4.55 to $53.23 per share)
|
|
|
( 8,568 |
) |
|
|
24.84 |
|
|
|
|
|
|
|
|
Forfeited
|
|
|
( 1,132 |
) |
|
|
38.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2007 (at $5.64 to $76.66 per share)
|
|
|
18,224 |
|
|
|
40.91 |
|
|
|
|
|
|
|
|
Granted
(at $37.26 to $51.96 per share)
|
|
|
3,248 |
|
|
|
38.68 |
|
|
|
|
|
|
|
|
Exercised
(at $5.64 to $53.23 per share)
|
|
|
( 734 |
) |
|
|
36.68 |
|
|
|
|
|
|
|
|
Forfeited
|
|
|
( 1,444 |
) |
|
|
44.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2008 (at $9.77 to $76.66 per share)
|
|
|
19,294 |
|
|
|
40.38 |
|
|
|
|
|
|
|
|
Granted
(at $20.55 to $38.33 per share)
|
|
|
2,989 |
|
|
|
28.62 |
|
|
|
|
|
|
|
|
Exercised
(at $9.77 to $38.94 per share)
|
|
|
( 715 |
) |
|
|
14.88 |
|
|
|
|
|
|
|
|
Forfeited
|
|
|
( 2,715 |
) |
|
|
46.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2009 (at $12.29 to $76.66 per share)
|
|
|
18,853 |
|
|
$ |
38.58 |
|
|
|
4.5 |
|
|
$ |
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at March 31, 2009
|
|
|
10,475 |
|
|
$ |
39.05 |
|
|
|
2.8 |
|
|
$ |
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
average grant date fair value
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
453 |
|
|
$ |
37.33 |
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
( 2 |
) |
|
|
39.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2008
|
|
|
451 |
|
|
|
37.32 |
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,086 |
|
|
|
25.44 |
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
( 133 |
) |
|
|
37.31 |
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
( 44 |
) |
|
|
36.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2009
|
|
|
1,360 |
|
|
$ |
27.87 |
|
|
|
|
|
|
|
|
|
At March
31, 2009, 6,293 shares were available for grant.
The total
intrinsic value of stock options exercised during the years ended March 31,
2009, 2008 and 2007 was $8,234, $9,461, and $203,105, respectively, and the
total intrinsic value of restricted stock vested during the years ended March
31, 2009 and 2008 was $3,366 and $62, respectively. The weighted
average grant date fair value per stock option granted during the years ended
March 31, 2009, 2008 and 2007 were $11.19, $15.20 and $16.52,
respectively. The total cash received as a result of stock option
exercises for the years ended March 31, 2009, 2008 and 2007 was approximately
$10,630, $26,655 and $210,920, respectively. In connection with these
exercises, the tax benefit realized was $2,419, $1,755 and $80,225,
respectively. The Company settles employee stock option exercises
with newly issued common shares.
14. Contingencies
(In
thousands):
The
Company remains a defendant in actions filed in various federal district courts
alleging certain violations of the federal anti-trust laws in the marketing of
pharmaceutical products. In each case, the actions were filed against
many pharmaceutical manufacturers and suppliers and allege price discrimination
and conspiracy to fix prices in the sale of pharmaceutical
products. The actions were brought by various pharmacies (both
individually and, with respect to certain claims, as a class action) and seek
injunctive relief and monetary damages. The Judicial Panel on
Multi-District Litigation ordered these actions coordinated (and, with respect
to those actions brought as class actions, consolidated) in the Federal District
Court for the Northern District of Illinois (Chicago) under the caption “In re Brand Name Prescription Drugs
Antitrust Litigation.”
On
November 30, 1998, the defendants remaining in the consolidated federal class
action (which proceeded to trial beginning in September 1998), including the
Company, were granted a directed verdict by the trial court after the plaintiffs
had concluded their case. In ruling in favor of the defendants, the
trial judge held that no reasonable jury could reach a verdict in favor of the
plaintiffs and stated “the evidence of conspiracy is meager, and the evidence as
to individual defendants paltry or non-existent.” The Court of
Appeals for the Seventh Circuit subsequently affirmed the granting of the
directed verdict in the federal class case in the Company’s favor.
Following
the Seventh Circuit’s affirmation of the directed verdict in the Company’s
favor, the Company secured the voluntary dismissal of the conspiracy allegations
contained in all of the federal cases brought by individual plaintiffs who
elected to “opt-out” of the federal class action, which cases were included in
the coordinated proceedings, as well as the dismissal of similar conspiracy and
price discrimination claims pending in various state courts. The
Company remains a defendant, together with other manufacturers, in many of the
federal opt-out cases included in the coordinated proceedings to the extent of
claims alleging price discrimination in violation of the Robinson-Patman
Act. While no discovery or other significant proceedings with respect
to the Company has been taken to date in respect of such claims, there can be no
assurance that the Company will not be required to actively defend such claims
or to pay substantial amounts to dispose of such claims. However, by
way of a decision dated January 25, 2007, the judge handling the Robinson-Patman
Act cases for certain of a smaller group of designated defendants whose claims
are being litigated on a test basis, granted summary judgment to those
designated defendants due to plaintiffs’ failure to demonstrate any antitrust
injury. Subsequently, the Court also granted the designated
defendants’ motion for summary judgment with respect to plaintiffs’ effort to
obtain injunctive relief. It is likely that the plaintiffs will
pursue an appeal of both rulings.
In
December 2008, the Company entered into a definitive Stipulation of Settlement
with respect to consolidated securities class action cases pending against the
Company and certain of its executive officers in the United States District
Court for the Southern District of New York under the caption “In re Forest Laboratories, Inc.
Securities Litigation” pursuant to which the Company paid $65 million to
settle these actions. The cases alleged that defendants made
materially false and misleading statements and omitted to state material facts
with respect to the Company’s drugs for the treatment of
depression. The settlement was approved by the Court following a
hearing held in April 2009. While the Company believes a majority of
the settlement will be covered by its insurance and is engaged in discussions
with the carriers concerning their liability for payment, the Company has
recorded a $25 million provision in connection with this
settlement. In addition, the Company’s directors and certain of its
officers have been named as defendants in two derivative actions purportedly
brought on behalf of the Company, filed in the same Court and consolidated under
the caption “In re Forest
Laboratories, Inc. Derivative Litigation, 05-CV-3489
(RJH).” The complaints in these derivative actions allege that
the defendants have breached their fiduciary duties by, among other things,
causing Forest to misrepresent its financial results and prospects, selling
shares of its common stock while in possession of proprietary non-public
information concerning its financial condition and future prospects, abusing its
control and mismanaging the Company and wasting corporate assets. The
complaint seeks damages in an unspecified amount and various forms of equitable
relief. In September 2006, the Court granted the Company’s motion to
dismiss this case on the ground that the plaintiffs failed to make a pre-suit
demand on its Board of Directors. By stipulation, plaintiffs appeal
of this decision to the United States Court of Appeals for the Second Circuit
and any other actions in this litigation have been stayed until June 30,
2009.
In April
2009, a new derivative action captioned Arnold Wandel, derivatively,
Plaintiff vs. Howard Solomon, Lawrence S. Olanoff, et al, Defendants and Forest
Laboratories, Inc. and Forest Pharmaceuticals, Inc., Nominal Defendants
was filed in New York State Supreme Court, alleging that the Company’s directors
and certain of its officers breached their fiduciary duties to the Company in
connection with disclosure of Celexa and Lexapro pediatric studies and alleged
improper marketing of Celexa and Lexapro, and thereby caused the Company to be
harmed by incurring the $65 million settlement of the securities class action
described above and exposed the Company to possible damages and fines in
connection with the matters alleged in the amended complaint filed by the United
States Government in the qui
tam actions described below. The complaint also alleges that
some defendants sold shares of the Company’s stock at inflated prices and
thereby harmed the Company (even though the shares were not purchased by the
Company). Most of the substantive allegations in this complaint
(other than those relating specifically to the recently filed amended complaint
in the qui tam actions
described below) were also made in the derivative action in federal court
described above which was dismissed because the plaintiffs did not make a
pre-suit demand on the Company’s Board of Directors. The Company
intends to vigorously defend this action.
Forest
Laboratories, Inc. and Forest Pharmaceuticals, Inc. are named, in one capacity
or another, as defendants, along with numerous other manufacturers of
pharmaceutical products in various actions which allege that the plaintiffs (all
governmental entities) were overcharged for their share of Medicaid drug
reimbursement costs as a result of reporting by manufacturers of “average
wholesale prices” (or AWP) which did not correspond to actual provider costs of
prescription drugs. Actions brought by nearly all of the counties of
the State of New York (first action commenced January 14, 2003) and by the State
of Iowa (commenced October 9, 2007) are pending in the United States District
Court for the District of Massachusetts under the caption “In re Pharmaceutical Industry AWP
Litigations” for coordinated treatment. In addition, various
state court actions are pending in actions brought by the States of Alabama
(commenced January 26, 2005), Alaska (commenced October 6, 2006), Hawaii
(commenced April 27, 2006), Idaho (commenced June 8, 2007), Illinois (commenced
February 7, 2005), Mississippi (commenced October 20, 2005), and Kansas
(commenced November 3, 2008), as well as actions brought by the Commonwealth of
Kentucky (commenced November 4, 2004) and the State of Utah (commenced in May
2008). Furthermore, state court actions pending in the State Court of
New York were brought by three of the New York counties, Erie (commenced March
8, 2005), Schenectady (commenced May 10, 2006) and Oswego (commenced May 11,
2006).
Motions
to dismiss have been filed with respect to most of the actions. While
the motions to dismiss largely have been denied, some claims have been
dismissed, including RICO claims brought by various New York counties whose
remaining claims are pending in the MDL proceeding in
Massachusetts. The Utah motion was granted with leave to
replead. Discovery is ongoing. As of the date of this
report, a trial is scheduled with respect to Forest in Hawaii on July 5,
2010. In May 2009, several defendants, including the Company, reached
an agreement in principle to settle the action brought by the State of
Alabama. The Company’s share of the settlement payment is not
material to the Company’s financial condition or results of operations and is
fully covered by established reserves. It is not anticipated that any
other trials involving the Company will take place before the end of calendar
2010.
The
United States Attorney’s Office for the District of Massachusetts is
investigating whether the Company may have committed civil or criminal
violations of the federal “Anti-Kickback” laws and laws and regulations related
to “off-label” promotional activities in connection with our marketing of
Celexa, Lexapro and other products. As part of this investigation,
the Company received a subpoena from the Office of Inspector General of the
Federal Office of Personnel Management requesting documents relating to Celexa
and have subsequently received further subpoenas from the United States
Attorney’s Office concerning Lexapro and other products, including Namenda and
Combunox. The subpoenas request documents relating to a broad range
of its marketing and promotional activities during the period from January 1,
1997 to the present. In April 2006, the Company received an
additional subpoena from the United States Attorney’s Office for the District of
Massachusetts requesting documents concerning its manufacture and marketing of
Levothroid, our levothyroxine supplement for the treatment of
hypothyroidism. The Company understands that this subpoena was issued
in connection with that office’s investigation of potential civil or criminal
violation of federal health laws in connection with Levothroid. In
connection with this investigation, in February 2009 the United States
Attorney’s Office filed an amended complaint against the Company in two qui tam lawsuits relating to
the Company’s marketing practices which had been filed under
seal. The amended complaint, under the caption “United States of America ex rel.
Christopher R. Gobble, et al. v. Forest Laboratories, Inc. and Forest
Pharmaceuticals, Inc.; United States of America ex rel. Joseph Piacentile, et
al. v. Forest Laboratories, Inc.” was made publicly available in February
2009. The amended complaint details allegations of the government’s
view of the Company’s conduct and includes allegations with respect to off-label
promotion, activities deemed to be “kickbacks” and disclosure issues relating to
a failed pediatric trial of Lexapro. The Company is continuing to
cooperate with this investigation and to discuss these issues with the
government. During fiscal 2009, the Company recorded an expense of
$170 million in connection with this investigation and
litigation. There can be no assurance that a negotiated resolution of
these matters can be achieved or that any such resolution will not require
payments in excess of this reserve.
In March
2009, the Company was named as a defendant in two actions purportedly brought as
class actions on behalf of various persons and entities that purchased or
reimbursed the purchase of Celexa or Lexapro from 1998 to the present for use by
a minor. One such action, captioned “Universal Care, Inc., Angela
Jaeckel and Melvin M. Fullmer v. Forest Pharmaceuticals, Inc. and Forest
Laboratories, Inc.”, was brought in the United States District Court for
the Eastern District of Missouri; the other action is captioned “New Mexico UFCW Union’s and
Employers’ Health and Welfare Trust Fund v. Forest Laboratories, Inc., Forest
Pharmaceuticals, Inc., Pfizer, Inc. and Warner Lambert Company” and was
brought in the United States District Court for the Eastern District of New
York. The cases allege Federal and state law causes of action arising
from the Company’s marketing of Celexa and Lexapro. The Company
intends to vigorously defend against these actions, which are in the preliminary
stage. The Company has initially filed a motion to consolidate these actions,
together with any similar actions which may be filed in the future, in a
multi-district proceeding.
The
Company received a subpoena dated January 26, 2006 from the United States
Attorney’s Office for the District of Massachusetts requesting documents related
to its commercial relationship with Omnicare, Inc. (or Omnicare), a long-term
care pharmacy provider, including but not limited to documents concerning its
contracts with Omnicare, and rebates and other payments made by the Company to
Omnicare. The Company understands that the subpoena was issued in
connection with that office’s investigation of potential criminal violations of
federal healthcare laws by Omnicare and potentially others and is cooperating in
this investigation.
In
September 2007, the United States Court of Appeals for the Federal Circuit
upheld the validity of the Company’s composition of matter patent covering
Lexapro and the decision of the United States District Court for the District of
Delaware granting the Company an injunction preventing Teva Pharmaceuticals (or
Teva) from marketing a generic version of Lexapro. In July 2006, the
Company and Lundbeck commenced similar patent infringement litigation against
Caraco Pharmaceutical Laboratories, Ltd. (or Caraco), who had filed an ANDA with
the FDA seeking to market a generic equivalent to Lexapro, in the United States
District Court for the Eastern District of Michigan under the caption Forest Laboratories, Inc. et al. v.
Caraco Pharmaceutical Laboratories, Ltd. et al. Caraco has
stipulated to infringing the Company’s patent leaving only its invalidity
defenses to be litigated. A five day bench trial originally scheduled
to begin on April 27, 2009 was adjourned until June 1,
2009.
In
February 2007, Caraco filed a single-count declaratory judgment action against
the Company and Lundbeck in the United States District Court for the Eastern
District of Michigan for non-infringement of a different patent for Lexapro that
is listed in the FDA’s Orange Book. After Forest and Lundbeck granted
Caraco an irrevocable covenant not to sue, Chief Judge Freidman dismissed
Caraco’s action for lack of subject matter jurisdiction. On April 1,
2008, a three-judge panel of the United States Court of Appeals for the Federal
Circuit reversed and remanded Chief Judge Freidman’s decision. The
Company’s requests for panel rehearing and rehearing en banc at the Federal
Circuit and certiorari
at the Supreme Court were unsuccessful. Accordingly, the case is
proceeding in the district court with a trial scheduled to begin on October 27,
2009.
In
January 2009, Caraco also filed a single-count declaratory judgment action
against the Company and Lundbeck in the United States District Court for the
Eastern District of Michigan for non-infringement of a third patent for Lexapro
that is listed in the FDA’s Orange Book. In March 2009, the Company
filed its Answer denying Caraco’s claim and counterclaiming for patent
infringement. No case schedule or trial date has been
set.
Beginning
in January 2008, the Company and Merz Pharma GmbH, our licensor for Namenda,
commenced a series of patent infringement lawsuits in the United States District
Court for the District of Delaware and other districts, including the United
States District Court for the Eastern District of North Carolina, against
several companies (including Teva, Mylan and Barr Laboratories, Inc.) who have
notified us that they have filed ANDAs with the FDA seeking to obtain approval
to market generic versions of Namenda. The lawsuits filed in
districts other than Delaware were withdrawn after all but two defendants
consented to jurisdiction in Delaware. The cases in Delaware have
been consolidated under the caption Forest Laboratories, Inc. et al. v.
Cobalt Laboratories Inc. et al. Two defendants have contested
jurisdiction in such court and have moved to dismiss for lack of personal
jurisdiction. The magistrate judge issued a Report and Recommendation
in March 2009, finding that the cases against those defendants should be
transferred to the District of New Jersey. The issue will now be
considered by the district court judge. This action is currently in
the discovery phase, with fact discovery currently scheduled to close on June 1,
2009 and expert discovery scheduled to be completed by September 11,
2009. A trial date has been set for April 5, 2010.
On July
14, 2006, the Company was named as a defendant, together with approximately 20
other pharmaceutical manufacturers and wholesalers in an action brought by RxUSA
Wholesale, Inc. in the United States District Court for the Eastern District of
New York under the caption RxUSA Wholesale, Inc. v. Alcon
Laboratories, et al. The action alleges various antitrust and
related claims arising out of an alleged concerted refusal by the defendant
manufacturers and wholesalers to sell prescription drugs to plaintiff, a
secondary drug wholesaler. Motions to dismiss have been filed by all
of the defendants, and those motions are now sub judice before the
court.
In April
2006, an action was commenced in the United States District Court for the
Southern District of New York against the Company and Lundbeck under the caption
Infosint S.A. v. H. Lundbeck
A/S, H. Lundbeck Inc. and Forest Laboratories, Inc. In the
action, the plaintiff alleges that the importation and sale in the United States
of “citalopram products” by Lundbeck and the Company infringes certain claims of
a manufacturing process patent owned by plaintiff. The action seeks
injunctive relief as well as damages under U.S. patent laws. The
Company believes that the plaintiff’s claim is without
merit. Further, the Company believes that its license agreements with
Lundbeck require Lundbeck to indemnify the Company from the cost of defending
this action and from any associated damages or awards. A trial is
scheduled to begin on September 28, 2009.
The
Company has been named in approximately 75 product liability lawsuits that
remain active. Most of the lawsuits allege that Celexa or Lexapro
caused or contributed to individuals committing or attempting
suicide. Twenty-seven of these lawsuits allege that Celexa or Lexapro
caused birth defects or persistent pulmonary hypertension in
newborns. The suits seek substantial compensatory and punitive
damages. The Company is vigorously defending these
suits. A multi-district proceeding (or MDL) has been established for
the suicidality-related litigation, with the federal court cases being
transferred to Judge Rodney Sippel in the United States District Court for the
Eastern District of Missouri. Except for two federal court cases, the
birth defect cases have been consolidated in Cole County Circuit Court in
Missouri.
The
Company expects the MDL will ease the burden of defending these
cases. While litigation is inherently subject to uncertainty and
accordingly the Company cannot predict or determine the outcome of this
litigation, the Company believes there is no merit to these actions and that the
consolidated proceedings will promote the economical and efficient resolution of
these lawsuits and provides the Company with a meaningful opportunity to
vindicate the Company’s products. The Company currently maintains
$140 million of product liability coverage per “occurrence” and in the
aggregate.
The
Company received two subpoenas dated April 27, 2007 from the Office of the
Attorney General of the State of Delaware requesting documents relating to its
use of the “nominal price” exception to the Medicaid program’s “Best Price”
rules. The Company understands that comparable subpoenas have been or will
be issued to other pharmaceutical manufacturers as part of that office’s
investigation of the use of the “nominal price” exception. The
Company has complied with the subpoenas.
The
Company is also subject to various legal proceedings that arise from time to
time in the ordinary course of its business. Although the Company
believes that the proceedings brought against it, including the product
liability cases described above, are without merit and it has product liability
and other insurance, litigation is subject to many factors which are difficult
to predict and there can be no assurance that the Company will not incur
material costs in the resolution of these matters.
15. Income taxes
(In
thousands):
The
components of income before income tax expense were:
|
Years ended March 31,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$ |
238,219 |
|
|
$ |
440,271 |
|
|
$ |
( 26,935 |
) |
|
Foreign
|
|
|
732,315 |
|
|
|
770,126 |
|
|
|
735,779 |
|
|
Income
before income tax expense
|
|
$ |
970,534 |
|
|
$ |
1,210,397 |
|
|
$ |
708,844 |
|
The
provision for income taxes consists of the following:
|
Years ended March 31,
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
U.S.
federal
|
|
$ |
149,739 |
|
|
$ |
194,491 |
|
|
$ |
248,846 |
|
|
State
and local
|
|
|
20,263 |
|
|
|
18,139 |
|
|
|
15,397 |
|
|
Foreign
|
|
|
46,884 |
|
|
|
56,885 |
|
|
|
61,230 |
|
|
|
|
|
216,886 |
|
|
|
269,515 |
|
|
|
325,473 |
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
( 11,943 |
) |
|
|
( 26,549 |
) |
|
|
( 79,147 |
) |
|
Foreign
|
|
|
( 2,152 |
) |
|
|
( 502 |
) |
|
|
8,415 |
|
|
|
|
|
( 14,095 |
) |
|
|
( 27,051 |
) |
|
|
( 70,732 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
202,791 |
|
|
$ |
242,464 |
|
|
$ |
254,741 |
|
The
reasons for the difference between the provision for income taxes and expected
federal income taxes at statutory rates are as follows:
|
Years
ended March 31, (percentage of income
before income tax
expense)
|
|
2009
|
|
2008
|
|
2007
|
|
U.S.
statutory rate
|
|
35.0%
|
|
35.0%
|
|
35.0%
|
|
Acquired
in-process research and development
|
|
|
|
|
|
23.5
|
|
Effect
of foreign operations
|
|
(18.9)
|
|
(14.5)
|
|
(21.8)
|
|
Research
credit
|
|
( 1.3)
|
|
( 1.6)
|
|
( 2.2)
|
|
State
and local taxes, less federal tax benefit
|
|
0.7
|
|
1.4
|
|
2.4
|
|
Government
investigation
|
|
3.1
|
|
0.0
|
|
0.0
|
|
Permanent
differences and other items
|
|
2.3
|
|
( 0.3)
|
|
( 1.0)
|
|
|
|
20.9%
|
|
20.0%
|
|
35.9%
|
The
Company’s effective tax rate for fiscal years 2009 and 2008 is lower than the
federal statutory rate principally as a result of the proportion of earnings
generated in lower-taxed foreign jurisdictions as compared with the United
States. The Company's effective tax rate in fiscal 2007 was higher
than the federal statutory rate principally as a result of the in-process
R&D expensed as part of the Cerexa acquisition completed in January
2007.
Net
deferred income taxes relate to the following timing differences:
|
March
31,
|
|
2009
|
|
|
2008
|
|
|
Inventory
reserves
|
|
$ |
53,505 |
|
|
$ |
47,278 |
|
|
Receivable
allowances and other reserves
|
|
|
40,302 |
|
|
|
93,900 |
|
|
Depreciation
|
|
|
1,430 |
|
|
|
( 2,097 |
) |
|
Amortization
|
|
|
82,871 |
|
|
|
52,212 |
|
|
Carryforwards
and credits
|
|
|
73,305 |
|
|
|
81,334 |
|
|
Accrued
liabilities
|
|
|
12,732 |
|
|
|
21,548 |
|
|
Employee
stock option tax benefits
|
|
|
8,455 |
|
|
|
1,932 |
|
|
Other
(includes reserve for legal contingencies)
|
|
|
67,242 |
|
|
|
12,723 |
|
|
|
|
|
339,842 |
|
|
|
308,830 |
|
|
Valuation
allowance
|
|
|
( 21,273 |
) |
|
|
( 23,772 |
) |
|
Deferred
taxes, net
|
|
$ |
318,569 |
|
|
$ |
285,058 |
|
The
Company has certain state and local net operating loss carryforwards as well as
excess charitable contribution carryovers which are available to reduce future
U.S. federal and state taxable income, expiring at various times between 2009
and 2025. Although not material, valuation allowances have been
established for a portion of deferred tax assets acquired as part of the Cerexa
purchase as the Company determined that it was more likely than not that these
benefits will not be realized.
No
provision has been made for income taxes on the undistributed earnings of the
Company’s foreign subsidiaries of approximately $3,367,794 at March 31, 2009 as
the Company intends to indefinitely reinvest such earnings.
The
Company accrues liabilities for identified tax contingencies that result from
positions that are being challenged or could be challenged by tax
authorities. The Company believes that its accrual for tax
liabilities is adequate for all open years, based on Management’s assessment of
many factors, including its interpretations of the tax law and judgments about
potential actions by tax authorities. However, it is possible that
the ultimate resolution of any tax audit may be materially greater or lower than
the amount accrued.
The
Company’s income tax returns for fiscal years prior to 1999 in most
jurisdictions and prior to 2002 in Ireland are no longer subject to review as
such fiscal years are generally closed. Tax authorities in various
jurisdictions are in the process of reviewing the Company’s tax returns for
various post-1999 fiscal years, including the Internal Revenue Service (or IRS),
which has concluded its examination of the Company’s U.S. federal income tax
returns for fiscal 2002 and 2003. In connection with that
examination, in July 2007, the IRS issued a notice of proposed adjustment
primarily relating to the Company’s intercompany transfer pricing
methodology. On November 5, 2007, the IRS issued a Revenue Agent
Report which seeks to assess approximately $206.7 million of additional U.S.
corporation income tax relating to the examination period, excluding interest
and penalties. The Company continues to disagree with the IRS
position and adjustment because it believes that it is inconsistent with
applicable tax laws and the Company intends to defend its position
vigorously. In accordance with the Company’s taxpayer appeals rights,
a formal written protest of the proposed adjustment has been filed with the IRS
and the matter is in administrative appeals.
While the
resolution of this issue may result in tax liabilities that are greater or less
than the reserves established, Management believes that the ultimate resolution
will not have a material effect on the Company’s financial position or
liquidity. If the IRS prevails in a position that increases the U.S.
tax liability in excess of established reserves, it is likely that the IRS could
make similar claims for years subsequent to fiscal 2003 which could be
material. At this time Management believes that it is unlikely that
the ultimate outcome will be determined within the next 12 months.
As of
March 31, 2009, the Company’s consolidated balance sheet reflects UTBs (or
unrecognized tax benefits) of $228,534, of which $213,866 would impact the
effective tax rate if recognized. A reconciliation of the beginning
and ending amount of UTBs is as follows:
(In
thousands)
|
|
|
2009
|
|
|
2008
|
|
|
Balance
as of April 1
|
|
$ |
178,471 |
|
|
$ |
143,605 |
|
|
Additions
related to prior year positions
|
|
|
26,264 |
|
|
|
16,883 |
|
|
Reduction
related to prior year positions
|
|
|
( 15,885 |
) |
|
|
( 24,435 |
) |
|
Additions
related to current year positions
|
|
|
39,684 |
|
|
|
42,418 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of March 31
|
|
$ |
228,534 |
|
|
$ |
178,471 |
|
The
Company recorded interest related to UTBs in income tax expense and related
liability accounts on the balance sheet. During the fiscal years
ended March 31, 2009 and 2008, the Company recognized $15,915 and $9,599 of
interest and penalties, respectively. Accrued interest related to
UTBs totaled $35,854 and $19,939 as of March 31, 2009 and 2008,
respectively.
It is
anticipated that the amount of UTBs will not change significantly within the
next 12 months.
16. Quarterly financial
data (unaudited) (In
thousands, except per share data):
(In
thousands, except per share data)
|
|
|
Net
sales
|
|
|
Gross
profit
|
|
|
Net
income
|
|
|
Diluted
earnings per share
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
$ |
893,745 |
|
|
$ |
696,405 |
|
|
$ |
242,920 |
|
|
$ |
0.79 |
|
|
Second
quarter
|
|
|
925,570 |
|
|
|
720,569 |
|
|
|
244,086 |
|
|
|
0.80 |
|
|
Third
quarter
|
|
|
920,013 |
|
|
|
713,359 |
|
|
|
187,975 |
|
|
|
0.62 |
|
|
Fourth
quarter
|
|
|
896,727 |
|
|
|
689,042 |
|
|
|
92,762 |
|
|
|
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
$ |
842,616 |
|
|
$ |
656,376 |
|
|
$ |
268,162 |
|
|
$ |
0.83 |
|
|
Second
quarter
|
|
|
842,337 |
|
|
|
652,345 |
|
|
|
225,244 |
|
|
|
0.71 |
|
|
Third
quarter
|
|
|
918,146 |
|
|
|
704,640 |
|
|
|
301,757 |
|
|
|
0.96 |
|
|
Fourth
quarter
|
|
|
898,703 |
|
|
|
688,327 |
|
|
|
172,770 |
|
|
|
0.55 |
|
AND
RESULTS OF OPERATIONS
(Dollar
amounts in thousands)
General
This year
marked continued growth of our key marketed products, continued investment in
research and development to enhance and develop our current pipeline of products
and support behind a new product launch in April 2009. For the fiscal
year ended March 31, 2009, total net revenues increased by $86,453 to a record
high of $3,922,782 as a result of increased sales growth of our key marked
products Lexapro® and Namenda®, despite a decrease in Lexapro’s market
share. Also contributing to this increase were sales of Bystolic®, a
beta-blocker for the treatment of hypertension launched in January
2008.
During
the fourth fiscal quarter, we provided a $170,000 pretax expense in connection
with ongoing discussions with the United States Department of Justice (or DOJ)
arising out of the investigations led by the U.S. Attorney’s Office for the
District of Massachusettes (or USAO) into marketing, promotional and other
activities primarily in connection with Lexapro, Celexa® and
Levothroid®. These discussions with the DOJ have not yet concluded,
and there can be no assurance as to when they will conclude or whether they will
lead to a negotiated resolution, or the amount of any settlement that may be
reached. Accordingly, until the investigation is resolved, there can
be no assurance that the amount we reserved will be sufficient and that a larger
material amount will not be required.
On March
20, 2009, we received approval from the United States Food and Drug
Administration (or FDA) for our supplemental New Drug Application (or sNDA) for
Lexapro (escitalopram oxalate) for the acute and maintenance treatment of Major
Depressive Disorder (MDD) in adolescents, 12-17 years of age.
On
January 14, 2009, we along with our licensing partner Cypress Bioscience, Inc.
(or Cypress) received marketing approval for Savella™ (milnacipran
HCl). Savella is a selective serotonin and norepinephrine reuptake
inhibitor for the management of fibromyalgia. Pursuant to our
licensing agreement with Cypress, we made a milestone payment of $25,000 upon
FDA approval. Savella became available to trade channels in April
2009 at which time we began detailing to physicians.
In
December 2008, we entered into a collaboration agreement with Pierre Fabre
Medicament (or Pierre Fabre) to develop and commercialize F2695 in the United
States and Canada for the treatment of depression. F2695 is a
proprietary selective norepinephrine and serotonin reuptake inhibitor that is
being developed by Pierre Fabre for the treatment of depression and other
central nervous system disorders. We will initiate Phase III studies
with F2695 in calendar 2009. Under the terms of the agreement, we
made an upfront payment to Pierre Fabre of $75,000 and are subject to future
milestone payments.
In
October 2008, we entered into a collaboration agreement with Phenomix
Corporation (or Phenomix) to co-develop and co-promote dutogliptin in North
America. Dutogliptin is Phenomix’ proprietary orally administered,
small molecule dipeptidyl-peptidase-4 (DPP-4) inhibitor currently in Phase III
clinical development for Type II diabetes. Under the terms of the
agreement, we made a $75,000 upfront payment to Phenomix and are subject to
future milestone payments.
Effective
July 1, 2008, we and Daiichi Sankyo (or Sankyo) terminated our co-promotion
agreement for Azor® (amlodipine and olmesartan medoxomil). In the
first quarter of fiscal 2009, we recorded a one-time charge of approximately
$44,100 which was comprised of a one-time payment to Sankyo of approximately
$26,600 related to the termination of the agreement and $17,500 related to the
unamortized portion of the initial upfront payment. We determined
that the resources we had allocated to the co-promotion of Azor would be better
utilized in providing additional support for our other currently marketed
products.
During fiscal 2007 our Board
of Directors (or the Board) approved the 2007 Repurchase Program which
authorized the purchase of up to 25 million shares of common
stock. On August 13, 2007, the Board authorized the purchase of an
additional 10 million shares of common stock. For the year
ended March 31, 2009, we repurchased a total of 10.1 million shares at a cost of
$332,102. As of May 28, 2009, we have repurchased, cumulatively, a
total of 29.3 million shares at a cost of $1,160,708 under the 2007 Repurchase
Program, leaving us the authority to purchase 5.7 million more
shares.
Financial Condition and
Liquidity
Net
current assets increased by $542,302 for fiscal 2009. Cash increased
from ongoing operations. Short-term marketable securities increased
while long-term marketable securities decreased as we invest in more liquid and
less volatile investment vehicles. During the first two quarters of
fiscal 2009, pursuant to the 2007 Repurchase Program, we repurchased 10.1
million shares of common stock at a cost of $332,102. No shares were
repurchased during the third and fourth quarters and 5.7 million shares were
available for repurchase under the program at March 31, 2009. During
the third quarter of fiscal 2009 we made $150,000 in combined licensing fee
payments in connection with product collaboration agreements with Phenomix and
Pierre Fabre. Of our total cash and marketable securities position at
March 31, 2009, 29%, or about $880,000, is domiciled domestically, with the
remainder held by our international subsidiaries. We currently invest
funds in variable rate demand notes that have major bank liquidity agreements,
municipal bonds and notes, commercial paper including money market instruments,
auction rate securities and bank floating rate notes. These
investments are subject to general credit, liquidity and market risks and have
been affected by the global credit crisis. At March 31, 2009,
approximately 27% of our investments were affected by net unrealized losses
compared with approximately 26% at March 31, 2008. As a result, we
have recorded unrealized losses on certain of these investments to Other
Comprehensive Income. We believe these unrealized losses to be
temporary in nature. We have the ability and intend to hold our investments
until a recovery of fair value, which may be at maturity. Trade
accounts receivable decreased primarily due to the timing of
receipts. Other accounts receivable increased primarily due to an
insurance claim receivable relating to a securities litigation against us and
certain of our officers, for which all claims have been settled subject to final
Court approval, and the settlement amount paid into escrow in January
2009. Raw materials inventory decreased as we are bringing these
balances to more normalized levels. Finished goods inventory
increased in order to support continued demand for our products, including our
recently launched products, Bystolic and Savella. We believe that
current inventory levels are adequate to support the growth of our ongoing
business. License agreements, product rights and other intangibles
net of accumulated amortization decreased primarily due to the write-off of the
Azor license in the June quarter as well as normal amortization, offset by a
$25,000 license payment to Cypress upon FDA approval of
Savella. Non-current deferred income taxes increased as a result of
an upfront licensing charge in connection with the collaboration agreement with
Phenomix to co-develop and co-promote dutogliptin. Other current
assets increased primarily due to movements in our current tax asset account
that consists of payments in excess of our provision. Other current
liabilities increased primarily due to the reserve recorded related to the
ongoing USAO investigation described above.
Property,
plant and equipment before accumulated depreciation increased from March 31,
2008, as we continued to make technology investments to expand our principal
operating systems to enhance supply chain and salesforce
applications.
Management
believes that current cash levels, coupled with funds to be generated by ongoing
operations, will continue to provide adequate liquidity to facilitate potential
acquisitions of products, payment of achieved milestones, capital investments
and continued share repurchases.
Contractual
Obligations
The
following table shows our contractual obligations related to lease obligations
and inventory purchase commitments as of March 31, 2009:
|
|
|
Payments
due by period (In
thousands)
|
|
|
|
|
<1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
>5 years
|
|
|
Total
|
|
|
Operating
lease obligations
|
|
$ |
35,438 |
|
|
$ |
47,767 |
|
|
$ |
25,559 |
|
|
$ |
36,469 |
|
|
$ |
145,233 |
|
|
Inventory
purchase commitments
|
|
|
112,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,256 |
|
|
|
|
$ |
147,694 |
|
|
$ |
47,767 |
|
|
$ |
25,559 |
|
|
$ |
36,469 |
|
|
$ |
257,489 |
|
Potential
future milestone payments to third parties under our collaboration and license
agreements of approximately $966 million were not included in the contractual
obligations table as they are contingent on the achievement of various research
and development (approximately $460 million) and regulatory approval
(approximately $506 million) milestones. The specific timing of such
milestones cannot be predicted and depend upon future clinical developments as
well as regulatory agency actions which cannot be predicted with certainty
(including actions which may never occur). Further, under the terms
of certain licensing agreements, we may be obligated to pay commercial
milestones contingent upon the achievement of specific sales
levels. Due to the long-range nature of such commercial milestone
amounts, they are neither probable at this time nor predictable and consequently
are not included in this disclosure.
Forest’s
income tax liabilities are not included in this table because we cannot be
certain as to when they will become due. See Note 15 to the
Consolidated Financial Statements.
Off-Balance Sheet
Arrangements
Forest is
a party to several license agreements for products currently under
development. As described above, such agreements may require us to
make future payments to the licensors, subject to the achievement of specific
product or commercial development milestones, as defined.
Results of
Operations
Net sales
increased $134,253 or 4% to $3,636,055 in fiscal 2009 from $3,501,802 in fiscal
2008 and increased $318,478 or 10% in fiscal 2008 as compared to $3,183,324 in
fiscal 2007 primarily due to strong sales of our key marketed
products.
Sales of
Lexapro, our most significant product, were $2,300,945 in fiscal 2009,
contributing $8,909 to the net sales change as compared with fiscal 2008, of
which $120,265 was due to price increases offset by volume decreases of
$111,356. In fiscal 2008, Lexapro sales totaled $2,292,036 and
contributed $186,046 to the net sales change compared to fiscal 2007, of which
$106,205 was due to price and $79,841 was related to volume. Lexapro
is indicated for the treatment of depression and generalized anxiety disorder in
adults and major depressive disorder in adolescents. We expect
Lexapro sales to remain strong during fiscal 2010. During fiscal 2007
Caraco Pharmaceutical Laboratories, Ltd. (or Caraco), filed an Abbreviated New
Drug Application (or ANDA) with a Paragraph IV Certification for a generic
equivalent to Lexapro. We along with our licensing partner H.
Lundbeck A/S (or Lundbeck) have filed a lawsuit in the U.S. District Court for
the Eastern District of Michigan against Caraco for patent
infringement. Caraco has stipulated to infringing our patent leaving
only Caraco’s invalidity defenses to be litigated. A five day bench
trial, originally scheduled to begin on April 27, 2009, was adjourned until June
1, 2009.
Sales of
Namenda, our N-methyl-D-aspartate (or NMDA) receptor antagonist for the
treatment of moderate to severe Alzheimer's disease grew 14%, an increase of
$119,632 to
$949,289 in
fiscal 2009 as compared with fiscal 2008, of which $67,293 was due to price and $52,339 was due to volume. In fiscal 2008,
sales of Namenda grew 26%, an increase of $169,362 to $829,657 as compared to $660,295 in
fiscal 2007, of which $134,804 was due to volume and $34,558 was due to
price. Namenda achieved a 34.2% share of total prescriptions
in the Alzheimer's market as of March 31, 2009. We anticipate Namenda
continuing positive growth. During the third quarter of fiscal 2008,
we received notification from several generic manufacturers that they filed
ANDAs with Paragraph IV Certifications to obtain approval to market generic
equivalents of Namenda. In January 2008, we along with our licensing
partner Merz Pharma GmbH & Co. KgaA (or Merz) commenced patent infringement
litigation against these generic manufacturers. These actions are in
the discovery phase, with fact discovery currently scheduled to close on June 1,
2009 and expert discovery scheduled to be completed by September 11,
2009. A trial date has been set for April 5,
2010. Namenda’s patent is set to expire in April 2015 after receiving
a five year patent term extension from the United States Patent and Trademark
Office (or USPTO).
Bystolic
(nebivolol hydrochloride), a beta-blocker indicated for the treatment of
hypertension, launched in January 2008, achieved sales of $69,238 and $11,070 in
fiscal years 2009 and 2008, respectively. The U.S. composition of
matter patent covering nebivolol hydrochloride is licensed from Mylan Inc. (or
Mylan) and expires in 2020 (We submitted a patent term extension application to
extend this patent until 2021). In November 2008 the USPTO closed the
prosecution of the merits of reexamination proceedings for the patents covering
Bystolic and confirmed the validity of the previously granted
claims. The remainder of the net sales change for the periods
presented was due principally to volume and price fluctuations of our older and
non-promoted product lines.
Contract
revenue for fiscal year 2009 was $209,000 compared to $216,500 in fiscal year
2008 and $176,943 in fiscal year 2007, primarily due to co-promotion income from
our co-marketing agreement with Sankyo for Benicar. Forest had been
co-promoting Benicar, indicated for the treatment of hypertension, since May
2002. Pursuant to the agreement with Sankyo, active co-promotion of
Benicar ended in the first quarter of fiscal 2009 and we now receive a gradually
reducing residual royalty through March 2014. We are no longer
incurring any salesforce expenses for this product.
Interest
income decreased in fiscal 2009 primarily due to lower average rates of return
offset by higher levels of invested funds. Fiscal 2008 interest
income increased when compared with fiscal 2007 primarily due to interest
received on higher levels of invested funds offset by lower average rates of
return.
Cost of
sales as a percentage of net sales was 22% in fiscal 2009, as compared with 23%
in fiscal 2008 and fiscal 2007.
Selling,
general and administrative expense increased to $1,474,274 in fiscal 2009 from
$1,154,845 in fiscal 2008 and $1,046,336 in fiscal 2007. The increase
in fiscal 2009 was primarily due to the $170,000 expense recorded in connection
with ongoing discussions with the DOJ discussed above. Fiscal 2009
also included launch costs for Bystolic and pre-launch costs for Savella, as
well as the one-time charge of approximately $44,100 relating to the termination
of the Azor co-promotion agreement in the June 2008
quarter. Additionally, during the September 2008 quarter, we expensed
$25,000 in connection with a Memorandum of Understanding setting forth an
agreement in principle to settle all claims against all defendants in a
securities litigation pending against us and certain of our
officers. In January 2009, pursuant to a formal Stipulation of
Settlement dated December 12, 2008, we paid the full amount of the settlement
into escrow pending final Court approval of the settlement. We expect
a majority of such settlement to be funded by insurance. The increase in fiscal
2008 compared with 2007 related primarily to salesforce activity and promotional
support for promoted products and launch and pre-launch costs for Bystolic and
Savella.
Research
and development expense decreased to $661,294 in fiscal 2009 from $670,973 in
fiscal 2008 and from $941,003 in fiscal 2007. During the current
fiscal year we made two $75,000 upfront licensing payments; the first to
Phenomix for dutogliptin and the second to Pierre Fabre for
F2695. Dutogliptin is Phenomix’ proprietary orally administered small
molecule DPP-4 inhibitor currently in Phase III clinical development for Type II
diabetes. F2695 is a proprietary selective norepinephrine and
serotonin reuptake inhibitor for the treatment of patients with
depression. Fiscal 2009 also included approximately $59,500 in
development milestone expenses. Fiscal 2008 included a $70,000
licensing charge in connection with the collaboration agreement with Ironwood
for the right to co-develop and co-market linaclotide. Phase III
testing of linaclotide for the treatment of chronic constipation has recently
commenced and we expect to begin Phase III trials for the additional indication
of constipation-predominant irritable bowel syndrome by the end of the second
quarter of calendar 2009. Also during the fiscal 2008 year, we made
an upfront license payment of approximately $110,000 to Novexel for the
development, manufacture and commercialization of Novexel’s novel intravenous
beta-lactamase inhibitor, NXL104, in combination with Forest’s
ceftaroline. Development milestone expenses amounted to approximately
$51,000 in fiscal 2008. Fiscal 2007 included a one-time charge of
$476,000 for in-process research and development (or IPR&D) related to the
acquisition of Cerexa, Inc. and $20,000 in connection with a development
milestone.
Research
and development expense also reflects the following:
|
|
·
|
In
October 2008, we entered into a collaboration agreement with Phenomix to
co-develop and co-promote dutogliptin. Dutogliptin is Phenomix’
proprietary orally administered, small molecule DPP-4 inhibitor currently
in Phase III clinical development for Type II diabetes. In a
double-blind, randomized 12-week, 422 patient placebo-controlled Phase
II(b) clinical trial, dutogliptin met all primary and secondary endpoints,
including statistically significant reductions in HbA1c when administered
once-daily in combination with metformin, a glitazone, or metformin and a
glitazone for the treatment of Type II diabetes. Dutogliptin
was also well tolerated.
|
|
|
·
|
In
December 2008, we entered into a collaboration agreement with Pierre Fabre
to develop and commercialize F2695 in the United States and Canada for the
treatment of depression. F2695 is a proprietary selective
norepinephrine and serotonin reuptake inhibitor that is being developed by
Pierre Fabre for the treatment of depression and other central nervous
system disorders. In a recently completed European
placebo-controlled, double-blind Phase II study of F2695 in over 550
patients with major depressive disorder, the compound demonstrated
statistically significant improvement compared to placebo (p<0.0001) on
the primary endpoint, a change from baseline in total score on the
Montgomery-Asberg Depression Rating Scale (or MADRS) and for a secondary
endpoint, the Hamilton Depression Scale (or HAMD-17) as well as in
response and remission rates using both the MADRS and
HAMD-17. F2695 demonstrated symptom improvement compared to
placebo within two weeks after treatment initiation. We will
initiate Phase III studies with F2695 in calendar
2009.
|
|
|
·
|
In
connection with our acquisition of Cerexa, Inc. in January 2007, we
acquired worldwide development and marketing rights (excluding Japan) to
ceftaroline, a next generation, broad-spectrum, hospital-based injectable
cephalosporin antibiotic with activity against gram-positive bacteria such
as methicillin resistant Staphylococcus aureus and gram-negative
bacteria. In June 2008, we reported positive results from two
globally conducted, multi-center Phase III studies of ceftaroline for
complicated skin and skin structure infections. We are also
conducting two Phase III studies for community acquired pneumonia and we
anticipate those results by the second quarter of calendar
2009. The data from these two indications, if supportive, will
serve as our planned submission package to the FDA for initial marketing
approval, anticipated to be filed around the end of calendar
2009.
|
|
|
·
|
In
April 2006, we entered into a collaboration agreement with Laboratorios
Almirall, S.A. (or Almirall) for the U.S. rights to aclidinium, a novel
long-acting muscarinic antagonist which is being developed as an inhaled
therapy for the treatment of chronic obstructive pulmonary disease (or
COPD). In September 2008 we received positive results from two
Phase III studies assessing the safety and efficacy of aclidinium in
moderate to severe COPD. In both trials, once-daily aclidinium
showed a statistically significant difference versus placebo in the
primary endpoint of trough FEV1, a measure of pulmonary function that is
decreased in patients with moderate to severe COPD. After
consultation with the FDA, we and Almirall have determined to conduct
additional clinical studies to provide further support for a range of
dosing regimens, including higher and more frequent doses. We
and Almirall are also pursuing the development of a fixed-dose combination
of aclidinium and the beta-agonist formoterol, which is currently in Phase
II testing.
|
|
|
·
|
During
the September 2007 quarter, we entered into a partnership with Ironwood to
co-develop and co-market the compound linaclotide in North
America. Linaclotide is currently being investigated for the
treatment of constipation-predominant irritable bowel syndrome (or IBS-C)
and chronic constipation (or CC). Based on positive results of
Phase II(b) randomized, double-blind, placebo-controlled studies assessing
the safety and efficacy of linaclotide in patients with CC and IBS-C, we
have initiated a comprehensive Phase III clinical program to evaluate
linaclotide’s safety and efficacy in patients with either IBS-C or
CC. The CC studies have been initiated and we expect to report
top-line data in the fourth quarter of calendar 2009. The IBS-C
trials are anticipated to commence during the second quarter of calendar
2009.
|
|
|
·
|
During
the third quarter of fiscal 2005, we entered into a collaboration
agreement with Gedeon Richter Ltd. (or Richter) for the North American
rights to cariprazine and related compounds, being developed as an
atypical antipsychotic for the treatment of schizophrenia, bipolar mania
and other psychiatric conditions. In September 2008, we
received positive preliminary top-line results from a Phase II study of
cariprazine in patients with acute mania associated with bipolar
disorder. A review of top-line results of a Phase II study in
schizophrenia indicated that cariprazine demonstrated a nominally
statistical significant (i.e., not adjusted for multiple comparisons)
therapeutic effect compared to placebo in a low-dose arm and a numerical
improvement compared to placebo in a high-dose arm that did not reach
nominal statistical significance. Based on the review of the
results, we and Richter initiated a Phase II(b) dose-ranging study in
schizophrenia patients. This study is being performed in order
to better determine an optimal dose to take into the planned Phase III
program, which we expect top-line results for in the second half of
2009. Based on these results we also expect to initiate the
Phase III mania disorder studies by the end of calendar 2009 and the
schizophrenia Phase III program shortly thereafter. In
addition, we will commence Phase II proof of concept studies in bipolar
depression and add-on treatment for MDD in the third quarter of calendar
2009.
|
|
|
·
|
Regarding
Bystolic (nebivolol hydrochloride), we recently filed a sNDA for a
congestive heart failure indication based on a single large Phase III
study.
|
|
|
·
|
In
February 2008, we received preliminary results of a Phase III study of
memantine HCl in a novel once-daily formulation of Namenda for the
treatment of moderate and severe Alzheimer’s disease. The
results indicated that patients treated with this formulation experienced
statistically significant benefits in cognition and clinical global status
compared to placebo. Based on the results of this study, we
intend to prepare a NDA for this new
formulation.
|
|
|
·
|
During
the second quarter of fiscal 2005, Forest entered into a collaboration
agreement with Glenmark Pharmaceuticals Ltd. for the North American
development and marketing of Oglemilast (GRC 3886), a PDE4 inhibitor for
the treatment of asthma and COPD. We have commenced a Phase II
study of this compound for the COPD indication with results expected in
the second half of calendar 2009. Glenmark is conducting a
Phase II study for this compound in adult patients with
asthma.
|
Among
other research and development projects we continue to support are the
following: RGH-896, a compound being developed for the treatment of chronic pain
and other CNS conditions; a series of novel compounds that target group 1
metabotropic glutamate receptors (mGLUR1/5) and NXL104, a novel intravenous
beta-lactamase inhibitor being developed in combination with
ceftaroline. In addition, we have entered into several collaborations
to conduct pre-clinical drug discovery.
The
effective tax rate increased to 20.9% in fiscal 2009 as compared to 20.0% in
fiscal 2008 and decreased compared to 21.5% in fiscal 2007 (excluding the
one-time Cerexa IPR&D charge). The effective tax rate for fiscal
2009 was higher compared to fiscal 2008 due primarily to a higher proportion of
earnings generated in the United States as compared to lower taxed foreign
jurisdictions. Effective tax rates can be affected by ongoing tax
audits. See Note 15 to the Consolidated Financial
Statements.
We expect
to continue our profitability into fiscal 2010 with continued sales growth in
our principal promoted products.
Inflation
has not had a material effect on our operations for the periods
presented.
Critical Accounting
Policies
The
following accounting policies are important in understanding our financial
condition and results of operations and should be considered an integral part of
the financial review. Refer to the notes to the consolidated
financial statements for additional policies.
Estimates and
Assumptions
The
preparation of financial statements in conformity with generally accepted
accounting principles requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and of revenues and expenses
during the reporting period. Estimates are made when accounting for
sales allowances, returns, rebates and other pricing adjustments, depreciation,
amortization and certain contingencies. Forest is subject to risks
and uncertainties, which may include but are not limited to competition, federal
or local legislation and regulations, litigation and overall changes in the
healthcare environment that may cause actual results to vary from
estimates. We review all significant estimates affecting the
financial statements on a recurring basis and record the effect of any
adjustments when necessary. Certain of these risks, uncertainties and
assumptions are discussed further under the section entitled “Forward Looking
Statements.”
Revenue
Recognition
Revenues
are recorded in the period the merchandise is shipped. As is typical
in the pharmaceutical industry, gross product sales are subject to a variety of
deductions, primarily representing rebates and discounts to government agencies,
wholesalers and managed care organizations. These deductions
represent estimates of the related liabilities and, as such, judgment is
required when estimating the impact of these sales deductions on gross sales for
a reporting period. Historically, our adjustments for actual future
settlements have not been material, and have resulted in either a net increase
or a net decrease to net income. If estimates are not representative
of actual settlements, results could be materially
affected. Provisions for estimated sales allowances, returns, rebates
and other pricing adjustments are accrued at the time revenues are recognized as
a direct reduction of such revenue.
The
accruals are estimated based on available information, including third party
data, regarding the portion of sales on which rebates and discounts can be
earned, adjusted as appropriate for specific known events and the prevailing
contractual discount rate. Provisions are reflected either as a
direct reduction to accounts receivable or, to the extent that they are due to
entities other than customers, as accrued expense. Adjustments to
estimates are recorded when customer credits are issued or payments are made to
third parties.
The
sensitivity of estimates can vary by program and type of
customer. However, estimates associated with Medicaid and contract
rebates are most at risk for adjustment because of the extensive time delay
between the recording of the accrual and its ultimate settlement, an interval
that can range up to one year. Because of this time lag, in any given
quarter, adjustments to actual may incorporate revisions of prior
quarters.
Provisions
for Medicaid and contract rebates during a period are recorded based upon the
actual historical experience ratio of rebates paid and actual prescriptions
written. The experience ratio is applied to the period's sales to
determine the rebate accrual and related expense. This experience
ratio is evaluated regularly to ensure that the historical trends are as current
as practicable. As appropriate, we will adjust the ratio to more
closely match the current experience or expected future
experience. In assessing this ratio, we consider current contract
terms, such as the effect of changes in formulary status, discount rate and
utilization trends. Periodically, the accrual is adjusted based upon
actual payments made for rebates. If the ratio is not indicative of
future experience, results could be affected. Rebate accruals for
Medicaid were $36,989 at March 31, 2009 and $31,756 at March 31,
2008. Commercial discounts and other rebate accruals were $176,395 at
March 31, 2009 and $141,949 at March 31, 2008. These and other rebate
accruals are established in the period the related revenue was recognized,
resulting in a reduction to sales and the establishment of a liability, which is
included in accrued expenses.
The
following table summarizes the activity in the accounts related to accrued
rebates, sales returns and discounts (In thousands):
|
|
|
March 31, 2009
|
|
|
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
229,681 |
|
|
$ |
208,063 |
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for rebates
|
|
|
511,132 |
|
|
|
440,975 |
|
|
Changes
in estimates
|
|
|
|
|
|
|
2,500 |
|
|
Settlements
|
|
|
( 471,252 |
) |
|
|
( 412,852 |
) |
|
|
|
|
39,880 |
|
|
|
30,623 |
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for returns
|
|
|
25,517 |
|
|
|
30,804 |
|
|
Settlements
|
|
|
( 22,052 |
) |
|
|
( 28,273 |
) |
|
|
|
|
3,465 |
|
|
|
2,531 |
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for chargebacks and discounts
|
|
|
308,655 |
|
|
|
346,496 |
|
|
Changes
in estimates
|
|
|
|
|
|
|
( 7,700 |
) |
|
Settlements
|
|
|
( 303,787 |
) |
|
|
( 350,332 |
) |
|
|
|
|
4,868 |
|
|
|
( 11,536 |
) |
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$ |
277,894 |
|
|
$ |
229,681 |
|
Deductions
for chargebacks (primarily discounts to group purchasing organizations and
federal government agencies) closely approximate actual as these deductions are
settled generally within 2-3 weeks of incurring the liability.
Forest's
policy relating to the supply of inventory at wholesalers is to maintain
stocking levels of up to three weeks and to keep monthly levels consistent from
year to year, based on patterns of utilization. We have historically
closely monitored wholesale customer stocking levels by purchasing information
directly from customers and by obtaining other third party
information. Unusual or unexpected variations in buying patterns or
utilizations are investigated.
Sales
incentives are generally given in connection with a new product
launch. These sales incentives are recorded as a reduction of
revenues and are based on terms fixed at the time goods are
shipped. New product launches may result in expected temporary
increases in wholesaler inventories, which as described above, are closely
monitored and historically have not resulted in increased product
returns.
Forward Looking
Statements
Except
for the historical information contained herein, the Management Discussion and
other portions of this Annual Report contain forward looking statements that
involve a number of risks and uncertainties, including the difficulty of
predicting FDA approvals, acceptance and demand for new pharmaceutical products,
the impact of competitive products and pricing, the timely development and
launch of new products, changes in laws and regulations affecting the healthcare
industry and the risk factors listed from time to time in our filings with the
SEC, including the Annual Report on Form 10-K for the fiscal year ended March
31, 2009.
Quantitative and Qualitative
Disclosures about Market Risk
In the
normal course of business, operations may be exposed to fluctuations in currency
values and interest rates. These fluctuations can vary the costs of
financing, investing and operating transactions. Because we had no debt and only
minimal foreign currency transactions, there was no material impact on earnings
due to fluctuations in interest and currency exchange rates.