FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission file number: 001-14471
MEDICIS PHARMACEUTICAL CORPORATION
(Exact name of Registrant as specified in its charter)
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Delaware
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52-1574808 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
7720 North Dobson Road
Scottsdale, Arizona 85256-2740
(Address of principal executive offices)
(602) 808-8800
(Registrants telephone number,
including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
(do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2) Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
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Class
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Outstanding at August 6, 2009 |
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Class A Common Stock $.014 Par Value
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59,410,511 (a)
(a) includes 1,947,414 shares of unvested restricted stock awards |
MEDICIS PHARMACEUTICAL CORPORATION
Table of Contents
Part I. Financial Information
Item 1. Financial Statements
MEDICIS PHARMACEUTICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
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June 30, 2009 |
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December 31, 2008 |
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(unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
133,782 |
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$ |
86,450 |
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Short-term investments |
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271,608 |
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257,435 |
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Accounts receivable, net |
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97,409 |
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52,588 |
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Inventories, net |
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24,485 |
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24,226 |
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Deferred tax assets, net |
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62,420 |
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53,161 |
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Other current assets |
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20,675 |
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19,676 |
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Total current assets |
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610,379 |
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493,536 |
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Property and equipment, net |
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25,871 |
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26,300 |
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Intangible assets: |
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Intangible assets related to product line
acquisitions and business combinations |
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337,541 |
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267,624 |
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Other intangible assets |
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7,669 |
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7,752 |
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345,210 |
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275,376 |
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Less: accumulated amortization |
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120,464 |
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113,947 |
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Net intangible assets |
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224,746 |
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161,429 |
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Goodwill |
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93,669 |
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156,762 |
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Deferred tax assets, net |
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65,942 |
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77,149 |
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Long-term investments |
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36,935 |
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55,333 |
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Other assets |
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2,415 |
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2,925 |
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$ |
1,059,957 |
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$ |
973,434 |
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See accompanying notes to condensed consolidated financial statements.
1
MEDICIS PHARMACEUTICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS, Continued
(in thousands, except share amounts)
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June 30, 2009 |
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December 31, 2008 |
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(unaudited) |
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Liabilities |
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Current liabilities: |
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Accounts payable |
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$ |
44,770 |
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$ |
39,032 |
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Reserve for sales returns |
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57,674 |
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59,611 |
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Income taxes payable |
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19,372 |
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Other current liabilities |
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129,972 |
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87,258 |
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Total current liabilities |
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251,788 |
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185,901 |
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Long-term liabilities: |
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Contingent convertible senior notes |
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169,326 |
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169,326 |
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Deferred revenue |
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4,399 |
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4,167 |
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Other liabilities |
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7,489 |
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10,346 |
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Stockholders Equity |
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Preferred stock, $0.01 par value; shares
authorized: 5,000,000; no shares issued |
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Class A common stock, $0.014 par value;
shares authorized: 150,000,000; issued and
outstanding: 70,166,135 and 69,396,394 at
June 30, 2009 and December 31, 2008,
respectively |
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978 |
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969 |
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Class B common stock, $0.014 par value; shares
authorized: 1,000,000; issued and outstanding: none |
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Additional paid-in capital |
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675,592 |
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661,703 |
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Accumulated other comprehensive income |
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(2,205 |
) |
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2,106 |
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Accumulated earnings |
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296,578 |
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282,284 |
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Less: Treasury stock, 12,733,488 and 12,678,559 shares
at cost at June 30, 2009 and December 31, 2008,
respectively |
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(343,988 |
) |
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(343,368 |
) |
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Total stockholders equity |
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626,955 |
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603,694 |
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$ |
1,059,957 |
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$ |
973,434 |
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See accompanying notes to condensed consolidated financial statements.
2
MEDICIS PHARMACEUTICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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June 30, |
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June 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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Net product revenues |
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$ |
138,695 |
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$ |
133,039 |
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$ |
235,294 |
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$ |
258,092 |
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Net contract revenues |
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2,551 |
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4,410 |
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5,770 |
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8,260 |
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Net revenues |
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141,246 |
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137,449 |
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241,064 |
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266,352 |
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Cost of product revenues (1) |
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13,067 |
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9,204 |
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22,512 |
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20,337 |
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Gross profit |
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128,179 |
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128,245 |
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218,552 |
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246,015 |
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Operating expenses: |
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Selling, general and administrative (2) |
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71,654 |
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71,872 |
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142,079 |
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143,934 |
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Research and development (3) |
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12,072 |
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33,000 |
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25,347 |
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42,189 |
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Depreciation and amortization |
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7,945 |
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6,780 |
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15,077 |
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13,502 |
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Operating income |
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36,508 |
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16,593 |
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36,049 |
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46,390 |
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Other (income) expense, net |
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(2,243 |
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630 |
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2,871 |
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Interest and investment income |
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(2,158 |
) |
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(7,449 |
) |
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(4,645 |
) |
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(16,649 |
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Interest expense |
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1,058 |
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2,148 |
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2,112 |
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4,555 |
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Income before income tax expense |
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39,851 |
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21,894 |
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37,952 |
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55,613 |
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Income tax expense |
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24,258 |
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8,886 |
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22,031 |
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22,080 |
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Net income |
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$ |
15,593 |
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$ |
13,008 |
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$ |
15,921 |
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$ |
33,533 |
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Basic net income per share |
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$ |
0.26 |
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$ |
0.23 |
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$ |
0.27 |
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$ |
0.59 |
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Diluted net income per share |
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$ |
0.25 |
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$ |
0.21 |
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$ |
0.27 |
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$ |
0.52 |
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Cash dividend declared per common share |
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$ |
0.04 |
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$ |
0.04 |
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$ |
0.08 |
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$ |
0.08 |
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Common shares used in calculating: |
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Basic net income per share |
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57,088 |
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56,493 |
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56,911 |
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56,425 |
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Diluted net income per share |
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63,008 |
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|
68,209 |
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62,838 |
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69,204 |
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(1) amounts exclude amortization of
intangible
assets related to acquired products |
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$ |
6,233 |
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$ |
5,346 |
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$ |
11,675 |
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$ |
10,633 |
|
(2) amounts include share-based
compensation expense |
|
$ |
4,786 |
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$ |
4,601 |
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$ |
8,519 |
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$ |
8,930 |
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(3) amounts include share-based
compensation expense |
|
$ |
230 |
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$ |
51 |
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$ |
368 |
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$ |
112 |
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See accompanying notes to condensed consolidated financial statements.
3
MEDICIS PHARMACEUTICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
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Six Months Ended |
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June 30, 2009 |
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June 30, 2008 |
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Operating Activities: |
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Net income |
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$ |
15,921 |
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$ |
33,533 |
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Adjustments to reconcile net income to
net cash provided by operating activities: |
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Depreciation and amortization |
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15,077 |
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13,502 |
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Amortization of deferred financing fees |
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|
666 |
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Loss on disposal of property and equipment |
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36 |
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Gain on sale of product rights |
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(350 |
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Gain on sale of Medicis Pediatrics |
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(2,915 |
) |
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Adjustment of impairment of available-for-sale investments |
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(33 |
) |
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Charge reducing value of investment in Revance |
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2,886 |
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2,871 |
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Gain on sale of available-for-sale investments, net |
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(76 |
) |
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(947 |
) |
Share-based compensation expense |
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8,887 |
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|
9,042 |
|
Deferred income tax benefit |
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(3,378 |
) |
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(34,355 |
) |
Tax expense from exercise of stock options and
vesting of restricted stock awards |
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(694 |
) |
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|
(1,007 |
) |
Excess tax benefits from share-based payment arrangements |
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|
(169 |
) |
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|
(167 |
) |
Increase in provision for sales discounts and chargebacks |
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|
1,120 |
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|
908 |
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Accretion (amortization) of premium/(discount) on investments |
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1,416 |
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(919 |
) |
Changes in operating assets and liabilities: |
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Accounts receivable |
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(45,941 |
) |
|
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(10,503 |
) |
Inventories |
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(259 |
) |
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|
6,113 |
|
Other current assets |
|
|
(999 |
) |
|
|
463 |
|
Accounts payable |
|
|
5,738 |
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|
5,093 |
|
Reserve for sales returns |
|
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(1,937 |
) |
|
|
(3,244 |
) |
Income taxes payable |
|
|
19,372 |
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|
27,023 |
|
Other current liabilities |
|
|
39,925 |
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|
2,159 |
|
Other liabilities |
|
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(2,569 |
) |
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|
(1,891 |
) |
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Net cash provided by operating activities |
|
|
51,022 |
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|
48,376 |
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Investing Activities: |
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Purchase of property and equipment |
|
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(2,828 |
) |
|
|
(7,252 |
) |
Payment of direct merger costs |
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(306 |
) |
Payments for purchase of product rights |
|
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(74,932 |
) |
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(405 |
) |
Proceeds from sale of product rights |
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350 |
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Proceeds from sale of Medicis Pediatrics |
|
|
70,294 |
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|
Purchase of available-for-sale investments |
|
|
(154,187 |
) |
|
|
(280,874 |
) |
Sale of available-for-sale investments |
|
|
71,201 |
|
|
|
364,739 |
|
Maturity of available-for-sale investments |
|
|
84,276 |
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|
|
267,363 |
|
|
|
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Net cash (used in) provided by investing activities |
|
|
(5,826 |
) |
|
|
343,265 |
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Financing Activities: |
|
|
|
|
|
|
|
|
Payment of dividends |
|
|
(4,663 |
) |
|
|
(3,992 |
) |
Payment of contingent convertible senior notes |
|
|
|
|
|
|
(283,729 |
) |
Excess tax benefits from share-based payment arrangements |
|
|
169 |
|
|
|
167 |
|
Proceeds from the exercise of stock options |
|
|
6,807 |
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|
|
3,532 |
|
|
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|
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|
Net cash provided by (used in) financing activities |
|
|
2,313 |
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|
|
(284,022 |
) |
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Effect of exchange rate on cash and cash equivalents |
|
|
(177 |
) |
|
|
(62 |
) |
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|
Net increase in cash and cash equivalents |
|
|
47,332 |
|
|
|
107,557 |
|
Cash and cash equivalents at beginning of period |
|
|
86,450 |
|
|
|
108,046 |
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Cash and cash equivalents at end of period |
|
$ |
133,782 |
|
|
$ |
215,603 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
4
MEDICIS PHARMACEUTICAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(unaudited)
Medicis Pharmaceutical Corporation (Medicis or the Company) is a leading specialty
pharmaceutical company focusing primarily on the development and marketing of products in the
United States (U.S.) for the treatment of dermatological, aesthetic and podiatric conditions.
Medicis also markets products in Canada for the treatment of dermatological and aesthetic
conditions and began commercial efforts in Europe with the Companys acquisition of LipoSonix, Inc.
(LipoSonix) in July 2008.
The Company offers a broad range of products addressing various conditions or aesthetic
improvements including facial wrinkles, glabellar lines, acne, fungal infections, rosacea,
hyperpigmentation, photoaging, psoriasis, seborrheic dermatitis and cosmesis (improvement in the
texture and appearance of skin). Medicis currently offers 19 branded products. Its primary brands
are DYSPORTTM, PERLANE®, RESTYLANE®, SOLODYN®,
TRIAZ®, VANOS® and ZIANA®. Medicis entered the non-invasive fat
ablation market with its acquisition of LipoSonix in July 2008.
The consolidated financial statements include the accounts of Medicis and its wholly owned
subsidiaries. The Company does not have any subsidiaries in which it does not own 100% of the
outstanding stock. All of the Companys subsidiaries are included in the consolidated financial
statements. All significant intercompany accounts and transactions have been eliminated in
consolidation.
The accompanying interim condensed consolidated financial statements of Medicis have been
prepared in conformity with U.S. generally accepted accounting principles, consistent in all
material respects with those applied in the Companys Annual Report on Form 10-K for the year ended
December 31, 2008. The financial information is unaudited, but reflects all adjustments,
consisting only of normal recurring adjustments and accruals, which are, in the opinion of the
Companys management, necessary to a fair statement of the results for the interim periods
presented. Interim results are not necessarily indicative of results for a full year. The
information included in this Form 10-Q should be read in conjunction with the Companys Annual
Report on Form 10-K for the year ended December 31, 2008.
2. |
|
SHARE-BASED COMPENSATION |
Stock Option and Restricted Stock Awards
At June 30, 2009, the Company had seven active share-based employee compensation plans. Of
these seven share-based compensation plans, only the 2006 Incentive Award Plan is eligible for the
granting of future awards. Stock option awards granted from these plans are granted at the fair
market value on the date of grant. The option awards vest over a period determined at the time the
options are granted, ranging from one to five years, and generally have a maximum term of ten
years. Certain options provide for accelerated vesting if there is a change in control (as defined
in the plans). When options are exercised, new shares of the Companys Class A common stock are
issued. Effective July 1, 2005, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123R, Share-Based Payment, using the modified prospective method. Other than
restricted stock, no share-based employee compensation cost has been reflected in net income prior
to the adoption of SFAS No. 123R.
The total value of the stock option awards is expensed ratably over the service period of the
employees receiving the awards. As of June 30, 2009, total unrecognized compensation cost related
to stock option awards, to be recognized as expense subsequent to June 30, 2009, was approximately
$3.1 million and the related weighted average period over which it is expected to be recognized is
approximately 1.6 years.
5
A summary of stock option activity within the Companys stock-based compensation plans and
changes for the six months ended June 30, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number |
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
of Shares |
|
|
Price |
|
|
Term |
|
|
Value |
|
Balance at December 31, 2008 |
|
|
10,707,357 |
|
|
$ |
27.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
182,017 |
|
|
$ |
13.94 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(620,287 |
) |
|
$ |
10.97 |
|
|
|
|
|
|
|
|
|
Terminated/expired |
|
|
(260,375 |
) |
|
$ |
29.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009 |
|
|
10,008,712 |
|
|
$ |
28.73 |
|
|
|
3.5 |
|
|
$ |
511,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of options exercised during the six months ended June 30, 2009, was
$2,663,621. Options exercisable under the Companys share-based compensation plans at June 30,
2009, were 9,080,628, with a weighted average exercise price of $28.45, a weighted average
remaining contractual term of 3.3 years, and an aggregate intrinsic value of $82,088.
A summary of outstanding stock options that are fully vested and are expected to vest, based
on historical forfeiture rates, and those stock options that are exercisable, as of June 30, 2009,
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
|
|
Number |
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
of Shares |
|
Price |
|
Term |
|
Value |
Outstanding, net of expected forfeitures |
|
|
9,211,283 |
|
|
$ |
28.78 |
|
|
|
3.5 |
|
|
$ |
428,917 |
|
Exercisable |
|
|
8,369,141 |
|
|
$ |
28.50 |
|
|
|
3.3 |
|
|
$ |
67,468 |
|
The fair value of each stock option award is estimated on the date of the grant using the
Black-Scholes option pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
Six Months Ended |
|
|
June 30, 2009 |
|
June 30, 2008 |
Expected dividend yield |
|
0.3% to 1.0% |
|
0.6% to 0.7% |
Expected stock price volatility |
|
|
0.45 to 0.46 |
|
|
|
0.35 to 0.38 |
|
Risk-free interest rate |
|
2.2% to 2.8% |
|
3.0% to 3.4% |
Expected life of options |
|
7 Years |
|
7 Years |
The expected dividend yield is based on expected annual dividends to be paid by the Company as
a percentage of the market value of the Companys stock as of the date of grant. The Company
determined that a blend of implied volatility and historical volatility is more reflective of
market conditions and a better indicator of expected volatility than using purely historical
volatility. The risk-free interest rate is based on the U.S. treasury security rate in effect as
of the date of grant. The expected lives of options are based on historical data of the Company.
The weighted average fair value of stock options granted during the six months ended June 30,
2009 and 2008, was $6.44 and $8.90, respectively.
The Company also grants restricted stock awards to certain employees. Restricted stock awards
are valued at the closing market value of the Companys Class A common stock on the date of grant,
and the total value of the award is expensed ratably over the service period of the employees
receiving the grants. During the six months ended June 30, 2009, 975,173 shares of restricted
stock were granted to certain employees. Share-based compensation expense related to all
restricted stock awards outstanding during the three months ended June 30, 2009 and 2008, was
approximately $2.3 million and $1.5 million, respectively. Share-based compensation expense
related to all restricted stock awards
6
outstanding during the six months ended June 30, 2009 and 2008, was approximately $4.1 million
and $2.6 million, respectively. As of June 30, 2009, the total amount of unrecognized compensation
cost related to nonvested restricted stock awards, to be recognized as expense subsequent to June
30, 2009, was approximately $29.2 million, and the related weighted average period over which it is
expected to be recognized is approximately 3.4 years.
A summary of restricted stock activity within the Companys share-based compensation plans and
changes for the six months ended June 30, 2009, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant-Date |
|
Nonvested Shares |
|
Shares |
|
|
Fair Value |
|
Nonvested at December 31, 2008 |
|
|
1,204,851 |
|
|
$ |
23.38 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
975,173 |
|
|
$ |
11.28 |
|
Vested |
|
|
(149,454 |
) |
|
$ |
25.07 |
|
Forfeited |
|
|
(31,772 |
) |
|
$ |
20.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2009 |
|
|
1,998,798 |
|
|
$ |
17.40 |
|
|
|
|
|
|
|
|
|
The total fair value of restricted shares vested during the six months ended June 30, 2009 and
2008, was approximately $3.7 million and $2.9 million, respectively.
Stock Appreciation Rights
During the six months ended June 30, 2009, the Company granted, in aggregate, 2,019,558
cash-settled stock appreciation rights (SARs) to over 200 of its employees. SARs generally vest
over a graduated five-year period and expire seven years from the date of grant, unless such
expiration occurs sooner due to the employees termination of employment, as provided in the
applicable SAR award agreement. SARs allow the holder to receive cash (less applicable tax
withholding) upon the holders exercise, equal to the excess, if any, of the market price of the
Companys Class A common stock on the exercise date over the exercise price, multiplied by the
number of shares relating to the SAR with respect to which the SAR is exercised. The exercise
price of the SAR is the fair market value of a share of the Companys Class A common stock relating
to the SAR on the date of grant. The total value of the SARs is expensed over the service period
of the employees receiving the grants, and a liability is recognized in the Companys condensed
consolidated balance sheets until settled. SFAS No. 123R requires the fair value of SARs to be
remeasured at the end of each reporting period until the award is settled, and changes in fair
value must be recognized as compensation expense to the extent of vesting each reporting period
based on the new fair value. Share-based compensation expense related to SARs during the three and
six months ended June 30, 2009, was approximately $0.9 million and $1.1 million, respectively. As
of June 30, 2009, the total measured amount of unrecognized compensation cost related to
outstanding SARs, to be recognized as expense subsequent to June 30, 2009, was approximately $15.9
million, and the related weighted average period over which it is expected to be recognized is
approximately 4.7 years.
The fair value of each SAR is estimated on the date of the grant, and at the end of each
reporting period, using the Black-Scholes option pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
SARs Granted During the |
|
Remeasurement |
|
|
Six Months Ended |
|
as of |
|
|
June 30, 2009 |
|
June 30, 2009 |
Expected dividend yield |
|
0.3% to 1.0% |
|
|
1.0 |
% |
Expected stock price volatility |
|
|
0.45 to 0.46 |
|
|
|
0.42 |
|
Risk-free interest rate |
|
2.2% to 2.8% |
|
|
3.2 |
% |
Expected life of SARs |
|
7.0 Years |
|
6.7 Years |
7
A summary of SARs activity for the six months ended June 30, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number |
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
of SARs |
|
|
Price |
|
|
Term |
|
|
Value |
|
Balance at December 31, 2008 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
2,019,558 |
|
|
$ |
11.29 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminated/expired |
|
|
(32,718 |
) |
|
$ |
11.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009 |
|
|
1,986,840 |
|
|
$ |
11.29 |
|
|
|
6.7 |
|
|
$ |
9,987,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No SARs were exercisable as of June 30, 2009.
3. |
|
SHORT-TERM AND LONG-TERM INVESTMENTS |
The Companys policy for its short-term and long-term investments is to establish a
high-quality portfolio that preserves principal, meets liquidity needs, avoids inappropriate
concentrations and delivers an appropriate yield in relationship to the Companys investment
guidelines and market conditions. Short-term and long-term investments consist of corporate and
various government agency and municipal debt securities. The Companys investments in auction rate
floating securities consist of investments in student loans. Management classifies the Companys
short-term and long-term investments as available-for-sale. Available-for-sale securities are
carried at fair value with unrealized gains and losses reported in stockholders equity. Realized
gains and losses and declines in value judged to be other than temporary, if any, are included in
other expense in the condensed consolidated statement of operations. A decline in the market value
of any available-for-sale security below cost that is deemed to be other than temporary, results in
impairment of the fair value of the investment. The impairment is charged to earnings and a new
cost basis for the security is established. Premiums and discounts are amortized or accreted over
the life of the related available-for-sale security. Dividends and interest income are recognized
when earned. The cost of securities sold is calculated using the specific identification method.
At June 30, 2009, the Company has recorded the estimated fair value in available-for-sale and
trading securities for short-term and long-term investments of approximately $271.6 million and
$36.9 million, respectively.
Available-for-sale and trading securities consist of the following at June 30, 2009 (amounts
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Than- |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Temporary |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Impairment |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Losses |
|
|
Value |
|
Corporate notes and
bonds |
|
$ |
79,278 |
|
|
$ |
459 |
|
|
$ |
(98 |
) |
|
$ |
|
|
|
$ |
79,639 |
|
Federal agency notes
and bonds |
|
|
182,090 |
|
|
|
940 |
|
|
|
(6 |
) |
|
|
|
|
|
|
183,024 |
|
Auction rate floating
securities |
|
|
44,525 |
|
|
|
|
|
|
|
(6,091 |
) |
|
|
(1,499 |
) |
|
|
36,935 |
|
Asset-backed securities |
|
|
9,417 |
|
|
|
82 |
|
|
|
(554 |
) |
|
|
|
|
|
|
8,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
$ |
315,310 |
|
|
$ |
1,481 |
|
|
$ |
(6,749 |
) |
|
$ |
(1,499 |
) |
|
$ |
308,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and six months ended June 30, 2009, the gross realized gains on sales of
available-for-sale securities totaled $66,789 and $76,178, respectively, while no gross losses were
realized. Such amounts were determined based on the specific identification method. The net
adjustment to unrealized gains during the three and six months ended June 30, 2009, on
available-for-sale securities included in stockholders equity totaled $4,059,329
8
and $4,133,878 respectively. Of these amounts, $3,095,185 was reclassified from retained
earnings in accordance with FSP FAS 115-2 during the three months ended June 30, 2009. The
amortized cost and estimated fair value of the available-for-sale securities at June 30, 2009, by
maturity, are shown below (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
|
|
|
|
|
Estimated |
|
|
|
Cost |
|
|
Fair Value |
|
Available-for-sale |
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
223,098 |
|
|
$ |
223,685 |
|
Due after one year through five years |
|
|
47,687 |
|
|
|
47,923 |
|
Due after five years through 10 years |
|
|
|
|
|
|
|
|
Due after 10 years |
|
|
36,225 |
|
|
|
30,135 |
|
|
|
|
|
|
|
|
|
|
$ |
307,010 |
|
|
$ |
301,743 |
|
|
|
|
|
|
|
|
Expected maturities will differ from contractual maturities because the issuers of the
securities may have the right to prepay obligations without prepayment penalties, and the Company
views its available-for-sale securities as available for current operations. At June 30, 2009,
approximately $36.9 million in estimated fair value expected to mature greater than one year has
been classified as long-term investments since these investments are in an unrealized loss
position, and management has both the ability and intent to hold these investments until recovery
of fair value, which may be maturity.
As of June 30, 2009, the Companys investments included auction rate floating securities with
a fair value of $36.9 million. The Companys auction rate floating securities are debt instruments
with a long-term maturity and with an interest rate that is reset in short intervals through
auctions. The negative conditions in the credit markets during 2008 and the first half of 2009
have prevented some investors from liquidating their holdings, including their holdings of auction
rate floating securities. During the three months ended March 31, 2008, the Company was informed
that there was insufficient demand at auction for the auction rate floating securities. As a
result, these affected auction rate floating securities are now considered illiquid, and the
Company could be required to hold them until they are redeemed by the holder at maturity. The
Company may not be able to liquidate the securities until a future auction on these investments is
successful. As a result of the continued lack of liquidity of these investments, the Company
recorded an other-than-temporary impairment loss of $6.4 million during the year ended December 31,
2008, based on the Companys estimate of the fair value of these investments. The Companys
estimate of the fair value of its auction rate floating securities was based on market information
and assumptions determined by the Companys management, which could change significantly based on
market conditions. On April 9, 2009, the Financial Accounting Standards Board (FASB) released
FASB Staff Position (FSP) FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments (FSP FAS 115-2), effective for interim and annual reporting
periods ending after June 15, 2009. Upon adoption, FSP FAS 115-2 requires that entities should
report a cumulative effect adjustment as of the beginning of the period of adoption to reclassify
the non-credit component of previously recognized other-than-temporary impairments on debt
securities held at that date from retained earnings to other comprehensive income if the entity
does not intend to sell the security and it is not more likely than not that the entity will be
required to sell the security before recovery of its amortized cost basis. The Company adopted FSP
FAS 115-2 during the three months ended June 30, 2009, and accordingly, reclassified approximately
$3.1 million of previously recognized other-than-temporary impairment losses, net of income taxes,
related to its auction rate floating securities from retained earnings to other comprehensive
income in the Companys condensed consolidated balance sheets during the three months ended June
30, 2009.
In November 2008, the Company entered into a settlement agreement with the broker through
which the Company purchased auction rate floating securities. The settlement agreement provides
the Company with the right to put an auction rate floating security currently held by the Company
back to the broker beginning on June 30, 2010. At March 31, 2009 and December 31, 2008, the
Company held one auction rate floating security with a par value of $1.3 million that was subject
to the settlement agreement. The Company elected the irrevocable Fair Value Option treatment under
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, and adjusted
the put option to fair value. The Company reclassified this auction rate floating security from
available-for-sale to trading securities as of December 31, 2008, and future changes in fair value
related to this investment will be recorded in earnings.
The following table shows the gross unrealized losses and the fair value of the Companys
investments, with unrealized losses that are not deemed to be other-than-temporarily impaired
aggregated by investment category
9
and length of time that individual securities have been in a continuous unrealized loss
position at June 30, 2009 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months |
|
|
Greater Than 12 Months |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
Corporate notes and bonds |
|
$ |
12,253 |
|
|
$ |
77 |
|
|
$ |
6,454 |
|
|
$ |
22 |
|
Federal agency notes and bonds |
|
|
22,638 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
Auction rate floating securities |
|
|
|
|
|
|
|
|
|
|
36,935 |
| |
|
6,091 |
|
Asset-backed securities |
|
|
1,780 |
|
|
|
17 |
|
|
|
1,383 |
|
|
|
537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
$ |
36,671 |
|
|
$ |
100 |
|
|
$ |
44,772 |
|
|
$ |
6,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009, the Company has concluded that the unrealized losses on its investment
securities are temporary in nature and are caused by changes in credit spreads and liquidity issues
in the marketplace. Available-for-sale securities are reviewed quarterly for possible
other-than-temporary impairment. This review includes an analysis of the facts and circumstances
of each individual investment such as the severity of loss, the length of time the fair value has
been below cost, the expectation for that securitys performance and the creditworthiness of the
issuer. Additionally, the Company has the intent and ability to hold these investments for the
time necessary to recover its cost, which for debt securities may be at maturity.
4. |
|
FAIR VALUE MEASUREMENTS |
As of June 30, 2009, the Company held certain assets that are required to be measured at fair
value on a recurring basis. These included certain of the Companys short-term and long-term
investments, including investments in auction rate floating securities, and the Companys
investments in Revance Therapeutics, Inc. (Revance) and Hyperion Therapeutics, Inc. (Hyperion).
The Company has invested in auction rate floating securities, which are classified as
available-for-sale or trading securities and reflected at fair value. Due to recent events in
credit markets, the auction events for some of these instruments held by the Company failed during
the three months ended March 31, 2008 (see Note 3). Therefore, the fair values of these auction
rate floating securities, which are primarily rated AAA, are estimated utilizing a discounted cash
flow analysis as of June 30, 2009. These analyses consider, among other items, the
collateralization underlying the security investments, the creditworthiness of the counterparty,
the timing of expected future cash flows, and the expectation of the next time the security is
expected to have a successful auction. These investments were also compared, when possible, to
other observable market data with similar characteristics to the securities held by the Company.
Changes to these assumptions in future periods could result in additional declines in fair value of
the auction rate floating securities.
As a result of the liquidity issues of the Companys auction rate floating securities, the
Company recorded an other-than-temporary impairment loss of $6.4 million in other expense during
the three months ended December 31, 2008, based on the Companys estimate of the fair value of
these investments. In accordance with FSP FAS 115-2, during the three months ended June 30, 2009,
the Company reclassified approximately $3.1 million of previously recognized other-than-temporary
impairment losses, net of income taxes, related to its auction rate floating securities from
retained earnings to other comprehensive income in the Companys condensed consolidated balance
sheets during the three months ended June 30, 2009 (see Note 3). The auction rate floating
securities held by the Company at June 30, 2009 and December 31, 2008, totaling $36.9 million and
$38.2 million, respectively, were in securities collateralized by student loan portfolios. These
securities were included in long-term investments at June 30, 2009 and December 31, 2008, in the
accompanying condensed consolidated balance sheets. As of June 30, 2009, the Company continued to
earn interest on virtually all of its auction rate floating securities. Any future fluctuation in
fair value related to the auction rate floating securities classified as available-for-sale that
the Company deems to be temporary, would be recorded to accumulated other comprehensive (loss)
income. If the Company determines that any future decline in fair value of its available-for-sale
securities was other than temporary, it would record a charge to earnings as appropriate.
10
The Company estimates changes in the net realizable value of its investment in Revance based
on a hypothetical liquidation at book value approach (see Note 7). During the three months ended
March 31, 2009, the Company reduced the carrying value of its investment in Revance by
approximately $2.9 million as a result of a reduction in the estimated net realizable value of the
investment using the hypothetical liquidation at book value approach, which reduced the Companys
investment in Revance to $0 as of March 31, 2009 and June 30, 2009.
The Companys assets measured at fair value on a recurring basis subject to the disclosure
requirements of SFAS No. 157, Fair Value Measurements, at June 30, 2009, were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting Date Using |
|
|
|
|
|
|
|
Quoted |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Active |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Markets |
|
|
Inputs |
|
|
Inputs |
|
|
|
Jun. 30, 2009 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Auction rate floating securities |
|
$ |
36,935 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
36,935 |
|
Other available-for-sale securities |
|
|
271,608 |
|
|
|
271,608 |
|
|
|
|
|
|
|
|
|
Investment in Revance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Hyperion |
|
|
2,375 |
|
|
|
|
|
|
|
|
|
|
|
2,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
|
$ |
310,918 |
|
|
$ |
271,608 |
|
|
$ |
|
|
|
$ |
39,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the Companys assets measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) as defined in SFAS No. 157 for the three and six
months ended June 30, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant |
|
|
|
|
|
|
|
Unobservable Inputs (Level 3) |
|
|
|
|
|
|
|
Auction Rate |
|
|
Investment |
|
|
Investment |
|
|
|
Floating |
|
|
in |
|
|
in |
|
|
|
Securities |
|
|
Revance |
|
|
Hyperion |
|
Balance at March 31, 2009 |
|
$ |
38,602 |
|
|
$ |
|
|
|
$ |
|
|
Transfers to (from) Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
Total gains included in interest and
investment income |
|
|
10 |
|
|
|
|
|
|
|
|
|
Total gains included in other (income)
expense, net |
|
|
20 |
|
|
|
|
|
|
|
|
|
Total losses included in other
comprehensive income |
|
|
(1,647 |
) |
|
|
|
|
|
|
|
|
Common stock of Hyperion received
related to amendment of collaboration
agreement (see Note 8) |
|
|
|
|
|
|
|
|
|
|
2.375 |
|
Purchases and settlements (net) |
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009 |
|
$ |
36,935 |
|
|
$ |
|
|
|
$ |
2,375 |
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant |
|
|
|
|
|
|
|
Unobservable Inputs (Level 3) |
|
|
|
|
|
|
|
Auction Rate |
|
|
Investment |
|
|
Investment |
|
|
|
Floating |
|
|
in |
|
|
in |
|
|
|
Securities |
|
|
Revance |
|
|
Hyperion |
|
Balance at December 31, 2008 |
|
$ |
38,225 |
|
|
$ |
2,887 |
|
|
$ |
|
|
Transfers to (from) Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
Total gains included in interest and
investment income |
|
|
15 |
|
|
|
|
|
|
|
|
|
Total gains (losses) included
in other (income)
expense, net |
|
|
33 |
|
|
|
(2,887 |
) |
|
|
|
|
Total losses included in other
comprehensive income |
|
|
(1,238 |
) |
|
|
|
|
|
|
|
|
Common stock of Hyperion received
related to amendment of collaboration
agreement (see Note 8) |
|
|
|
|
|
|
|
|
|
|
2.375 |
|
Purchases and settlements (net) |
|
|
(100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009 |
|
$ |
36,935 |
|
|
$ |
|
|
|
$ |
2,375 |
|
|
|
|
|
|
|
|
|
|
|
5. |
|
DEVELOPMENT AND DISTRIBUTION AGREEMENT WITH IPSEN FOR RIGHTS TO IPSENS BOTULINUM TOXIN TYPE
A PRODUCT KNOWN AS DYSPORTTM |
On March 17, 2006, the Company entered into a development and distribution agreement with
Ipsen Ltd., a wholly-owned subsidiary of Ipsen, S.A. (Ipsen), whereby Ipsen granted Aesthetica
Ltd., a wholly-owned subsidiary of Medicis, rights to develop, distribute and commercialize Ipsens
botulinum toxin type A product in the United States, Canada and Japan for aesthetic use by
physicians. During the development of the product, the proposed name of the product for aesthetic
use in the U.S. was RELOXIN®.
In May 2008, the U.S. Food and Drug Administration (FDA) accepted the filing of Ipsens
Biologics License Application (BLA) for RELOXIN®, and in accordance with the
agreement, Medicis paid Ipsen $25.0 million during the three months ended June 30, 2008, upon
achievement of this milestone. The $25.0 million was recognized as a charge to research and
development expense during the three months ended June 30, 2008.
On April 29, 2009, the FDA approved the BLA for DYSPORTTM. The approval includes
two separate indications, the treatment of cervical dystonia in adults to reduce the severity of
abnormal head position and neck pain, and the temporary improvement in the appearance of moderate
to severe glabellar lines in adults younger than 65 years of age. RELOXIN®, which was
the proposed U.S. name for Ipsens botulinum toxin product for aesthetic use, is now marketed under
the name of DYSPORTTM. Ipsen will market DYSPORTTM in the U.S. for the
therapeutic indication (cervical dystonia), while Medicis markets DYSPORTTM in the U.S.
for the aesthetic indication (glabellar lines).
In accordance with the agreement, the Company paid Ipsen $75.0 million during the three months
ended June 30, 2009, as a result of the approval by the FDA. The $75.0 million payment was
capitalized into intangible assets in the Companys condensed consolidated balance sheet, and is
being amortized on a straight-line basis over a period of 15 years. Ipsen will manufacture and
provide the product to Medicis for the term of the agreement, which extends to December 2036.
Medicis will pay Ipsen a royalty based on sales and a supply price, the total of which is
equivalent to approximately 30% of net sales as defined under the agreement.
The product is not currently approved for use in Canada or Japan. Under the terms of the
agreement, Medicis is responsible for all remaining research and development costs associated with
obtaining the products approval in Canada and Japan. Medicis will pay an additional $2.0 million
to Ipsen upon regulatory approval of the product in Japan.
12
6. |
|
SALE OF MEDICIS PEDIATRICS |
On June 10, 2009, Medicis, Medicis Pediatrics, Inc. (Medicis Pediatrics, formerly known as
Ascent Pediatrics, Inc.), a wholly-owned subsidiary of Medicis, and BioMarin Pharmaceutical Inc.
(BioMarin) entered into an amendment (the Amendment) to the Securities Purchase Agreement (the
Securities Purchase Agreement), dated as of May 18, 2004, and amended on January 12, 2005, by and
among Medicis, Medicis Pediatrics, BioMarin and BioMarin Pediatrics Inc., a wholly-owned subsidiary
of BioMarin that previously merged into BioMarin. The Amendment was effected to accelerate the
closing of BioMarins option under the Securities Purchase Agreement to purchase from Medicis all
of the issued and outstanding capital stock of Medicis Pediatrics (the Option), which was
previously expected to close in August 2009. In accordance with the Amendment, the parties
consummated the closing of the Option on June 10, 2009 (the Option Closing). The aggregate cash
consideration paid to Medicis in conjunction with the Option Closing was approximately $70.3
million and the purchase was completed substantially in accordance with the previously disclosed
terms of the Securities Purchase Agreement.
As a result of the Option Closing, the Company recognized a pretax gain of $2.2 million during
the three months ended June 30, 2009, which is included in other (income) expense, net, in the
accompanying condensed consolidated statements of operations. Because of the difference between
the Companys book and tax basis of goodwill in Medicis Pediatrics, the transaction resulted in a
$24.8 million gain for income tax purposes, and, accordingly, the Company recorded a $9.0 million
income tax provision during the three months ended June 30, 2009, which is included in income tax
expense in the accompanying condensed consolidated statements of operations.
On December 11, 2007, the Company announced a strategic collaboration with Revance, a
privately-held, venture-backed development-stage entity, whereby the Company made an equity
investment in Revance and purchased an option to acquire Revance or to license exclusively in North
America Revances novel topical botulinum toxin type A product currently under clinical
development. The consideration to be paid to Revance upon the Companys exercise of the option
will be at an amount that will approximate the then fair value of Revance or the license of the
product under development, as determined by an independent appraisal. The option period will
extend through the end of Phase 2 testing in the United States. In consideration for the Companys
$20.0 million payment, the Company received preferred stock representing an approximate 13.7
percent ownership in Revance, or approximately 11.7 percent on a fully diluted basis, and the
option to acquire Revance or to license the product under development. The $20.0 million was
expected to be used by Revance primarily for the development of the product. Approximately $12.0
million of the $20.0 million payment represented the fair value of the investment in Revance at the
time of the investment and was included in other long-term assets in the Companys condensed
consolidated balance sheets as of December 31, 2007. The remaining $8.0 million, which is
non-refundable and was expected to be utilized in the development of the new product, represented
the residual value of the option to acquire Revance or to license the product under development and
was recognized as research and development expense during the three months ended December 31, 2007.
Prior to the exercise of the option, Revance will remain primarily responsible for the
worldwide development of Revances topical botulinum toxin type A product in consultation with the
Company in North America. The Company will assume primary responsibility for the development of
the product should consummation of either a merger or a license for topically delivered botulinum
toxin type A in North America be completed under the terms of the option. Revance will have sole
responsibility for manufacturing the development product and manufacturing the product during
commercialization worldwide. The Companys right to exercise the option is triggered upon
Revances successful completion of certain regulatory milestones through the end of Phase 2 testing
in the United States. A license would contain a payment upon exercise of the license option,
milestone payments related to clinical, regulatory and commercial achievements, and royalties based
on sales defined in the license. If the Company elects to exercise the option, the financial terms
for the acquisition or license will be determined through an independent valuation in accordance
with specified methodologies.
The Company estimates the impairment and/or the net realizable value of the investment based
on a hypothetical liquidation at book value approach as of the reporting date, unless a
quantitative valuation metric is available for these purposes (such as the completion of an equity
financing by Revance). During the three months
13
and six months ended June 30, 2009, the Company reduced the carrying value of its investment
in Revance by approximately $0 and $2.9 million, respectively, as a result of a reduction in the
estimated net realizable value of the investment using the hypothetical liquidation at book value
approach. Such amounts were recognized as other expense. At June 30, 2009, the Companys
investment in Revance was $0.
A business entity is subject to the consolidation rules of FASB Interpretation No. 46,
Consolidation of Variable Interest Entities an Interpretation of Accounting Research Bulletin
No. 51 (FIN 46) and is referred to as a variable interest entity if it lacks sufficient equity to
finance its activities without additional financial support from other parties or its equity
holders lack adequate decision making ability based on criteria set forth in FIN 46. FIN 46 also
requires disclosures about variable interest entities that a company is not required to
consolidate, but in which a company has a significant variable interest. The Company has
determined that Revance is a variable interest entity and that the Company is not the primary
beneficiary, and therefore the Companys equity investment in Revance currently does not require
the Company to consolidate Revance into its financial statements. The consolidation status could
change in the future, however, depending on changes in the Companys relationship with Revance.
8. |
|
STRATEGIC COLLABORATIONS |
Hyperion
On June 29, 2009, Ucyclyd Pharma, Inc. (Ucyclyd), a wholly-owned subsidiary of Medicis, and
Hyperion entered into a second amendment (the Second Amendment) to their existing Collaboration
Agreement (the Agreement), which was initially entered into on August 23, 2007, and first amended
on November 24, 2008. Under the original Agreement, Hyperion is required to pay Ucyclyd royalties
and regulatory and sales milestone payments in connection with certain licenses that would be
granted to Hyperion upon its exercise of buyout rights granted to it with respect to Ucyclyds
product referred to as GT4P. In connection with Hyperion obtaining additional venture financing,
Ucyclyd agreed in the Second Amendment to restructure the royalty and milestone payments in
exchange for Hyperion having agreed to issue five percent of its fully-diluted common stock to
Ucyclyd. In addition, pursuant to the Second Amendment, Ucyclyd agreed to provide seller financing
in the event that Hyperion exercises its buyout rights with respect to GT4P.
The common stock of Hyperion that was received by Ucyclyd in consideration for the
restructuring of the royalty and milestone payments was valued at $2.4 million, which was derived
utilizing the per share price of preferred shares issued by Hyperion at the same time as the common
shares that were issued to Ucyclyd. The $2.4 million was capitalized into other assets in the
Companys condensed consolidated balance sheets as of June 30, 2009, along with corresponding
deferred revenue, which will be recognized as contract revenue ratably over a 30-month period
ending December 31, 2011, which corresponds to the period over which the Company is recording
contract revenue on the original license for GT4P.
Perrigo
On April 8, 2009, the Company entered into a License and Settlement Agreement (the License
and Settlement Agreement) and a Joint Development Agreement (the Joint Development Agreement)
with Perrigo Israel Pharmaceuticals Ltd. Perrigo Company was also a party to the License and
Settlement Agreement. Perrigo Israel Pharmaceuticals Ltd. and Perrigo Company are collectively
referred to as Perrigo.
In connection with the License and Settlement Agreement, the Company and Perrigo agreed to
terminate all legal disputes between them relating to the Companys VANOS® fluocinonide
Cream. On April 17, 2009, the Court entered a consent judgment dismissing all claims and
counterclaims between Medicis and Perrigo, and enjoining Perrigo from marketing a generic version
of VANOS® other than under the terms of the settlement agreement. In addition, Perrigo
confirmed that certain of the Companys patents relating to VANOS® are valid and
enforceable, and cover Perrigos activities relating to its generic product under Abbreviated New
Drug Application (ANDA) No. 090256. Further, subject to the terms and conditions contained in
the License and Settlement Agreement:
|
|
|
the Company granted Perrigo, effective December 15, 2013, or earlier upon the occurrence
of certain events, a license to make and sell generic versions of the existing
VANOS® products; and |
14
|
|
|
when Perrigo does commercialize generic versions of VANOS® products, Perrigo
will pay the Company a royalty based on sales of such generic products. |
|
|
|
|
Pursuant to the Joint Development Agreement, subject to the terms and conditions contained
therein: |
|
|
|
|
the Company and Perrigo will collaborate to develop a novel proprietary product; |
|
|
|
|
the Company has the sole right to commercialize the novel proprietary product; |
|
|
|
|
if and when a New Drug Application (NDA) for a novel proprietary product is submitted
to the FDA, the Company and Perrigo shall enter into a commercial supply agreement
pursuant to which, among other terms, for a period of three years following approval of the
NDA, Perrigo would exclusively supply to the Company all of the Companys novel proprietary
product requirements in the U.S.; |
|
|
|
|
the Company made an up-front $3.0 million payment to Perrigo and will make additional
payments to Perrigo of up to $5.0 million upon the achievement of certain development,
regulatory and commercialization milestones; and |
|
|
|
|
the Company will pay to Perrigo royalty payments on sales of the novel proprietary
product. |
The $3.0 million payment was recognized as research and development expense during the three
months ended June 30, 2009.
IMPAX
On November 26, 2008, the Company entered into a License and Settlement Agreement and a Joint
Development Agreement with IMPAX Laboratories, Inc. (IMPAX). In connection with the License and
Settlement Agreement, the Company and IMPAX agreed to terminate all legal disputes between them
relating to SOLODYN®. Additionally, under terms of the License and Settlement
Agreement, IMPAX confirmed that the Companys patents relating to SOLODYN® are valid and
enforceable, and cover IMPAXs activities relating to its generic product under ANDA #90-024.
Under the terms of the License and Settlement Agreement, IMPAX has a license to market its
generic versions of SOLODYN® 45mg, 90mg and 135mg under the SOLODYN®
intellectual property rights belonging to the Company upon the occurrence of specific events. Upon
launch of its generic formulations of SOLODYN®, IMPAX may be required to pay the Company
a royalty, based on sales of those generic formulations by IMPAX under terms described in the
License and Settlement Agreement.
Under the Joint Development Agreement, the Company and IMPAX will collaborate on the
development of five strategic dermatology product opportunities, including an advanced-form
SOLODYN® product. Under terms of the agreement, the Company made an initial payment of
$40.0 million upon execution of the agreement. During the three months ended March 31, 2009, the
Company paid IMPAX $5.0 million upon the achievement of a clinical milestone, in accordance with
terms of the agreement. In addition, the Company will be required to pay up to $18.0 million upon
successful completion of certain other clinical and commercial milestones. The Company will also
make royalty payments based on sales of the advanced-form SOLODYN® product if and when
it is commercialized by Medicis upon approval by the FDA. The Company will share equally in the
gross profit of the other four development products if and when they are commercialized by IMPAX
upon approval by the FDA.
The $40.0 million initial payment was recognized as a charge to research and development
expense during the three months ended December 31, 2008, and the $5.0 million clinical milestone
achievement payment was recognized as a charge to research and development expense during the three
months ended March 31, 2009.
Other
On June 27, 2008, the Company and a U.S. company entered into a license agreement that
provides patent rights for development and commercialization of dermatologic products. Under the
terms of the agreement, the Company made an initial payment of $2.0 million upon execution of the
agreement. In addition, the Company will
15
be required to pay $19.0 million upon successful completion of certain clinical milestones for
the first and second products, $15.0 million upon the first commercial sale for the first and
second products in the U.S. and $30.0 million upon achievement of certain commercial sales
milestones. The Company will also make royalty payments based on net sales as defined in the
license. The $2.0 million payment was recognized as a charge to research and development expense
during the three months ended June 30, 2008.
9. |
|
SEGMENT AND PRODUCT INFORMATION |
The Company operates in one significant business segment: pharmaceuticals. The Companys
current pharmaceutical franchises are divided between the dermatological and non-dermatological
fields. The dermatological field represents products for the treatment of acne and acne-related
dermatological conditions and non-acne dermatological conditions. The non-dermatological field
represents products for the treatment of urea cycle disorder and contract revenue. The acne and
acne-related dermatological product lines include DYNACIN®, PLEXION®,
SOLODYN®, TRIAZ® and ZIANA®. The non-acne dermatological product
lines include DYSPORTTM, LOPROX®, PERLANE®, RESTYLANE®
and VANOS®. The non-dermatological product lines include AMMONUL® and
BUPHENYL®. The non-dermatological field also includes contract revenues associated with
licensing agreements and authorized generics, and LipoSonix revenues.
The Companys pharmaceutical products, with the exception of AMMONUL® and
BUPHENYL®, are promoted to dermatologists, podiatrists and plastic surgeons. Such
products are often prescribed by physicians outside these three specialties; including family
practitioners, general practitioners, primary-care physicians and OB/GYNs, as well as hospitals,
government agencies and others. Currently, the Companys products are sold primarily to
wholesalers and retail chain drug stores.
Net revenues and the percentage of net revenues for each of the product categories are as
follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2009 |
|
2008 |
|
2009 |
2008 |
|
Acne and acne-related
dermatological products |
|
$ |
94,185 |
|
|
$ |
86,383 |
|
|
$ |
160,638 |
|
|
$ |
166,516 |
|
Non-acne dermatological products |
|
|
37,100 |
|
|
|
40,523 |
|
|
|
60,573 |
|
|
|
79,614 |
|
Non-dermatological products |
|
|
9,961 |
|
|
|
10,543 |
|
|
|
19,853 |
|
|
|
20,222 |
|
|
|
|
|
Total net revenues |
|
$ |
141,246 |
|
|
$ |
137,449 |
|
|
$ |
241,064 |
|
|
$ |
266,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Acne and acne-related
dermatological products |
|
|
67 |
% |
|
|
63 |
% |
|
|
67 |
% |
|
|
62 |
% |
Non-acne dermatological products |
|
|
26 |
|
|
|
29 |
|
|
|
25 |
|
|
|
30 |
|
Non-dermatological products |
|
|
7 |
|
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
|
|
|
Total net revenues |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
Except for the LipoSonix technology, the Company utilizes third parties to manufacture and
package inventories held for sale, takes title to certain inventories once manufactured, and
warehouses such goods until packaged for final distribution and sale. Inventories consist of
salable products held at the Companys warehouses, as well as raw materials and components at the
manufacturers facilities, and are valued at the lower of cost or market using the first-in,
first-out method. The Company provides valuation reserves for estimated obsolescence or
unmarketable inventory in an
16
amount equal to the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions.
Inventory costs associated with products that have not yet received regulatory approval are
capitalized if, in the view of the Companys management, there is probable future commercial use
and future economic benefit. If future commercial use and future economic benefit are not
considered probable, then costs associated with pre-launch inventory that has not yet received
regulatory approval are expensed as research and development expense during the period the costs
are incurred. As of June 30, 2009 and December 31, 2008, there was $0 and $1.1 million,
respectively, of costs capitalized into inventory for products that have not yet received
regulatory approval.
Inventories are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
December 31, 2008 |
|
Raw materials |
|
$ |
7,734 |
|
|
$ |
7,234 |
|
Finished goods |
|
|
17,901 |
|
|
|
18,407 |
|
Valuation reserve |
|
|
(1,150 |
) |
|
|
(1,415 |
) |
|
|
|
|
|
|
|
Total inventories |
|
$ |
24,485 |
|
|
$ |
24,226 |
|
|
|
|
|
|
|
|
11. |
|
OTHER CURRENT LIABILITIES |
Other current liabilities are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Accrued incentives |
|
$ |
14,174 |
|
|
$ |
18,910 |
|
Managed care and Medicaid reserves |
|
|
34,820 |
|
|
|
16,956 |
|
Accrued customer rebate and loyalty
programs |
|
|
47,829 |
|
|
|
28,449 |
|
Deferred revenue |
|
|
10,956 |
|
|
|
3,341 |
|
Other accrued expenses |
|
|
22,193 |
|
|
|
19,602 |
|
|
|
|
|
|
|
|
|
|
$ |
129,972 |
|
|
$ |
87,258 |
|
|
|
|
|
|
|
|
Included in deferred revenue as of June 30, 2009 and December 31, 2008, was $0.6 million and
$0.7 million, respectively, associated with the deferral of the recognition of revenue and related
cost of revenue for certain sales of inventory into the wholesale distribution channel that are in
excess of eight (8) weeks of projected demand.
12. |
|
CONTINGENT CONVERTIBLE SENIOR NOTES |
In June 2002, the Company sold $400.0 million aggregate principal amount of its 2.5%
Contingent Convertible Senior Notes Due 2032 (the Old Notes) in private transactions. As
discussed below, approximately $230.8 million in principal amount of the Old Notes was exchanged
for New Notes on August 14, 2003. The Old Notes bear interest at a rate of 2.5% per annum, which
is payable on June 4 and December 4 of each year, beginning on December 4, 2002. The Company also
agreed to pay contingent interest at a rate equal to 0.5% per annum during any six-month period,
with the initial six-month period commencing June 4, 2007, if the average trading price of the Old
Notes reaches certain thresholds. No contingent interest related to the Old Notes was payable at
June 30, 2009 or December 31, 2008. The Old Notes will mature on June 4, 2032.
The Company may redeem some or all of the Old Notes at any time on or after June 11, 2007, at
a redemption price, payable in cash, of 100% of the principal amount of the Old Notes, plus accrued
and unpaid interest, including contingent interest, if any. Holders of the Old Notes may require
the Company to repurchase all or a portion of their Old Notes on June 4, 2012 and June 4, 2017, or
upon a change in control, as defined in the indenture governing the Old Notes, at 100% of the
principal amount of the Old Notes, plus accrued and unpaid interest to the date of the repurchase,
payable in cash. Pursuant to SFAS No. 78, Classification of Obligations That Are Callable by the
Creditor, if an obligation is due on demand or will be due on demand within one year from the
balance sheet date, even though liquidation may not be expected within that period, it should be
classified as a current liability. Accordingly, the outstanding balance of Old Notes along with
the deferred tax liability associated
17
with accelerated interest deductions on the Old Notes will be classified as a current liability
during the respective twelve month periods prior to June 4, 2012 and June 4, 2017.
The Old Notes are convertible, at the holders option, prior to the maturity date into shares
of the Companys Class A common stock in the following circumstances:
|
|
|
during any quarter commencing after June 30, 2002, if the closing price of the Companys
Class A common stock over a specified number of trading days during the previous quarter,
including the last trading day of such quarter, is more than 110% of the conversion price
of the Old Notes, or $31.96. The Old Notes are initially convertible at a conversion price
of $29.05 per share, which is equal to a conversion rate of approximately 34.4234 shares
per $1,000 principal amount of Old Notes, subject to adjustment; |
|
|
|
|
if the Company has called the Old Notes for redemption; |
|
|
|
|
during the five trading day period immediately following any nine consecutive day
trading period in which the trading price of the Old Notes per $1,000 principal amount for
each day of such period was less than 95% of the product of the closing sale price of the
Companys Class A common stock on that day multiplied by the number of shares of the
Companys Class A common stock issuable upon conversion of $1,000 principal amount of the
Old Notes; or |
|
|
|
|
upon the occurrence of specified corporate transactions. |
The Old Notes, which are unsecured, do not contain any restrictions on the payment of
dividends, the incurrence of additional indebtedness or the repurchase of the Companys securities
and do not contain any financial covenants.
The Company incurred $12.6 million of fees and other origination costs related to the issuance
of the Old Notes. The Company amortized these costs over the first five-year Put period, which ran
through June 4, 2007.
On August 14, 2003, the Company exchanged approximately $230.8 million in principal amount of
its Old Notes for approximately $283.9 million in principal amount of its 1.5% Contingent
Convertible Senior Notes Due 2033 (the New Notes). Holders of Old Notes that accepted the
Companys exchange offer received $1,230 in principal amount of New Notes for each $1,000 in
principal amount of Old Notes. The terms of the New Notes are similar to the terms of the Old
Notes, but have a different interest rate, conversion rate and maturity date. Holders of Old Notes
that chose not to exchange continue to be subject to the terms of the Old Notes.
The New Notes bear interest at a rate of 1.5% per annum, which is payable on June 4 and
December 4 of each year, beginning December 4, 2003. The Company will also pay contingent interest
at a rate of 0.5% per annum during any six-month period, with the initial six-month period
commencing June 4, 2008, if the average trading price of the New Notes reaches certain thresholds.
No contingent interest related to the New Notes was payable at June 30, 2009 or December 31, 2008.
The New Notes mature on June 4, 2033.
As a result of the exchange, the outstanding principal amounts of the Old Notes and the New
Notes were $169.2 million and $283.9 million, respectively. The Company incurred approximately
$5.1 million of fees and other origination costs related to the issuance of the New Notes. The
Company amortized these costs over the first five-year Put period, which ran through June 4, 2008.
Holders of the New Notes were able to require the Company to repurchase all or a portion of
their New Notes on June 4, 2008, at 100% of the principal amount of the New Notes, plus accrued and
unpaid interest, including contingent interest, if any, to the date of the repurchase, payable in
cash. Holders of approximately $283.7 million of New Notes elected to require the Company to
repurchase their New Notes on June 4, 2008. The Company paid $283.7 million, plus accrued and
unpaid interest of approximately $2.2 million, to the holders of New Notes that elected to require
the Company to repurchase their New Notes. The Company was also required to pay an accumulated
deferred tax liability of approximately $34.9 million related to the repurchased New Notes. This
$34.9 million deferred tax liability was paid during the second half of 2008. Following the
repurchase of these New Notes, $181,000 of principal amount of New Notes remained outstanding as of
June 30, 2009 and December 31, 2008.
18
The remaining New Notes are convertible, at the holders option, prior to the maturity date
into shares of the Companys Class A common stock in the following circumstances:
|
|
|
during any quarter commencing after September 30, 2003, if the closing price of the
Companys Class A common stock over a specified number of trading days during the previous
quarter, including the last trading day of such quarter, is more than 120% of the
conversion price of the New Notes, or $46.51. The Notes are initially convertible at a
conversion price of $38.76 per share, which is equal to a conversion rate of approximately
25.7998 shares per $1,000 principal amount of New Notes, subject to adjustment; |
|
|
|
|
if the Company has called the New Notes for redemption; |
|
|
|
|
during the five trading day period immediately following any nine consecutive day
trading period in which the trading price of the New Notes per $1,000 principal amount for
each day of such period was less than 95% of the product of the closing sale price of the
Companys Class A common stock on that day multiplied by the number of shares of the
Companys Class A common stock issuable upon conversion of $1,000 principal amount of the
New Notes; or |
|
|
|
|
upon the occurrence of specified corporate transactions. |
The remaining New Notes, which are unsecured, do not contain any restrictions on the
incurrence of additional indebtedness or the repurchase of the Companys securities and do not
contain any financial covenants. The New Notes require an adjustment to the conversion price if
the cumulative aggregate of all current and prior dividend increases above $0.025 per share would
result in at least a one percent (1%) increase in the conversion price. This threshold has not
been reached and no adjustment to the conversion price has been made.
During the quarters ended June 30, 2009 and December 31, 2008, the Old Notes and New Notes did
not meet the criteria for the right of conversion. At the end of each future quarter, the
conversion rights will be reassessed in accordance with the bond indenture agreement to determine
if the conversion trigger rights have been achieved.
Income taxes are determined using an annual effective tax rate, which generally differs from
the U.S. Federal statutory rate, primarily because of state and local income taxes, enhanced
charitable contribution deductions for inventory, tax credits available in the U.S., the treatment
of certain share-based payments under SFAS 123R that are not designed to normally result in tax
deductions, various expenses that are not deductible for tax purposes, changes in valuation
allowances against deferred tax assets and differences in tax rates in certain non-U.S.
jurisdictions. The Companys effective tax rate may be subject to fluctuations during the year as
new information is obtained which may affect the assumptions it uses to estimate its annual
effective tax rate, including factors such as its mix of pre-tax earnings in the various tax
jurisdictions in which it operates, changes in valuation allowances against deferred tax assets,
reserves for tax audit issues and settlements, utilization of tax credits and changes in tax laws
in jurisdictions where the Company conducts operations. The Company recognizes tax benefits in
accordance with FIN 48, Accounting for Uncertainty in Income Taxes an Interpretation of FASB
Statement No. 109. Under FIN 48, tax benefits are recognized only if the tax position is more
likely than not of being sustained. The Company recognizes deferred tax assets and liabilities for
temporary differences between the financial reporting basis and the tax basis of its assets and
liabilities, along with net operating losses and credit carryforwards. The Company records
valuation allowances against its deferred tax assets to reduce the net carrying value to amounts
that management believes is more likely than not to be realized.
On June 10, 2009, the Company sold all of the outstanding capital stock of Medicis Pediatrics
(see Note 6). The transaction generated a $24.8 million net gain for income tax purposes and,
accordingly, a $9.0 million income tax provision was established as part of the transaction.
At June 30, 2009, the Company has an unrealized tax loss of $21.0 million related to the
Companys option to acquire Revance or license Revances product that is under development. The
Company will not be able to determine the character of the loss until the Company exercises or
fails to exercise its option. A realized loss characterized as a capital loss can only be utilized
to offset capital gains. At June 30, 2009, the Company has
19
recorded a valuation allowance of $7.6 million against the deferred tax asset associated with
this unrealized tax loss in order to reduce the carrying value of the deferred tax asset to $0,
which is the amount that management believes is more likely than not to be realized.
During the three months ended June 30, 2009 and June 30, 2008, the Company made net tax
payments of $2.1 million and $18.9 million, respectively. During the six months ended June 30,
2009 and June 30, 2008, the Company made net tax payments of $3.6 million and $30.2 million,
respectively.
The Company operates in multiple tax jurisdictions and is periodically subject to audit in
these jurisdictions. These audits can involve complex issues that may require an extended period
of time to resolve and may cover multiple years. The Company and its domestic subsidiaries file a
consolidated U.S. federal income tax return. Such returns have either been audited or settled
through statute expiration through fiscal 2004. The Internal Revenue Service is currently
conducting a limited scope examination on the Companys tax return for the period ending December
31, 2007.
The Company owns two subsidiaries that file corporate tax returns in Sweden. The Swedish tax
authorities examined the tax return of one of the subsidiaries for fiscal 2004. The examiners
issued a no change letter, and the examination is complete. The Companys other subsidiary in
Sweden has not been examined by the Swedish tax authorities. The Swedish statute of limitation may
be open for up to five years from the date the tax return was filed. Thus, all returns filed from
fiscal 2004 forward are open under the statute of limitation.
At December 31, 2008, the Company had $2.5 million in unrecognized tax benefits, the
recognition of which would have a favorable effect of $2.1 million on the Companys effective tax
rate. The amount of unrecognized tax benefits decreased $1.4 million from $2.5 million to $1.1
million during the six months ended June 30, 2009, due to statute closures. Recognition of the
$1.1 million unrecognized tax benefits would have a favorable effect of $0.7 million on the
Companys effective tax rate. During the next twelve months, the Company estimates that the amount
of unrecognized tax benefits will not change.
The Company recognizes accrued interest and penalties, if applicable, related to unrecognized
tax benefits in income tax expense. The Company had approximately $170,000 and $290,000 for the
payment of interest and penalties accrued (net of tax benefit) at June 30, 2009 and December 31,
2008, respectively.
14. |
|
DIVIDENDS DECLARED ON COMMON STOCK |
On June 10, 2009, the Company declared a cash dividend of $0.04 per issued and outstanding
share of its Class A common stock payable on July 31, 2009, to stockholders of record at the close
of business on July 1, 2009. The $2.4 million dividend was recorded as a reduction of accumulated
earnings and is included in other current liabilities in the accompanying condensed consolidated
balance sheets as of June 30, 2009. The Company has not adopted a dividend policy.
Total comprehensive income includes net income and other comprehensive income (loss), which
consists of foreign currency translation adjustments and unrealized gains and losses on
available-for-sale investments. Total comprehensive income for the three months ended June 30,
2009 and 2008, was $14.4 million and $10.6 million, respectively. Total comprehensive income for
the six months ended June 30, 2009 and 2008, was $14.7 million and $32.2 million, respectively.
16. |
|
NET INCOME PER COMMON SHARE |
In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities. In FSP 03-6-1, unvested share-based
payment awards that contain rights to receive nonforfeitable dividends or dividend equivalents
(whether paid or unpaid) are participating securities, and thus, should be included in the
two-class method of computing earnings per share. The two-class method is an earnings
allocation formula that treats a participating security as having rights to earnings that would
otherwise have been available to common shareholders. Restricted stock granted to certain
employees by the Company (see Note 2) participate in dividends on the same basis as common shares,
and these dividends are not forfeitable by the holders of the restricted stock. As a result, the
restricted stock grants meet the definition of a
20
participating security. The Company adopted FSP EITF 03-6-1 on January 1, 2009. Prior
periods have been restated as the provisions of FSP EITF 03-6-1 are retrospective. The adoption of
FSP EITF 03-6-1 reduced basic earnings per share for the three and six months ended June 30, 2009,
by $0.01 and $0.01, respectively. The adoption of FSP EITF 03-6-1 reduced diluted earnings per
share for the three months ended June 30, 2009, by $0.01. There was no impact to basic or diluted
earnings per share for all other periods presented.
The following table sets forth the computation of basic and diluted net income per common
share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
BASIC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
15,593 |
|
|
$ |
13,008 |
|
|
$ |
15,921 |
|
|
$ |
33,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: income allocated to participating securities |
|
|
526 |
|
|
|
232 |
|
|
|
467 |
|
|
|
487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
15,067 |
|
|
$ |
12,776 |
|
|
$ |
15,454 |
|
|
$ |
33,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
57,088 |
|
|
|
56,493 |
|
|
|
56,911 |
|
|
|
56,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share |
|
$ |
0.26 |
|
|
$ |
0.23 |
|
|
$ |
0.27 |
|
|
$ |
0.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
15,593 |
|
|
$ |
13,008 |
|
|
$ |
15,921 |
|
|
$ |
33,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: income allocated to participating securities |
|
|
526 |
|
|
|
232 |
|
|
|
467 |
|
|
|
487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
|
15,067 |
|
|
|
12,776 |
|
|
|
15,454 |
|
|
|
33,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings allocated to unvested shareholders |
|
|
(453 |
) |
|
|
(197 |
) |
|
|
(342 |
) |
|
|
(428 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings re-allocated to unvested shareholders |
|
|
452 |
|
|
|
195 |
|
|
|
341 |
|
|
|
423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-effected interest expense and issue costs related to
Old Notes |
|
|
666 |
|
|
|
666 |
|
|
|
1,332 |
|
|
|
1,332 |
|
Tax-effected interest expense and issue costs related to
New Notes |
|
|
|
|
|
|
687 |
|
|
|
1 |
|
|
|
1,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income assuming dilution |
|
$ |
15,732 |
|
|
$ |
14,127 |
|
|
$ |
16,786 |
|
|
$ |
35,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
57,088 |
|
|
|
56,493 |
|
|
|
56,911 |
|
|
|
56,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Old Notes |
|
|
5,823 |
|
|
|
5,823 |
|
|
|
5,823 |
|
|
|
5,823 |
|
New Notes |
|
|
4 |
|
|
|
5,233 |
|
|
|
4 |
|
|
|
6,279 |
|
Stock options |
|
|
93 |
|
|
|
660 |
|
|
|
100 |
|
|
|
677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares assuming dilution |
|
|
63,008 |
|
|
|
68,209 |
|
|
|
62,838 |
|
|
|
69,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share |
|
$ |
0.25 |
|
|
$ |
0.21 |
|
|
$ |
0.27 |
|
|
$ |
0.52 |
|
|
|
|
|
|
Diluted net income per common share must be calculated using the if-converted method
in accordance with EITF 04-8, Effect of Contingently Convertible Debt on Earnings per Share.
Diluted net income per share is calculated by adjusting net income for tax-effected net interest
and issue costs on the Old Notes and New Notes, divided by the weighted average number of common
shares outstanding assuming conversion.
21
The diluted net income per common share computation for the three and six months ended June
30, 2009, excludes 10,679,752 and 11,266,093 shares of stock, respectively, that represented
outstanding stock options whose exercise price were greater than the average market price of the
common shares during the period and were anti-dilutive. The diluted net income per common share
computation for the three and six months ended June 30, 2008, excludes 9,618,647 and 9,725,260
shares of stock, respectively, that represented outstanding stock options whose exercise price were
greater than the average market price of the common shares during the period and were
anti-dilutive.
17. |
|
COMMITMENTS AND CONTINGENCIES |
Lease Exit Costs
In connection with occupancy of the new headquarter office, the Company ceased use of the
prior headquarter office in July 2008, which consists of approximately 75,000 square feet of office
space, at an average annual expense of approximately $2.1 million, under an amended lease agreement
that expires in December 2010. Under SFAS 146, Accounting for Costs Associated with Exit or
Disposal Activities, a liability for the costs associated with an exit or disposal activity is
recognized when the liability is incurred. In accordance with SFAS 146, the Company recorded lease
exit costs of approximately $4.8 million during the three months ended September 30, 2008
consisting of the initial liability of $4.7 million and accretion expense of $0.1 million. These
amounts were recorded as selling, general and administrative expenses. The Company has not
recorded any other costs related to the lease for the prior headquarters.
As of June 30, 2009, approximately $3.1 million of lease exit costs remain accrued and are
expected to be paid by December 2010 of which $2.0 million is classified in other current
liabilities and $1.1 million is classified in other liabilities. Although the facilities are no
longer in use by the Company, the lease exit cost accrual has not been offset by an adjustment for
estimated sublease rentals. After considering sublease market information as well as factors
specific to the lease, the Company concluded it was probable it would be unable to obtain sublease
rentals for the prior headquarters and therefore it would not be subleased for the remaining lease
term. The Company will continue to monitor the sublease market conditions and reassess the impact
on the lease exit cost accrual.
The following is a summary of the activity in the liability for lease exit costs for the six
months ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability as of |
|
Amounts Charged |
|
Cash Payments |
|
Cash Received |
|
Liability as of |
|
|
December 31, 2008 |
|
to Expense |
|
Made |
|
from Sublease |
|
June 30, 2009 |
Lease exit costs
liability |
|
$ |
3,996,102 |
|
|
$ |
123,011 |
|
|
$ |
(1,069,056 |
) |
|
$ |
|
|
|
$ |
3,050,057 |
|
Medicaid Drug Rebates
In April 2009, the Company completed a voluntary review of pricing data submitted to the
Medicaid Drug Rebate Program (the Program) for the period from the first quarter of 2006 through
the fourth quarter of 2007. The review identified certain corrective actions that were needed in
relation to the reviewed data. The Company expects that the corrective actions, when implemented,
would result in an increase to the Companys rebate liability under the Program in the amount of
approximately $3.1 million for the eight-quarter period reviewed. The Company has disclosed the
results of the review and revised rebate liability to the Centers for Medicare and Medicaid
Services (CMS), which administers the Program, and is awaiting CMS instruction as to whether and
when to re-file the revised pricing data. The Companys submission to CMS also included a request
that CMS approve a change in drug category for certain Company products. If CMS does not accept
the Companys request for this change, the Company may owe additional Medicaid rebates which would
result in additional liability under the Program. Upon completion of CMSs review of the Companys
submission, the Company will evaluate the impact that CMSs conclusions will have on the Companys
liability under related drug rebate agreements with various states and the Public Health Service
Drug Pricing Program. As of March 31, 2009, the Company accrued $3.1 million for the 2006 and 2007
liability, which was recognized as a reduction of net revenues during the three months ended March
31, 2009.
22
In July 2009, the Company completed the extension of this review to the pricing data
submitted to the Program for the period from the first quarter of 2008 through the fourth quarter
of 2008. The review again identified certain corrective actions that were needed in relation to
the reviewed data. The Company expects that the corrective actions, when implemented, would result
in an increase to the Companys rebate liability under the Program in the amount of approximately
$0.2 million for the additional four-quarter period reviewed. If CMS does not accept the Companys
request to approve a change in drug category for certain Company products, the Company may owe
additional Medicaid rebates which would result in additional liability under the Program. Upon
completion of CMSs review of the Companys submission for this additional four-quarter period, the
Company will evaluate the impact that CMSs conclusions will have on the Companys liability under
related drug rebate agreements with various states and the Public Health Service Drug Pricing
Program. As of June 30, 2009, the Company accrued $0.2 million for the 2008 liability, which was
recognized as a reduction of net revenues during the three months ended June 30, 2009.
Department of Defense/TRICARE
On March 17, 2009, the Department of Defense (DoD) issued a Final Rule (the Rule)
implementing Section 703 of the National Defense Authorization Act of 2008. The Rule establishes a
program under which DoD seeks Federal Ceiling Price-based refunds, or rebates, from drug
manufacturers on TRICARE retail pharmacy utilization. Under the Rule, effective May 26, 2009, DoD
is seeking rebates on TRICARE Retail Pharmacy Program prescriptions filled from January 28, 2008,
forward. The Rule sets forth a program in which DoD asks manufacturers to enter into agreements
with the agency under which the manufacturers commit to pay such rebates; products that are not
listed on such an agreement will not be able to be included on the DoD Uniform Formulary.
Additionally, products not listed on TRICARE retail agreements will not be available through
TRICARE retail network pharmacies without prior authorization. Among other things, the Rule
further provides that manufacturers may apply for compromise or waivers of amounts due. As a
result of the Final Rule, the Companys rebate liability as of March 31, 2009, for 2008 utilization
is approximately $1.6 million, and the estimated rebate liability for the first quarter of 2009 is
approximately $0.8 million. It is possible that, pursuant to the compromise or waiver process set
forth in the Rule, DoD will agree to accept a lesser sum for the 2008 and first quarter of 2009
periods. The Company applied timely for a full waiver of liability from January 28, 2008 through
the date of its TRICARE rebate agreement, which was executed on June 29, 2009. As of March 31,
2009, the Company accrued $2.4 million for the 2008 and first quarter of 2009 liability, which was
recognized as a reduction of net revenues during the three months ended March 31, 2009.
Legal Matters
On June 23, 2009, the Company and IMPAX entered into a Settlement Agreement (the Settlement
Agreement) and Amendment No. 2 to the License and Settlement Agreement. In conjunction with the
Settlement Agreement, each of IMPAX and the Company released, acquitted, covenanted not to sue and
forever discharged one another and their affiliates from any and all liabilities relating to the
litigation stemming from the initial License and Settlement Agreement between IMPAX and the
Company. The Company made a settlement payment to IMPAX in conjunction with the execution of the
Settlement Agreement and Amendment No. 2 to the License and Settlement Agreement, which was
included in selling, general and administrative expenses during the three months ended June 30,
2009.
On May 8, 2009, the Company received a Paragraph IV Patent Certification from Glenmark
Generics Inc., USA (Glenmark) advising that Glenmark has filed an ANDA with the FDA for a generic
version of VANOS®. Glenmark did not advise the Company as to the timing or status of the
FDAs review of its filing, or whether it has complied with FDA requirements for proving
bioequivalence. Glenmarks Paragraph IV Certification alleged that the Companys U.S. Patent No.
6,765,001 (the 001 Patent) and U.S. Patent No. 7,220,424 (the 424 Patent) would not be
infringed by Glenmarks manufacture, use or sale of the product for which the ANDA was submitted.
The expiration date for the 001 Patent is 2021, and the expiration date for the 424 Patent is
2023. On June 19, 2009, the Company filed a complaint for patent infringement against Glenmark and
its foreign corporate parent Glenmark Generics Ltd. (Glenmark Ltd.) in the United States District
Court for the District of New Jersey. On July 14, 2009, Glenmark and Glenmark Ltd. answered the
Companys complaint, and filed counterclaims seeking a declaration that the patents the Company
listed with the FDA for VANOS® cream were invalid and unenforceable, and would not be
infringed by Glenmarks generic version of VANOS® cream. Given the early stage of this
matter, a gain (or loss) on this matter is currently not estimable.
23
On May 6, 2009, the Company received a Paragraph IV Patent Certification from Ranbaxy
Laboratories Limited (Ranbaxy) advising that Ranbaxy had filed an ANDA with the FDA for generic
SOLODYN® in its form of 135mg strength. Ranbaxy did not advise the Company as to the
timing or status of the FDAs review of its filing, or whether it has complied with FDA
requirements for proving bioequivalence. Ranbaxys Paragraph IV Certification alleged that
Ranbaxys manufacture, use, sale or offer for sale of the product for which the ANDA was submitted
would not infringe any valid claim of the Companys U.S. Patent No. 5,908,838 (the 838 Patent).
The expiration date for the 838 Patent is 2018. The Company is evaluating the details of
Ranbaxys certification letter and considering its options. On June 11, 2009, the Company filed
suit against Ranbaxy in the United States District Court for the District of Delaware seeking an
adjudication that Ranbaxy has infringed one or more claims of the 838 Patent by submitting the
above ANDA to the FDA. The relief requested by the Company included a request for a permanent
injunction preventing Ranbaxy from infringing the 838 patent by selling a generic version of
SOLODYN®.
A third party has requested that the U.S. Patent and Trademark Office (USPTO) conduct an Ex
Parte Reexamination of the 838 patent. The USPTO granted this request. In March 2009, the USPTO
issued a non-final office action in the reexamination of the 838 patent. On May 13, 2009,
Medicis filed its response to the non-final office action with the USPTO. Reexamination can
result in confirmation of the validity of all of a patents claims, the invalidation of all of a
patents claims, or the confirmation of some claims and the invalidation of others. The Company
cannot guarantee the outcome of the reexamination.
On January 13, 2009, the Company filed suit against Mylan, Inc., Matrix Laboratories Ltd.,
Matrix Laboratories Inc., Sandoz, Inc., and Barr Laboratories, Inc. (collectively Defendants) in
the United States District Court for the District of Delaware seeking an adjudication that
Defendants have infringed one or more claims of the Companys 838 patent by submitting to the FDA
their respective ANDAs for generic versions of SOLODYN®. The relief requested by the
Company includes a request for a permanent injunction preventing Defendants from infringing the
838 patent by selling generic versions of SOLODYN®. On March 18, 2009, the Company
entered into a Settlement Agreement with Barr (a subsidiary of Teva) whereby all legal disputes
between the Company and Teva relating to SOLODYN® were terminated and where Barr/Teva
agreed that Medicis patent-in-suit is valid, enforceable and not infringed and that it should be
permanently enjoined from infringement. The Delaware court subsequently entered a permanent
injunction against any infringement by Barr/Teva. On March 30, 2009, the Delaware Court dismissed
the claims between Medicis and Matrix Laboratories Inc. without prejudice, pursuant to a
stipulation between Medicis and Matrix Laboratories Inc.
On January 21, 2009, the Company received a letter from a stockholder demanding that its Board
of Directors take certain actions, including potentially legal action, in connection with the
restatement of its consolidated financial statements in 2008. The letter states that, if the Board
of Directors does not take the demanded action, the stockholder will commence a derivative action
on behalf of the Company. The Companys Board of Directors is reviewing the letter and has
established a special committee of the Board, comprised of directors who are independent and
disinterested with respect to the allegations in the letter, (i) to assess whether there is any
merit to the allegations contained in the letter, (ii) if the special committee does conclude that
there may be merit to any of the allegations contained in the letter, to further assess whether it
is in the best interest of the Company and its shareholders to pursue litigation or other action
against any or all of the persons named in the letter or any other persons not named in the letter,
and (iii) to recommend to the Board any other appropriate action to be taken. The special
committee has engaged outside counsel to conduct an inquiry, which is underway.
On October 3, 10, and 27, 2008, purported stockholder class action lawsuits styled Andrew Hall
v. Medicis Pharmaceutical Corp., et al. (Case No. 2:08-cv-01821-MHB); Steamfitters Local 449
Pension Fund v. Medicis Pharmaceutical Corp., et al. (Case No. 2:08-cv-01870-DKD); and Darlene
Oliver v. Medicis Pharmaceutical Corp., et al. (Case No. 2:08-cv-01964-JAT) were filed in the
United States District Court for the District of Arizona on behalf of stockholders who purchased
securities of the Company during the period between October 30, 2003 and approximately September
24, 2008. The Court has consolidated these actions into a single proceeding and appointed a lead
plaintiff and lead plaintiffs counsel. On May 18, 2009, the lead plaintiff filed an amended
complaint. The amended complaint names as defendants Medicis Pharmaceutical Corp. and the
Companys Chief Executive Officer and Chairman of the Board, Jonah Shacknai, the Companys Chief
Financial Officer, Executive Vice President and Treasurer, Richard D. Peterson, the Companys Chief
Operating Officer and Executive Vice President, Mark A. Prygocki and the Companys independent
auditors, Ernst & Young LLP. The claims alleged in the amended complaint arise in connection with
the restatement of the Companys annual, transition, and quarterly periods in fiscal years 2003
through 2007 and the first and second quarters of 2008. The amended complaint alleges
24
violations of federal securities laws, (Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and Rule 10b-5), based on alleged material misrepresentations to the market that
allegedly had the effect of artificially inflating the market price of the Companys stock. The
amended complaint seeks to recover unspecified damages and costs, including counsel and expert
fees. On July 17, 2009, the Company and the other defendants filed motions to dismiss the amended
complaint in its entirety on various grounds. The Company intends to vigorously defend the claims
in these consolidated matters. There can be no assurance, however, that the Company will be
successful, and an adverse resolution of the lawsuits could have a material adverse effect on the
Companys financial position and results of operations in the period in which the lawsuits are
resolved. The Company is not presently able to reasonably estimate potential losses, if any,
related to the lawsuits.
In addition to the matters discussed above, in the ordinary course of business, the Company is
involved in a number of legal actions, both as plaintiff and defendant, and could incur uninsured
liability in any one or more of them. Although the outcome of these actions is not presently
determinable, it is the opinion of the Companys management, based upon the information available
at this time, that the expected outcome of these matters, individually or in the aggregate, will
not have a material adverse effect on the results of operations, financial condition or cash flows
of the Company.
18. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2009, the FASB issued FSP FAS No. 157-4, Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly, which provides additional guidance for estimating fair value in
accordance with SFAS No. 157, Fair Value Measurements, when the volume and level of activity for
the asset or liability have significantly decreased. This FSP also includes guidance on
identifying circumstances that indicate a transaction is not orderly and applies to all assets and
liabilities within the scope of accounting pronouncements that require or permit fair value
measurements, except in paragraphs 2 and 3 of SFAS No. 157. FSP FAS No. 157-4 is effective for
interim and annual reporting periods ending after June 15, 2009. The Company adopted FSP FAS No.
157-4 on April 1, 2009, and it did not have a material impact on its consolidated results of
operations and financial condition.
In April 2009, the FASB issued FSP FAS No. 107-1 and APB No. 28-1, Interim Disclosures about
Fair Value of Financial Instruments, which amends the disclosure requirements of SFAS No. 107 and
APB No. 28 and requires disclosure about the fair value of its financial instruments whenever it
issues summarized financial information for interim reporting periods. FSP FAS No. 107-1 and APB
Opinion No. 28-1 are effective for financial statements issued for interim reporting periods ending
after June 15, 2009. The Company adopted FSP FAS No. 107-1 and ABP Opinion No. 28-1 on April 1,
2009, and it did not have a material impact on its results of operations and financial condition.
In June 2009, the FASB issued SFAS No. 167, New Consolidation Guidance for Variable Interest
Entities (VIE), which amends FIN 46 (R), Consolidation of Variable Interest Entities, to address
the elimination of the concept of a qualifying special purpose entity. SFAS No. 167 also replaces
the quantitative-based risks and rewards calculation for determining which enterprise has a
controlling financial interest in a variable interest entity with an approach focused on
identifying which enterprise has the power to direct the activities of variable interest entity,
and the obligation to absorb losses of the entity or the right to receive benefits from the entity.
Additionally, SFAS No. 167 requires any enterprise that holds a variable interest in a variable
interest entity to provide enhanced disclosures that will provide users of financial statements
with more transparent information about an enterprises involvement in a variable interest entity.
SFAS No. 167 is effective for annual reporting periods beginning after November 30, 2009. The
Company is currently assessing what impact, if any, that SFAS No. 167 will have on its results of
operations and financial condition.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement No. 162.
SFAS No. 168 establishes the FASB Standards Accounting Codification (Codification) as the source
of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to
be applied to nongovernmental entities, and rules and interpretive releases of the SEC as
authoritative GAAP for SEC registrants. The Codification will supersede all the existing non-SEC
accounting and reporting standards upon its effective date and subsequently, the FASB will not
issue new standards in the form of Statements, FSPs or EITF Abstracts. SFAS No. 168 also replaces
FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles but is not
25
intended to change or alter existing U.S. GAAP. The Codification will change the references
of financial standards within the Companys financial statements. Beginning in the third quarter
of 2009, all references made to U.S. GAAP will use the new Codification numbering system prescribed
by the FASB. SFAS No. 168 will not have any impact on the Companys results of operations and
financial condition.
19. SUBSEQUENT EVENTS
In May 2009, the FASB issued SFAS No. 165, Subsequent Events, (SFAS No. 165). SFAS No. 165
is effective for financial statements ending after June 15, 2009, and the Company adopted SFAS No.
165 during the three months ended June 30, 2009. SFAS No. 165 establishes general standards of
accounting for and disclosure of subsequent events that occur after the balance sheet date.
Entities are also required to disclose the date through which subsequent events have been evaluated
and the basis for that date. The Company has evaluated subsequent events through August 10, 2009,
the date of issuance of its financial statements.
On July 27, 2009, the Company announced that the FDA had approved additional strengths of
SOLODYN® in 65mg and 115mg dosages for the treatment of inflammatory lesions of
non-nodular moderate to severe acne vulgaris in patients 12 years of age and older. With the
addition of these newly-approved strengths, SOLODYN® is now available in five dosages:
45mg, 65mg, 90mg, 115mg, and 135mg. Shipment of the newly-approved 65mg and 115mg products to
wholesalers is expected to begin during the third quarter of 2009.
On July 28, 2009, the Company and Revance entered into a license agreement granting Medicis
worldwide aesthetic and dermatological rights to Revances novel, investigational, injectable
botulinum toxin type A product, referred to as RT002, currently in pre-clinical studies. The
objective of the RT002 program is the development of a next-generation neurotoxin with favorable
duration of effect and safety profiles.
Under the terms of the agreement, Medicis paid Revance $10 million upon closing of the
agreement, and will pay additional potential milestone payments totaling approximately $94 million
upon successful completion of certain clinical, regulatory and commercial milestones, and a royalty
based on sales and supply price, the total of which is equivalent to a double-digit percentage of
net sales. The initial $10 million payment will be recognized as research and development expense
during the three months ended September 30, 2009.
26
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of
Operations |
Executive Summary
We are a leading independent specialty pharmaceutical company focused primarily on helping
patients attain a healthy and youthful appearance and self-image through the development and
marketing in the U.S. of products for the treatment of dermatological, aesthetic and podiatric
conditions. We also market products in Canada for the treatment of dermatological and aesthetic
conditions and began commercial efforts in Europe with our acquisition of LipoSonix in July 2008.
We offer a broad range of products addressing various conditions or aesthetics improvements,
including facial wrinkles, acne, fungal infections, rosacea, hyperpigmentation, photoaging,
psoriasis, seborrheic dermatitis and cosmesis (improvement in the texture and appearance of skin).
Our current product lines are divided between the dermatological and non-dermatological
fields. The dermatological field represents products for the treatment of acne and acne-related
dermatological conditions and non-acne dermatological conditions. The non-dermatological field
represents products for the treatment of urea cycle disorder and contract revenue. Our acne and
acne-related dermatological product lines include DYNACIN®, PLEXION®,
SOLODYN®, TRIAZ® and ZIANA®. Our non-acne dermatological product
lines include DYSPORTTM, LOPROX®, PERLANE®, RESTYLANE®
and VANOS®. Our non-dermatological product lines include AMMONUL® and
BUPHENYL®. Our non-dermatological field also includes contract revenues associated with
licensing agreements and authorized generic agreements, and LipoSonix revenues.
Financial Information About Segments
We operate in one significant business segment: Pharmaceuticals. Our current pharmaceutical
franchises are divided between the dermatological and non-dermatological fields. Information on
revenues, operating income, identifiable assets and supplemental revenue of our business franchises
appears in the condensed consolidated financial statements included in Item 1 hereof.
Key Aspects of Our Business
We derive a majority of our revenue from our primary products: DYSPORTTM,
PERLANE®, RESTYLANE®, SOLODYN®, TRIAZ®,
VANOS® and ZIANA®. We believe that sales of our primary products will
constitute a significant portion of our revenue for 2009.
We have built our business by executing a four-part growth strategy: promoting existing
brands, developing new products and important product line extensions, entering into strategic
collaborations and acquiring complementary products, technologies and businesses. Our core
philosophy is to cultivate high integrity relationships of trust and confidence with the foremost
dermatologists and podiatrists and the leading plastic surgeons in the U.S. We rely on third
parties to manufacture our products.
We estimate customer demand for our prescription products primarily through use of third party
syndicated data sources which track prescriptions written by health care providers and dispensed by
licensed pharmacies. The data represents extrapolations from information provided only by certain
pharmacies and are estimates of historical demand levels. We estimate customer demand for our
non-prescription products primarily through internal data that we compile. We observe trends from
these data and, coupled with certain proprietary information, prepare demand forecasts that are the
basis for purchase orders for finished and component inventory from our third party manufacturers
and suppliers. Our forecasts may fail to accurately anticipate ultimate customer demand for our
products. Overestimates of demand and sudden changes in market conditions may result in excessive
inventory production and underestimates may result in inadequate supply of our products in channels
of distribution.
We schedule our inventory purchases to meet anticipated customer demand. As a result,
miscalculation of customer demand or relatively small delays in our receipt of manufactured
products could result in revenues being deferred or lost. Our operating expenses are based upon
anticipated sales levels, and a high percentage of our operating expenses are relatively fixed in
the short term.
We sell our products primarily to major wholesalers and retail pharmacy chains. Approximately
65-75% of our gross revenues are typically derived from two major drug wholesale concerns.
Depending on the customer, we recognize revenue at the time of shipment to the customer, or at the
time of receipt by the customer, net of estimated
27
provisions. As a result of certain amendments made to the contract with our exclusive distributor
of our aesthetics products, including DYSPORTTM, PERLANE® and
RESTYLANE®, beginning in the second quarter of 2009, we began recognizing revenue on
such products upon the shipment from the distributor to physicians. Consequently, variations in
the timing of revenue recognition could cause significant fluctuations in operating results from
period to period and may result in unanticipated periodic earnings shortfalls or losses. We have
distribution services agreements with our two largest wholesale customers. We review the supply
levels of our significant products sold to major wholesalers by reviewing periodic inventory
reports that are supplied to us by our major wholesalers in accordance with the distribution
services agreements. We rely wholly upon our wholesale and drug chain customers to effect the
distribution allocation of substantially all of our prescription products. We believe our
estimates of trade inventory levels of our products, based on our review of the periodic inventory
reports supplied by our major wholesalers and the estimated demand for our products based on
prescription and other data, are reasonable. We further believe that inventories of our products
among wholesale customers, taken as a whole, are similar to those of other specialty pharmaceutical
companies, and that our trade practices, which periodically involve volume discounts and early
payment discounts, are typical of the industry.
We periodically offer promotions to wholesale and chain drugstore customers to encourage
dispensing of our prescription products, consistent with prescriptions written by licensed health
care providers. Because many of our prescription products compete in multi-source markets, it is
important for us to ensure the licensed health care providers dispensing instructions are
fulfilled with our branded products and are not substituted with a generic product or another
therapeutic alternative product which may be contrary to the licensed health care providers
recommended and prescribed Medicis brand. We believe that a critical component of our brand
protection program is maintenance of full product availability at drugstore and wholesale
customers. We believe such availability reduces the probability of local and regional product
substitutions, shortages and backorders, which could result in lost sales. We expect to continue
providing favorable terms to wholesale and retail drug chain customers as may be necessary to
ensure the fullest possible distribution of our branded products within the pharmaceutical chain of
commerce. From time to time we may enter into business arrangements (e.g. loans or investments)
involving our customers and those arrangements may be reviewed by federal and state regulators.
Purchases by any given customer, during any given period, may be above or below actual
prescription volumes of any of our products during the same period, resulting in fluctuations of
product inventory in the distribution channel.
Recent Developments
As described in more detail below, the following significant events and transactions occurred
during the six months ended June 30, 2009, and affected our results of operations, our cash flows
and our financial condition:
- |
|
License and Settlement Agreement and Joint Development Agreement with Perrigo; |
|
- |
|
FDA approval of DYSPORTTM; |
|
- |
|
Sale of Medicis Pediatrics; |
|
- |
|
Tevas launch of a generic to SOLODYN®, our settlement agreement with Teva, and the impact of the launch on our
sales reserves; |
|
- |
|
Adjustments to Medicaid drug rebate and DoD/TRICARE liabilities; |
|
- |
|
Clinical milestone payment related to our collaboration with IMPAX; and |
|
- |
|
Reduction in the carrying value of our investment in Revance. |
License and Settlement Agreement and Joint Development Agreement with Perrigo
On April 8, 2009, we entered into a License and Settlement Agreement (the License and
Settlement Agreement) and a Joint Development Agreement (the Joint Development Agreement) with
Perrigo Israel Pharmaceuticals Ltd. Perrigo Company was also a party to the License and Settlement
Agreement. Perrigo Israel Pharmaceuticals Ltd. and Perrigo Company are collectively referred to as
Perrigo.
In connection with the License and Settlement Agreement, we and Perrigo agreed to terminate
all legal disputes between them relating to our VANOS® fluocinonide Cream. On April 17,
2009, the Court entered a consent judgment dismissing all claims and counterclaims between us and
Perrigo, and enjoining Perrigo from marketing a generic version of VANOS® other than
under the terms of the settlement agreement. In addition, Perrigo confirmed that certain of our
patents relating to VANOS® are valid and enforceable, and cover Perrigos
28
activities relating to its generic product under ANDA No. 090256. Further, subject to the
terms and conditions contained in the License and Settlement Agreement:
|
|
|
we granted Perrigo, effective December 15, 2013, or earlier upon the occurrence of
certain events, a license to make and sell generic versions of the existing
VANOS® products; and |
|
|
|
|
when Perrigo does commercialize generic versions of VANOS® products, Perrigo
will pay us a royalty based on sales of such generic products. |
|
|
|
|
Pursuant to the Joint Development Agreement, subject to the terms and conditions contained
therein: |
|
|
|
|
we and Perrigo will collaborate to develop a novel proprietary product; |
|
|
|
|
we have the sole right to commercialize the novel proprietary product; |
|
|
|
|
if and when a New Drug Application (NDA) for a novel proprietary product is submitted
to the FDA, we and Perrigo shall enter into a commercial supply agreement pursuant to
which, among other terms, for a period of three years following approval of the NDA,
Perrigo would exclusively supply to us all of our novel proprietary product requirements in
the U.S.; |
|
|
|
|
we made an up-front $3.0 million payment to Perrigo and will make additional payments to
Perrigo of up to $5.0 million upon the achievement of certain development, regulatory and
commercialization milestones; and |
|
|
|
|
we will pay to Perrigo royalty payments on sales of the novel proprietary product. |
The $3.0 million payment was recognized as research and development expense during the three
months ended June 30, 2009.
FDA approval of DYSPORTTM
On April 29, 2009, the FDA approved the Biologics License Application for
DYSPORTTM, an acetylcholine release inhibitor and a neuromuscular blocking agent. The
approval includes two separate indications, the treatment of cervical dystonia in adults to reduce
the severity of abnormal head position and neck pain, and the temporary improvement in the
appearance of moderate to severe glabellar lines in adults younger than 65 years of age.
RELOXIN®, which was the proposed U.S. name for Ipsens botulinum toxin product for
aesthetic use, is now marketed under the name of DYSPORTTM. Ipsen will market
DYSPORTTM in the U.S. for the therapeutic indication (cervical dystonia), while Medicis
markets DYSPORTTM in the U.S. for the aesthetic indication (glabellar lines).
In March 2006, Ipsen granted us the rights to develop, distribute and commercialize Ipsens
botulinum toxin product for aesthetic use in the U.S., Canada and Japan. In accordance with the
agreement, we paid Ipsen $75.0 million during the second quarter of 2009 as a result of the
approval by the FDA. The $75.0 million payment was capitalized into intangible assets in our
consolidated balance sheet. We will pay Ipsen a royalty based on sales and a supply price, the
total of which is equivalent to approximately 30% of net sales as defined under the agreement.
Sale of Medicis Pediatrics
On June 10, 2009, Medicis, Medicis Pediatrics, Inc. (Medicis Pediatrics, formerly known as
Ascent Pediatrics, Inc.), a wholly-owned subsidiary of Medicis, and BioMarin Pharmaceutical Inc.
(BioMarin) entered into an amendment (the Amendment) to the Securities Purchase Agreement (the
Securities Purchase Agreement), dated as of May 18, 2004 and amended on January 12, 2005, by and
among Medicis, Medicis Pediatrics, BioMarin and BioMarin Pediatrics Inc., a wholly-owned subsidiary
of BioMarin that previously merged into BioMarin. The Amendment was effected to accelerate the
closing of BioMarins option under the Securities Purchase Agreement to purchase from Medicis all
of the issued and outstanding capital stock of Medicis Pediatrics (the Option), which was
previously expected to close in August 2009. In accordance with the Amendment, the parties
consummated the closing of the Option on June 10, 2009 (the Option Closing). The aggregate cash
consideration paid to Medicis in conjunction with the Option Closing was approximately
$70.3 million and the
29
purchase was completed substantially in accordance with the previously disclosed terms of the
Securities Purchase Agreement.
As a result of the Option Closing, we recognized a pretax gain of $2.2 million during the
three months ended June 30, 2009, which is included in other (income) expense, net, in the
accompanying condensed consolidated statements of operations. Because of the difference between
our book and tax basis of goodwill in Medicis Pediatrics, the transaction resulted in a $24.8
million gain for income tax purposes, and, accordingly, we recorded a $9.0 million income tax
provision during the three months ended June 30, 2009, which is included in income tax expense in
the accompanying condensed consolidated statements of operations.
Tevas launch of a generic to SOLODYN®, our settlement agreement with Teva, and the
impact of the launch on our sales reserves
On March 17, 2009, Teva Pharmaceutical Industries Ltd. (Teva) was granted final approval by
the FDA for its ANDA #65-485 to market its generic version of 45mg, 90mg and 135mg
SOLODYN® Tablets. Teva commenced shipment of this product immediately after the FDAs
approval of the ANDA.
On March 18, 2009, we entered into a Settlement Agreement with Teva whereby all legal disputes
between us and Teva relating to SOLODYN® were terminated. Pursuant to the agreement,
Teva confirmed that our patents relating to SOLODYN® are valid and enforceable, and
cover Tevas activities relating to its generic SOLODYN® product. As part of the
settlement, Teva agreed to immediately stop all further shipments of its generic
SOLODYN® product. We agreed to release Teva from liability arising from any prior sales
of its generic SOLODYN® product, which were not authorized by Medicis. Under terms of
the agreement, Teva has the option to market its generic versions of 45mg, 90mg and 135mg
SOLODYN® Tablets under the SOLODYN® intellectual property rights belonging to
us in November 2011, or earlier under certain conditions.
Tevas shipment of its generic SOLODYN® product upon FDA approval, but prior to the
consummation of the Settlement Agreement with us on March 18, 2009, caused wholesalers to reduce
ordering levels for SOLODYN®, and caused us to increase our reserves for sales returns
and consumer rebates. As a result, net revenues of SOLODYN® during the three months
ended March 31, 2009, decreased as compared to the three months ended March 31, 2008, and as
compared to the three months ended December 31, 2008.
Adjustments to Medicaid drug rebate and Department of Defense/TRICARE liabilities
In April 2009, we completed a voluntary review of pricing data submitted to the Medicaid Drug
Rebate Program (the Program) for the period from the first quarter of 2006 through the fourth
quarter of 2007. The review identified certain corrective actions that were needed in relation to
the reviewed data. We expect that the corrective actions, when implemented, would result in an
increase to our rebate liability under the Program in the amount of approximately $3.1 million for
the eight-quarter period reviewed. We have disclosed the results of the review and revised rebate
liability to the Centers for Medicare and Medicaid Services (CMS), which administers the
Program, and are awaiting CMS instruction as to whether and when to re-file the revised pricing
data. Our submission to CMS also included a request that CMS approve a change in drug category for
certain of our products. If CMS does not accept our request for this change, we may owe additional
Medicaid rebates which would result in additional liability under the Program. Upon completion
of CMSs review of our submission, we will evaluate the impact that CMSs conclusions will have on
our liability under related drug rebate agreements with various states and the Public Health
Service Drug Pricing Program. As of March 31, 2009, we accrued $3.1 million for the 2006 and 2007
liability, which was recognized as a reduction of net revenues during the three months ended March
31, 2009.
In July 2009, we completed the extension of this review to the pricing data submitted to the
Program for the period from the first quarter of 2008 through the fourth quarter of 2008. The
review again identified certain corrective actions that were needed in relation to the reviewed
data. We expect that the corrective actions, when implemented, would result in an increase to our
rebate liability under the Program in the amount of approximately $0.2 million for the additional
four-quarter period reviewed. If CMS does not accept our request to approve a change in drug
category for certain of our products, we may owe additional Medicaid rebates which would result in
additional liability under the Program. Upon completion of CMSs review of our submission for this
additional four-quarter period, we will evaluate the impact that CMSs conclusions will have on our
liability under related drug rebate agreements with various states and the Public Health Service
Drug Pricing Program. As of June 30, 2009, we
30
accrued $0.2 million for the 2008 liability, which was recognized as a reduction of net
revenues during the three months ended June 30, 2009.
On March 17, 2009, the Department of Defense (DoD) issued a Final Rule (the Rule)
implementing Section 703 of the National Defense Authorization Act of 2008. The Rule establishes a
program under which DoD seeks Federal Ceiling Price-based refunds, or rebates, from drug
manufacturers on TRICARE retail pharmacy utilization. Under the Rule, effective May 26, 2009, DoD
is seeking rebates on TRICARE Retail Pharmacy Program prescriptions filled from January 28, 2008,
forward. The Rule sets forth a program in which DoD asks manufacturers to enter into agreements
with the agency under which the manufacturers commit to pay such rebates; products that are not
listed on such an agreement will not be able to be included on the DoD Uniform Formulary.
Additionally, products not listed on TRICARE retail agreements will not be available through
TRICARE retail network pharmacies without prior authorization. Among other things, the Rule
further provides that manufacturers may apply for compromise or waivers of amounts due. As a
result of the Final Rule, our rebate liability as of March 31, 2009, for 2008 utilization is
approximately $1.6 million, and the estimated rebate liability for the first quarter of 2009 is
approximately $0.8 million. It is possible that, pursuant to the compromise or waiver process set
forth in the Rule, DoD will agree to accept a lesser sum for the 2008 and first quarter of 2009
periods. We applied timely for a waiver of liability from January 28, 2008 through the date of our
TRICARE rebate agreement, which was executed on June 29, 2009. As of March 31, 2009, we accrued
$2.4 million for the 2008 and first quarter of 2009 liability, which was recognized as a reduction
of net revenues during the three months ended March 31, 2009.
Clinical milestone payment related to our collaboration with IMPAX
On November 26, 2008, we entered into a License and Settlement Agreement and a Joint
Development Agreement with IMPAX Laboratories, Inc. (IMPAX). In connection with the License and
Settlement Agreement, we and IMPAX agreed to terminate all legal disputes between us relating to
SOLODYN®. Additionally, under terms of the License and Settlement Agreement, IMPAX
confirmed that our patents relating to SOLODYN® are valid and enforceable, and cover
IMPAXs activities relating to its generic product under ANDA #90-024. Under the terms of the
License and Settlement Agreement, IMPAX has a license to market its generic versions of
SOLODYN® 45mg, 90mg and 135mg under the SOLODYN® intellectual property rights
belonging to us upon the occurrence of specific events. Upon launch of its generic formulations of
SOLODYN®, IMPAX may be required to pay us a royalty, based on sales of those generic
formulations by IMPAX under terms described in the License and Settlement Agreement. Under the
Joint Development Agreement, we and IMPAX will collaborate on the development of five strategic
dermatology product opportunities, including an advanced-form SOLODYN® product. Under
terms of the agreement, we made an initial payment of $40.0 million upon execution of the
agreement. During the three months ended March 31, 2009, we paid IMPAX $5.0 million upon the
achievement of a clinical milestone, in accordance with terms of the agreement. In addition, we
are required to pay up to $18.0 million upon successful completion of certain other clinical and
commercial milestones. We will also make royalty payments based on sales of the advanced-form
SOLODYN® product if and when it is commercialized by us upon approval by the FDA. We
will share equally in the gross profit of the other four development products if and when they are
commercialized by IMPAX upon approval by the FDA. The $40.0 million initial payment was recognized
as a charge to research and development expense during the three months ended December 31, 2008,
and the $5.0 million clinical milestone achievement payment was recognized as a charge to research
and development expense during the three months ended March 31, 2009.
Reduction in the carrying value of our investment in Revance
On December 11, 2007, we announced a strategic collaboration with Revance Therapeutics, Inc.
(Revance), a privately-held, venture-backed development-stage company, whereby we made an equity
investment in Revance and purchased an option to acquire Revance or to license exclusively in North
America Revances novel topical botulinum toxin type A product currently under clinical
development. The consideration to be paid to Revance upon our exercise of the option will be at an
amount that will approximate the then fair value of Revance or the license of the product under
development, as determined by an independent appraisal. The option period will extend through the
end of Phase 2 testing in the United States. In consideration for our $20.0 million payment, we
received preferred stock representing an approximate 13.7 percent ownership in Revance, or
approximately 11.7 percent on a fully diluted basis, and the option to acquire Revance or to
license the product under development. The $20.0 million is expected to be used by Revance
primarily for the development of the product. Approximately $12.0 million of the $20.0 million
payment represents the fair value of the investment in Revance at the time of the investment and
was included in other long-term assets in our condensed consolidated balance sheets as of December
31
31, 2007. The remaining $8.0 million, which is non-refundable and is expected to be utilized
in the development of the new product, represents the residual value of the option to acquire
Revance or to license the product under development and was recognized as research and development
expense during the three months ended December 31, 2007.
We estimate the net realizable value of the Revance investment based on a hypothetical
liquidation at book value approach as of the reporting date, unless a quantitative valuation metric
is available for these purposes (such as the completion of an equity financing by Revance).
During 2008, we reduced the carrying value of our investment in Revance and recorded a related
charge to earnings of approximately $9.1 million as a result of a reduction in the estimated net
realizable value of the investment using the hypothetical liquidation at book value approach as of
December 31, 2008. Additionally, during the three months ended March 31, 2009, we reduced the
carrying value of our investment in Revance by approximately $2.9 million as a result of a
reduction in the estimated net realizable value of the investment using the hypothetical
liquidation at book value approach as of March 31, 2009. We recognized the $2.9 million as other
expense in our condensed consolidated statement of operations during the three months ended March
31, 2009. Upon the recognition of the $2.9 million reduction of our investment in Revance during
the three months ended March 31, 2009, our investment in Revance as of March 31, 2009, was $0.
Subsequent Events
On July 27, 2009, we announced that the FDA had approved additional strengths of
SOLODYN® in 65mg and 115mg dosages for the treatment of inflammatory lesions of
non-nodular moderate to severe acne vulgaris in patients 12 years of age and older. With the
addition of these newly-approved strengths, SOLODYN® is now available in five dosages:
45mg, 65mg, 90mg, 115mg, and 135mg. Shipment of the newly-approved 65mg and 115mg products to
wholesalers is expected to begin during the third quarter of 2009.
On July 28, 2009, we and Revance entered into a license agreement granting us worldwide
aesthetic and dermatological rights to Revances novel, investigational, injectable botulinum toxin
type A product, referred to as RT002, currently in pre-clinical studies. The objective of the
RT002 program is the development of a next-generation neurotoxin with favorable duration of effect
and safety profiles.
Under the terms of the agreement, we paid Revance $10 million upon closing of the agreement,
and will pay additional potential milestone payments totaling approximately $94 million upon
successful completion of certain clinical, regulatory and commercial milestones, and a royalty
based on sales and supply price, the total of which is equivalent to a double-digit percentage of
net sales. The initial $10 million payment will be recognized as research and development expense
during the three months ended September 30, 2009.
32
Results of Operations
The following table sets forth certain data as a percentage of net revenues for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|
(a) |
|
(b) |
|
(c) |
|
(d) |
Net revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Gross profit (e) |
|
|
90.7 |
|
|
|
93.3 |
|
|
|
90.7 |
|
|
|
92.4 |
|
Operating expenses |
|
|
64.9 |
|
|
|
81.2 |
|
|
|
75.7 |
|
|
|
75.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
25.8 |
|
|
|
12.1 |
|
|
|
15.0 |
|
|
|
17.4 |
|
Other income (expense), net |
|
|
1.6 |
|
|
|
|
|
|
|
(0.3 |
) |
|
|
(1.1 |
) |
Interest and investment income, net |
|
|
0.8 |
|
|
|
3.9 |
|
|
|
1.1 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
28.2 |
|
|
|
16.0 |
|
|
|
15.8 |
|
|
|
20.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
(17.2 |
) |
|
|
(6.5 |
) |
|
|
(9.1 |
) |
|
|
(8.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
11.0 |
% |
|
|
9.5 |
% |
|
|
6.7 |
% |
|
|
12.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Included in operating expenses is $5.0 million (3.6% of net revenues) of compensation
expense related to stock options, restricted stock and stock appreciation rights and $3.0
million (2.1% of net revenues) paid to Perrigo related to a product development agreement. |
|
(b) |
|
Included in operating expenses is $25.0 million (18.2% of net revenues) paid to Ipsen upon
the FDAs acceptance of Ipsens BLA for RELOXIN®
(DYSPORTTM) and $4.7 million (3.4% of net revenues) of compensation expense
related to stock options and restricted stock. |
|
(c) |
|
Included in operating expenses is $5.0 million (2.1% of net revenues) paid to Impax related
to a product development agreement, $3.0 million (1.2% of net revenues) paid to Perrigo
related to a product development agreement and $5.0 million (3.6% of net revenues) of
compensation expense related to stock options, restricted stock and stock appreciation rights. |
|
(d) |
|
Included in operating expenses is $25.0 million (9.4% of net revenues) paid to Ipsen upon the
FDAs acceptance of Ipsens BLA for RELOXIN® (DYSPORTTM)
and $4.7 million (3.4% of net revenues) of compensation expense related to stock options and
restricted stock. |
|
(e) |
|
Gross profit does not include amortization of the related intangibles as such expense is
included in operating expenses. |
33
Three Months Ended June 30, 2009 Compared to the Three Months Ended June 30, 2008
Net Revenues
The following table sets forth our net revenues for the three months ended June 30, 2009 (the
second quarter of 2009) and June 30, 2008 (the second quarter of 2008), along with the
percentage of net revenues and percentage point change for each of our product categories (dollar
amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
Second Quarter |
|
|
|
|
|
|
2009 |
|
2008 |
|
$ Change |
|
% Change |
|
Net product revenues |
|
$ |
138.7 |
|
|
$ |
133.0 |
|
|
$ |
5.7 |
|
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net contract revenues |
|
|
2.5 |
|
|
|
4.4 |
|
|
|
(1.9 |
) |
|
|
(43.2 |
)% |
|
|
|
Total net revenues |
|
$ |
141.2 |
|
|
$ |
137.4 |
|
|
$ |
3.8 |
|
|
|
2.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
Second Quarter |
|
|
|
|
|
|
2009 |
|
2008 |
|
$ Change |
|
% Change |
|
Acne and acne-related
dermatological products |
|
$ |
94.2 |
|
|
$ |
86.4 |
|
|
$ |
7.8 |
|
|
|
9.0 |
% |
Non-acne dermatological
products |
|
|
37.1 |
|
|
|
40.5 |
|
|
|
(3.4 |
) |
|
|
(8.4 |
)% |
Non-dermatological products
(including contract revenues) |
|
|
9.9 |
|
|
|
10.5 |
|
|
|
(0.6 |
) |
|
|
(5.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
141.2 |
|
|
$ |
137.4 |
|
|
$ |
3.8 |
|
|
|
2.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
Second Quarter |
|
|
|
|
2009 |
|
2008 |
|
Change |
|
Acne and acne-related
dermatological products |
|
|
66.7 |
% |
|
|
62.8 |
% |
|
|
3.9 |
% |
Non-acne dermatological
products |
|
|
26.3 |
% |
|
|
29.5 |
% |
|
|
(3.2 |
)% |
Non-dermatological products
(including contract revenues) |
|
|
7.0 |
% |
|
|
7.7 |
% |
|
|
(0.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
Net revenues associated with our acne and acne-related dermatological products increased by
$7.8 million, or 9.0%, during the second quarter of 2009 as compared to the second quarter of 2008
primarily as a result of the increased sales of SOLODYN®. The increased sales of
SOLODYN® was primarily generated by strong prescription growth, partially offset by the
negative impact of units of Tevas generic SOLODYN® product that were sold into the
distribution channel prior to the consummation of a Settlement Agreement with us on March 18, 2009.
We expect net revenues of SOLODYN® will continue to be negatively affected during the
remainder of 2009 as units of Tevas generic SOLODYN® product are sold and prescribed
through the distribution channel. Net revenues associated with our non-acne dermatological
products decreased as a percentage of net revenues, and decreased in net dollars by $3.4 million,
or 8.4%, during the second quarter of 2009 as compared to the second quarter of 2008, primarily due
to decreased sales of RESTYLANE®, partially offset by the initial sales of
DYSPORTTM, which was
34
launched in June 2009. Beginning in the second quarter of 2009, we began recognizing revenue
on our aesthetics products, including RESTYLANE®, PERLANE® and
DYSPORTTM, upon the shipment from our exclusive distributor to physicians.
Net revenues associated with our non-dermatological products decreased by $0.6 million, or
5.7%, and by 0.7 percentage points as a percentage of net revenues during the second quarter of
2009 as compared to the second quarter of 2008.
Gross Profit
Gross profit represents our net revenues less our cost of product revenue. Our cost of
product revenue includes our acquisition cost for the products we purchase from our third party
manufacturers and royalty payments made to third parties. Amortization of intangible assets
related to products sold is not included in gross profit. Amortization expense related to these
intangibles for the second quarter of 2009 and 2008 was approximately $6.2 million and $5.3
million, respectively. Product mix plays a significant role in our quarterly and annual gross
profit as a percentage of net revenues. Different products generate different gross profit
margins, and the relative sales mix of higher gross profit products and lower gross profit products
can affect our total gross profit.
The following table sets forth our gross profit for the second quarter of 2009 and 2008, along
with the percentage of net revenues represented by such gross profit (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
Second Quarter |
|
|
|
|
|
|
2009 |
|
2008 |
|
$ Change |
|
% Change |
|
Gross profit |
|
$ |
128.2 |
|
|
$ |
128.2 |
|
|
$ |
|
|
|
|
|
% |
% of net revenues |
|
|
90.7 |
% |
|
|
93.3 |
% |
|
|
|
|
|
|
|
|
The decrease in gross profit as a percentage of net revenues was primarily due to a charge of
approximately $1.6 million during the second quarter of 2009 for the write-off of certain inventory
that, during the second quarter of 2009, were determined to be unsalable, and the impact of the
launch of DYSPORTTM during the second quarter of 2009. DYSPORTTM has a lower
gross profit margin than most of our other products.
Selling, General and Administrative Expenses
The following table sets forth our selling, general and administrative expenses for the second
quarter of 2009 and 2008, along with the percentage of net revenues represented by selling, general
and administrative expenses (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
Second Quarter |
|
|
|
|
|
|
2009 |
|
2008 |
|
$ Change |
|
% Change |
|
Selling, general and administrative |
|
$ |
71.7 |
|
|
$ |
71.9 |
|
|
$ |
(0.2 |
) |
|
|
(0.3 |
)% |
% of net revenues |
|
|
50.7 |
% |
|
|
52.3 |
% |
|
|
|
|
|
|
|
|
Share-based compensation expense
included in selling, general and
administrative |
|
$ |
4.8 |
|
|
$ |
4.6 |
|
|
$ |
0.2 |
|
|
|
4.3 |
% |
Selling, general and administrative expenses decreased $0.2 million, or 0.3%, during the
second quarter of 2009 as compared to the second quarter of 2008. Included in this decrease was a
$1.4 million decrease in travel, entertainment and meetings expenses and a $1.2 million decrease in
other expenses, partially offset by a $1.7 million increase in promotion expenses, primarily
related to the launch of DYSPORTTM and a $0.7 million increase in personnel costs,
primarily related to an increase in the number of employees from 503 as of June 30, 2008, to 607 as
of June 30, 2009, and the effect of the annual salary increase that occurred during February 2009.
35
Research and Development Expenses
The following table sets forth our research and development expenses for the second quarter of
2009 and 2008 (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second |
|
Second |
|
|
|
|
|
|
Quarter |
|
Quarter |
|
|
|
|
|
|
2009 |
|
2008 |
|
$ Change |
|
% Change |
|
Research and development |
|
$ |
12.1 |
|
|
$ |
33.0 |
|
|
$ |
(20.9 |
) |
|
|
(63.3 |
)% |
Charges included in
research
and development |
|
$ |
3.0 |
|
|
$ |
25.0 |
|
|
$ |
(22.0 |
) |
|
|
(88.0 |
)% |
Share-based compensation
expense included in
research and development |
|
$ |
0.2 |
|
|
$ |
0.1 |
|
|
$ |
0.1 |
|
|
|
100.0 |
% |
Included in research and development expenses for the second quarter of 2009 was a $3.0
million payment to Perrigo related to a product development agreement. Included in research and
development expenses for the second quarter of 2008 was a $25.0 million milestone payment to Ipsen,
upon the FDAs acceptance of Ipsens BLA for DYSPORTTM, which was formerly known as
RELOXIN® during clinical development. We expect research and development expenses to
continue to fluctuate from quarter to quarter based on the timing of the achievement of development
milestones under license and development agreements, as well as the timing of other development
projects and the funds available to support these projects.
Depreciation and Amortization Expenses
Depreciation and amortization expenses during the second quarter of 2009 increased $1.2
million, or 17.2%, to $7.9 million from $6.8 million during the second quarter of 2008. This
increase was primarily due to initial amortization of the $75.0 million milestone payment made to
Ipsen during the second quarter of 2009 upon the FDAs approval of DYSPORTTM, which was
capitalized as an intangible asset.
Other Income, net
Other income, net, of $2.2 million recognized during the second quarter of 2009 primarily
represented the $2.2 million gain on the sale of Medicis Pediatrics to BioMarin that closed during
June 2009.
Interest and Investment Income
Interest and investment income during the second quarter of 2009 decreased $5.3 million, or
71.0%, to $2.2 million from $7.4 million during the second quarter of 2008, due to an decrease in
the funds available for investment due to the repurchase of $283.7 million of our New Notes in June
2008 and our $150.0 million acquisition of LipoSonix in July 2008, and a decrease in the interest
rates achieved by our invested funds during the second quarter of 2009.
Interest Expense
Interest expense during the second quarter of 2009 decreased $1.1 million, to $1.1 million
during the second quarter of 2009 from $2.1 million during the second quarter of 2008. Our
interest expense during the second quarter of 2009 and 2008 consisted of interest expense on our
Old Notes, which accrue interest at 2.5% per annum, our New Notes, which accrue interest at 1.5%
per annum, and amortization of fees and other origination costs related to the issuance of the New
Notes. The decrease in interest expense during the second quarter of 2009 as compared to the
second quarter of 2008 was primarily due to the repurchase of $283.7 million of our New Notes in
June 2008, and the fees and origination costs related to the issuance of the New Notes becoming
fully amortized during the second quarter of 2008. See Note 12 in our accompanying condensed
consolidated financial statements for further discussion on the Old Notes and New Notes.
36
Income Tax Expense
Our effective tax rate for the second quarter of 2009 was 60.9%, as compared to 40.6% for the
second quarter of 2008. The effective tax rate for the second quarter of 2009 reflects a $9.0
million discrete tax expense due to the taxable gain on the sale of Medicis Pediatrics. Excluding
this discrete tax expense (and the associated accounting gain of $2.2 million), the effective tax
rate for the second quarter of 2009 was 40.5%. The 40.5% reflects managements estimate of the
effective tax rate expected to be applicable for the full year.
Six Months Ended June 30, 2009 Compared to the Six Months Ended June 30, 2008
Net Revenues
The following table sets forth our net revenues for the six months ended June 30, 2009 (the
2009 six months) and six months ended June 30, 2008 (the 2008 six months), along with the
percentage of net revenues and percentage point change for each of our product categories (dollar
amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Six |
|
2008 Six |
|
|
|
|
|
|
Months |
|
Months |
|
$ Change |
|
% Change |
|
Net product revenues |
|
$ |
235.3 |
|
|
$ |
258.1 |
|
|
$ |
(22.8 |
) |
|
|
(8.8 |
)% |
Net contract revenues |
|
|
5.8 |
|
|
|
8.3 |
|
|
|
(2.5 |
) |
|
|
(30.1 |
)% |
|
|
|
Total net revenues |
|
$ |
241.1 |
|
|
$ |
266.4 |
|
|
$ |
(25.3 |
) |
|
|
(9.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Six |
|
2008 Six |
|
|
|
|
|
|
Months |
|
Months |
|
$ Change |
|
% Change |
|
Acne and acne-related
dermatological products |
|
$ |
160.6 |
|
|
$ |
166.5 |
|
|
$ |
(5.9 |
) |
|
|
(3.5 |
)% |
Non-acne dermatological
products |
|
|
60.6 |
|
|
|
79.6 |
|
|
|
(19.0 |
) |
|
|
(23.9 |
)% |
Non-dermatological products
(including contract revenues) |
|
|
19.9 |
|
|
|
20.3 |
|
|
|
(0.4 |
) |
|
|
(2.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
241.1 |
|
|
$ |
266.4 |
|
|
$ |
(25.3 |
) |
|
|
(9.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Six |
|
2008 Six |
|
|
|
|
Months |
|
Months |
|
Change |
|
Acne and acne-related
dermatological products |
|
|
66.7 |
% |
|
|
62.5 |
% |
|
|
4.2 |
% |
Non-acne dermatological
products |
|
|
25.1 |
% |
|
|
29.9 |
% |
|
|
(4.8 |
)% |
Non-dermatological products
(including contract revenues) |
|
|
8.2 |
% |
|
|
7.6 |
% |
|
|
0.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
% |
|
|
|
Net revenues associated with our acne and acne-related dermatological products decreased by
$5.9 million, or 3.5%, during the 2009 six months as compared to the 2008 six months primarily as a
result of decreased sales of SOLODYN® due to the impact during the first quarter of 2009
of the one-day launch of Tevas generic SOLODYN® product, which caused wholesalers to
reduce ordering levels of SOLODYN® and caused us to increase our reserves for sales
returns and consumer rebates, partially offset by strong prescription trends of SOLODYN®
during the second quarter of 2009. We expect net revenues of SOLODYN® to continue to be
negatively affected during the
37
remainder of 2009 as units of Tevas generic SOLODYN® product that were sold prior
to the consummation of a Settlement Agreement with us on March 18, 2009, are sold and prescribed
through the distribution channel. Net revenues associated with our non-acne dermatological
products decreased as a percentage of net revenues, and decreased in net dollars by $19.0 million,
or 23.9%, during the 2009 six months as compared to the 2008 six months, primarily due to decreased
sales of RESTYLANE®, partially offset by the initial sales of DYSPORTTM,
which was launched in June 2009. Beginning in the second quarter of 2009, we began recognizing
revenue on our aesthetics products, including DYSPORTTM, PERLANE® and
RESTYLANE®, upon the shipment from our exclusive distributor to physicians.
Net revenues associated with our non-dermatological products decreased by $0.4 million, or
2.0%, but increased by 0.6 percentage points as a percentage of net revenues during the 2009 six
months as compared to the 2008 six months.
Gross Profit
Gross profit represents our net revenues less our cost of product revenue. Our cost of
product revenue includes our acquisition cost for the products we purchase from our third party
manufacturers and royalty payments made to third parties. Amortization of intangible assets
related to products sold is not included in gross profit. Amortization expense related to these
intangibles for the 2009 six months and 2008 six months was approximately $11.7 million and $10.6
million, respectively. Product mix plays a significant role in our quarterly and annual gross
profit as a percentage of net revenues. Different products generate different gross profit
margins, and the relative sales mix of higher gross profit products and lower gross profit products
can affect our total gross profit.
The following table sets forth our gross profit for the 2009 six months and 2008 six months,
along with the percentage of net revenues represented by such gross profit (dollar amounts in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Six |
|
2008 Six |
|
|
|
|
|
|
Months |
|
Months |
|
$ Change |
|
% Change |
|
Gross profit |
|
$ |
218.6 |
|
|
$ |
246.0 |
|
|
$ |
(27.4 |
) |
|
|
(11.1 |
)% |
% of net revenues |
|
|
90.7 |
% |
|
|
92.4 |
% |
|
|
|
|
|
|
|
|
The decrease in gross profit during the 2009 six months, compared to the 2008 six months, was
due to the decrease in our net revenues, and the decrease in gross profit as a percentage of net
revenues was primarily due to the different mix of products sold during the 2009 six months as
compared to the 2008 six months. Decreased sales of SOLODYN®, a higher margin product,
during the 2009 six months, was the primary change in the mix of products sold during the
comparable periods that affected gross profit as a percentage of net revenues.
Selling, General and Administrative Expenses
The following table sets forth our selling, general and administrative expenses for the 2009
six months and 2008 six months, along with the percentage of net revenues represented by selling,
general and administrative expenses (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Six |
|
2008 Six |
|
|
|
|
|
|
Months |
|
Months |
|
$ Change |
|
% Change |
|
Selling, general and administrative |
|
$ |
142.1 |
|
|
$ |
143.9 |
|
|
$ |
(1.8 |
) |
|
|
(1.3 |
)% |
% of net revenues |
|
|
58.9 |
% |
|
|
54.0 |
% |
|
|
|
|
|
|
|
|
Share-based compensation expense
included in selling, general and
administrative expense |
|
$ |
8.5 |
|
|
$ |
8.9 |
|
|
$ |
(0.4 |
) |
|
|
(4.5 |
)% |
The decrease in selling, general and administrative expenses during the 2009 six months from
the 2008 six months was attributable to approximately $3.0 million of decreased professional and
consulting expenses and a net reduction of $3.4 million of other selling, general and
administrative costs incurred during the 2009 six months, partially offset by $3.4 million of
increased personnel costs, primarily related to an increase in the number of employees from 503 as
of June 30, 2008, to 607 as of June 30, 2009, and the effect of the annual salary increase that
occurred during February 2009, and $1.2 million of increased promotion expenses, primarily due to
the launch of DYSPORTTM during the second quarter of 2009. Professional and consulting
expenses incurred during the 2008 six months included costs related to the implementation of our
new enterprise resource planning (ERP) system. The
38
increase of selling, general and administrative expenses as a percentage of net revenues
during the 2009 six months as compared to the 2008 six months was primarily due to the $25.3
million decrease in net revenues.
Research and Development Expenses
The following table sets forth our research and development expenses for the 2009 six months
and 2008 six months (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Six |
|
2008 Six |
|
|
|
|
|
|
Months |
|
Months |
|
$ Change |
|
% Change |
|
Research and development |
|
$ |
25.3 |
|
|
$ |
42.2 |
|
|
$ |
(16.9 |
) |
|
|
(40.0 |
)% |
Charges included in
research
and development |
|
$ |
8.0 |
|
|
$ |
25.0 |
|
|
$ |
(17.0 |
) |
|
|
(68.0 |
)% |
Share-based compensation
expense included in
research and development |
|
$ |
0.4 |
|
|
$ |
0.1 |
|
|
$ |
0.3 |
|
|
|
300.0 |
% |
Included in research and development expenses for the 2009 six months was a $3.0 million
payment to Perrigo related to a product development agreement and a $5.0 million payment to IMPAX
upon the achievement of a clinical milestone. Included in research and development expenses for
the 2008 six months was a $25.0 million milestone payment to Ipsen, upon the FDAs acceptance of
Ipsens BLA for DYSPORTTM, which was formerly known as RELOXIN® during
clinical development. We expect research and development expenses to continue to fluctuate from
quarter to quarter based on the timing of the achievement of development milestones under license
and development agreements, as well as the timing of other development projects and the funds
available to support these projects.
Depreciation and Amortization Expenses
Depreciation and amortization expenses during the 2009 six months increased $1.6 million, or
11.7%, to $15.1 million from $13.5 million during the 2008 six months. This increase was primarily
due to initial amortization of the $75.0 million milestone payment made to Ipsen during the second
quarter of 2009 upon the FDAs approval of DYSPORTTM, which was capitalized as an
intangible asset, and depreciation incurred related to our new headquarters facility.
Other Expense, net
Other expense, net, of $0.6 million recognized during the 2009 six months primarily
represented a $2.9 million reduction in the carrying value of our investment in Revance as a result
of a reduction in the estimated net realizable value of the investment using the hypothetical
liquidation at book value approach as of March 31, 2009, partially offset by a $2.2 million gain on
the sale of Medicis Pediatrics to BioMarin, which closed during June 2009. Other expense, net, of
$2.9 million recognized during the 2008 six months represented a reduction in the carrying value of
our investment in Revance as a result of a reduction in the estimated net realizable value of the
investment using the hypothetical liquidation at book value approach as of March 31, 2008.
Interest and Investment Income
Interest and investment income during the 2009 six months decreased $12.0 million, or 72.1%,
to $4.6 million from $16.6 million during the 2008 six months, due to an decrease in the funds
available for investment due to the repurchase of $283.7 million of our New Notes in June 2008 and
our $150.0 million acquisition of LipoSonix in July 2008, and a decrease in the interest rates
achieved by our invested funds during the 2009 six months.
Interest Expense
Interest expense during the 2009 six months decreased $2.4 million, to $2.1 million during the
2009 six months from $4.6 million during the 2008 six months. Our interest expense during the 2009
six months and 2008 six months consisted of interest expense on our Old Notes, which accrue
interest at 2.5% per annum, our New Notes, which accrue interest at 1.5% per annum, and
amortization of fees and other origination costs related to the issuance of the New Notes. The
decrease in interest expense during the 2009 six months as compared to the 2008 six months was
primarily due to
39
the repurchase of $283.7 million of our New Notes in June 2008, and the fees and origination
costs related to the issuance of the New Notes becoming fully amortized during the second quarter
of 2008. See Note 12 in our accompanying condensed consolidated financial statements for further
discussion on the Old Notes and New Notes.
Income Tax Expense
Our effective tax rate for the 2009 six months was 58.0%, as compared to 39.7% for the 2008
six months. The effective tax rate for the 2009 six months reflects a $1.4 million discrete tax
benefit recognized due to statute closures and a $9.0 million discrete tax expense due to the
taxable gain on the sale of Medicis Pediatrics. Excluding this discrete tax benefit and this
discrete tax expense (and the associated accounting gain of $2.2 million), the effective tax rate
for the 2009 six months was 40.5%. The 40.5% reflects managements estimate of the effective tax
rate expected to be applicable for the full year.
40
Liquidity and Capital Resources
Overview
The following table highlights selected cash flow components for the 2009 six months and 2008
six months, and selected balance sheet components as of June 30, 2009 and December 31, 2008 (dollar
amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Six |
|
2008 Six |
|
|
|
|
|
|
Months |
|
Months |
|
$ Change |
|
% Change |
|
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
51.0 |
|
|
$ |
48.4 |
|
|
$ |
2.6 |
|
|
|
5.4 |
% |
Investing activities |
|
|
(5.8 |
) |
|
|
343.3 |
|
|
|
(349.1 |
) |
|
|
(101.7 |
)% |
Financing activities |
|
|
2.3 |
|
|
|
(284.0 |
) |
|
|
286.3 |
|
|
|
(100.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jun. 30, 2009 |
|
Dec. 31, 2008 |
|
$ Change |
|
% Change |
|
Cash, cash equivalents,
and short-term investments |
|
$ |
405.4 |
|
|
$ |
343.9 |
|
|
$ |
61.5 |
|
|
|
17.9 |
% |
Working capital |
|
|
358.6 |
|
|
|
307.6 |
|
|
|
51.0 |
|
|
|
16.6 |
% |
Long-term investments |
|
|
36.9 |
|
|
|
55.3 |
|
|
|
(18.4 |
) |
|
|
(33.3 |
)% |
2.5% contingent convertible
senior notes due 2032 |
|
|
169.2 |
|
|
|
169.2 |
|
|
|
|
|
|
|
|
% |
1.5% contingent convertible
senior notes due 2033 |
|
|
0.2 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
% |
Working Capital
Working capital as of June 30, 2009 and December 31, 2008, consisted of the following (dollar
amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jun. 30, 2009 |
|
Dec. 31, 2008 |
|
$ Change |
|
% Change |
|
Cash, cash
equivalents, and short-term investments |
|
$ |
405.4 |
|
|
$ |
343.9 |
|
|
$ |
61.5 |
|
|
|
17.9 |
% |
Accounts receivable, net |
|
|
97.4 |
|
|
|
52.6 |
|
|
|
44.8 |
|
|
|
85.2 |
% |
Inventories, net |
|
|
24.5 |
|
|
|
24.2 |
|
|
|
0.3 |
|
|
|
1.2 |
% |
Deferred tax assets, net |
|
|
62.4 |
|
|
|
53.2 |
|
|
|
9.2 |
|
|
|
17.3 |
% |
Other current assets |
|
|
20.7 |
|
|
|
19.6 |
|
|
|
1.1 |
|
|
|
5.6 |
% |
|
|
|
Total current assets |
|
|
610.4 |
|
|
|
493.5 |
|
|
|
116.9 |
|
|
|
23.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
44.8 |
|
|
|
39.0 |
|
|
|
5.8 |
|
|
|
14.9 |
% |
Reserve for sales returns |
|
|
57.7 |
|
|
|
59.6 |
|
|
|
(1.9 |
) |
|
|
(3.2 |
)% |
Income taxes payable |
|
|
19.4 |
|
|
|
|
|
|
|
19.4 |
|
|
|
100.0 |
% |
Other current liabilities |
|
|
129.9 |
|
|
|
87.3 |
|
|
|
42.6 |
|
|
|
48.8 |
% |
|
|
|
Total current liabilities |
|
|
251.8 |
|
|
|
185.9 |
|
|
|
65.9 |
|
|
|
35.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
358.6 |
|
|
$ |
307.6 |
|
|
$ |
51.0 |
|
|
|
16.6 |
% |
|
|
|
|
|
|
|
We had cash, cash equivalents and short-term investments of $405.4 million and working capital
of $358.6 million at June 30, 2009, as compared to $343.9 million and $307.6 million, respectively,
at December 31, 2008. The increases were primarily due to the generation of $51.0 million of
operating cash flow during the 2009 six months.
41
Management believes existing cash and short-term investments, together with funds generated
from operations, should be sufficient to meet operating requirements for the foreseeable future.
Our cash and short-term investments are available for dividends, milestone payments related to our
product development collaborations, strategic investments, acquisitions of companies or products
complementary to our business, the repayment of outstanding indebtedness, repurchases of our
outstanding securities and other potential large-scale needs. In addition, we may consider
incurring additional indebtedness and issuing additional debt or equity securities in the future to
fund potential acquisitions or investments, to refinance existing debt or for general corporate
purposes. If a material acquisition or investment is completed, our operating results and
financial condition could change materially in future periods. However, no assurance can be given
that additional funds will be available on satisfactory terms, or at all, to fund such activities.
On July 1, 2008, we acquired LipoSonix, an independent, privately-held company that employs a
staff of approximately 40 scientists, engineers and clinicians located near Seattle, Washington.
LipoSonix is a medical device company developing non-invasive body sculpting technology, and its
first product is being marketed and sold through distributors in Europe. The LipoSonix technology
is currently not approved for sale or use in the United States. Under terms of the transaction, we
paid $150 million in cash for all of the outstanding shares of LipoSonix. In addition, we will pay
LipoSonix stockholders certain milestone payments up to an additional $150 million upon FDA
approval of the LipoSonix technology and if various commercial milestones are achieved on a
worldwide basis.
As of December 31, 2008, our short-term investments included $38.2 million of auction rate
floating securities. Our auction rate floating securities are debt instruments with a long-term
maturity and with an interest rate that is reset in short intervals through auctions. During the
three months ended March 31, 2008, we were informed that there was insufficient demand at auction
for the auction rate floating securities, and since that time we have been unable to liquidate our
holdings in such securities. As a result, these affected auction rate floating securities are now
considered illiquid, and we could be required to hold them until they are redeemed by the holder at
maturity or until a future auction on these investments is successful. As a result of the
continued lack of liquidity of these investments, we recorded an other-than-temporary impairment
loss of $6.4 million during the fourth quarter of 2008 on our auction rate floating securities,
based on our estimate of the fair value of these investments. On April 9, 2009, the FASB released
FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP
FAS 115-2), effective for interim and annual reporting periods ending after June 15, 2009. Upon
adoption, FSP FAS 115-2 requires that entities should report a cumulative effect adjustment as of
the beginning of the period of adoption to reclassify the non-credit component of previously
recognized other-than-temporary impairments on debt securities held at that date from retained
earnings to other comprehensive income if the entity does not intend to sell the security and it is
not more likely than not that the entity will be required to sell the security before recovery of
its amortized cost basis. We adopted FSP FAS 115-2 during the three months ended June 30, 2009,
and accordingly, we reclassified $3.1 million of previously recognized other-than-temporary
impairment losses, net of income taxes, related to our auction rate floating securities from
retained earnings to other comprehensive income in our condensed consolidated balance sheets during
the three months ended June 30, 2009.
42
Operating Activities
Net cash provided by operating activities during the 2009 six months was approximately $51.0
million, compared to cash provided by operating activities of approximately $48.4 million during
the 2008 six months. The following is a summary of the primary components of cash provided by
operating activities during the 2009 six months and 2008 six months (in millions):
|
|
|
|
|
|
|
|
|
|
|
2009 Six |
|
2008 Six |
|
|
Months |
|
Months |
Payment made to IMPAX related to development agreement |
|
$ |
(5.0 |
) |
|
$ |
|
|
Payment made to Perrigo related to development agreement |
|
|
(3.0 |
) |
|
|
|
|
Payment made to Ipsen related to development of
DYSPORTTM |
|
|
|
|
|
|
(25.0 |
) |
Income taxes paid |
|
|
(3.6 |
) |
|
|
(30.2 |
) |
Other cash provided by operating activities |
|
|
62.6 |
|
|
|
103.6 |
|
|
|
|
Cash provided by operating activities |
|
$ |
51.0 |
|
|
$ |
48.4 |
|
|
|
|
Other cash flows provided by operating activities decreased from $103.6 million during the
2008 six months to $62.6 million during the 2009 six months, primarily due to the timing of sales
during the respective periods. The change in accounts receivable during the 2008 six months was a
use of operating cash of $10.5 million, as compared to a use of operating cash of $45.9 million
during the 2009 six months.
Investing Activities
Net cash used in investing activities during the 2009 six months was approximately $5.8
million, compared to net cash provided by investing activities during the 2008 six months of $343.3
million. The change was primarily due to the net purchases and sales of our short-term and
long-term investments during the respective quarters. During the 2009 six months, we paid $75.0
million to Ipsen upon the FDAs approval of DYSPORTTM, and we received $70.3 million
upon the sale of Medicis Pediatrics to BioMarin, which closed in June 2009.
Financing Activities
Net cash provided by financing activities during the 2009 six months was $2.3 million,
compared to net cash used in financing activities of $284.0 million during the 2008 six months.
Cash used during the 2008 six months included the repurchase of $283.7 million of New Notes during
June 2008. Proceeds from the exercise of stock options were $6.8 million during the 2009 six
months compared to $3.5 million during the 2008 six months. Dividends paid during the 2009 six
months were $4.7 million, and dividends paid during the 2008 six months were $4.0 million.
Contingent Convertible Senior Notes and Other Long-Term Commitments
We have two outstanding series of Contingent Convertible Senior Notes, consisting of $169.2
million principal amount of 2.5% Contingent Convertible Senior Notes due 2032 (the Old Notes) and
$0.2 million principal amount of 1.5% Contingent Convertible Senior Notes due 2033 (the New
Notes). The New Notes and the Old Notes are unsecured and do not contain any restrictions on the
incurrence of additional indebtedness or the repurchase of our securities, and do not contain any
financial covenants. The Old Notes do not contain any restrictions on the payment of dividends.
The New Notes require an adjustment to the conversion price if the cumulative aggregate of all
current and prior dividend increases above $0.025 per share would result in at least a one percent
(1%) increase in the conversion price. This threshold has not been reached and no adjustment to
the conversion price has been made. On June 4, 2012 and 2017, or upon the occurrence of a change
in control, holders of the Old Notes may require us to offer to repurchase their Old Notes for
cash. On June 4, 2013 and 2018, or upon the occurrence of a change in control, holders of the New
Notes may require us to offer to repurchase their New Notes for cash.
Except for the New Notes and Old Notes, we had only $11.9 million of long-term liabilities at
June 30, 2009, and we had $251.8 million of current liabilities at June 30, 2009. Our other
commitments and planned
43
expenditures consist principally of payments we will make in connection with strategic
collaborations and research and development expenditures, and we will continue to invest in sales
and marketing infrastructure.
In connection with occupancy of the new headquarter office during 2008, we ceased use of the
prior headquarter office, which consists of approximately 75,000 square feet of office space, at an
average annual expense of approximately $2.1 million, under an amended lease agreement that expires
in December 2010. Under SFAS 146, a liability for the costs associated with an exit or disposal
activity is recognized when the liability is incurred. In accordance with SFAS 146, we recorded
lease exit costs of approximately $4.8 million during the three months ended September 30, 2008
consisting of the initial liability of $4.7 million and accretion expense of $0.1 million. These
amounts were recorded as selling, general and administrative expenses in our condensed consolidated
statements of operations. We have not recorded any other costs related to the lease for the prior
headquarters.
As of June 30, 2009, approximately $3.1 million of lease exit costs remain accrued and are
expected to be paid by December 2010 of which $2.0 million is classified in other current
liabilities and $1.1 million is classified in other liabilities. Although we no longer use the
facilities, the lease exit cost accrual has not been offset by an adjustment for estimated sublease
rentals. After considering sublease market information as well as factors specific to the lease,
we concluded it was probable we would be unable to reasonably obtain sublease rentals for the prior
headquarters and therefore we would not be subleased for the remaining lease term. We will
continue to monitor the sublease market conditions and reassess the impact on the lease exit cost
accrual.
The following is a summary of the activity in the liability for lease exit costs for the six
months ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability as of |
|
Amounts Charged |
|
Cash Payments |
|
Cash Received |
|
Liability as of |
|
|
December 31, 2008 |
|
to Expense |
|
Made |
|
from Sublease |
|
June 30, 2009 |
Lease exit costs
liability |
|
$ |
3,996,102 |
|
|
$ |
123,011 |
|
|
$ |
(1,069,056 |
) |
|
$ |
|
|
|
$ |
3,050,057 |
|
Dividends
We do not have a dividend policy. Since July 2003, we have paid quarterly cash dividends
aggregating approximately $41.8 million on our common stock. In addition, on June 10, 2009, we
declared a cash dividend of $0.04 per issued and outstanding share of common stock payable on July
31, 2009, to our stockholders of record at the close of business on July 1, 2009. Prior to these
dividends, we had not paid a cash dividend on our common stock. Any future determinations to pay
cash dividends will be at the discretion of our Board of Directors and will be dependent upon our
financial condition, operating results, capital requirements and other factors that our Board of
Directors deems relevant.
Fair Value Measurements
We utilize unobservable (Level 3) inputs in determining the fair value of our auction rate
floating security investments, which totaled $36.9 million at June 30, 2009. These securities were
included in long-term investments at June 30, 2009. We also utilize unobservable (Level 3) inputs
to value our investments in Revance and Hyperion. Our investment in Revance was $0 at March 31,
2009 and June 30, 2009.
Our auction rate floating securities are classified as available for sale securities and are
reflected at fair value. In prior periods, due to the auction process which took place every 30-35
days for most securities, quoted market prices were readily available, which would qualify as Level
1 under SFAS No 157. However, due to events in credit markets during the first quarter of 2008,
the auction events for most of these instruments failed, and, therefore, we determined the
estimated fair values of these securities utilizing a discounted cash flow analysis as of March 31,
2009. These analyses consider, among other items, the collateralization underlying the security
investments, the expected future cash flows, including the final maturity, associated with the
securities, and the expectation of the next time the security is expected to have a successful
auction. These securities were also compared, when possible, to other observable market data with
similar characteristics to the securities held by us. Due to these events, we reclassified these
instruments as Level 3 during the first quarter of 2008, and we recorded an other-than-temporary
impairment loss of $6.4 million during the fourth quarter of 2008 on our auction rate floating
securities, based on our estimate of the fair value of these investments. Our estimate of fair
value of our
44
auction-rate floating securities was based on market information and estimates determined by
our management, which could change in the future based on market conditions. In accordance with
FSP FAS 115-2, during the three months ended June 30, 2009, we reclassified $3.1 million of
previously recognized other-than-temporary impairment losses, net of income taxes, related to our
auction rate floating securities from retained earnings to other comprehensive income in our
condensed consolidated balance sheets during the three months ended June 30, 2009.
In November 2008, we entered into a settlement agreement with the broker through which we
purchased auction rate floating securities. The settlement agreement provides us with the right to
put an auction rate floating security currently held by us back to the broker beginning on June 30,
2010. At March 31, 2009 and December 31, 2008, we held one auction rate floating security with a
par value of $1.3 million that was subject to the settlement agreement. We elected the irrevocable
Fair Value Option treatment under SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, and adjusted the put option to fair value. We reclassified this auction
rate floating security from available-for-sale to trading securities as of December 31, 2008, and
future changes in fair value related to this investment and the related put right will be recorded
in earnings.
Off-Balance Sheet Arrangements
As of June 30, 2009, we are not involved in any off-balance sheet arrangements, as defined in
Item 3(a)(4)(ii) of Securities and Exchange Commission (SEC) Regulation S-K.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based
upon our condensed consolidated financial statements, which have been prepared in conformity with
U.S. generally accepted accounting principles. The preparation of the condensed consolidated
financial statements requires us to make estimates and assumptions that affect the amounts reported
in the condensed consolidated financial statements and accompanying notes. On an ongoing basis, we
evaluate our estimates related to sales allowances, chargebacks, rebates, returns and other pricing
adjustments, depreciation and amortization and other contingencies and litigation. We base our
estimates on historical experience and various other factors related to each circumstance. Actual
results could differ from those estimates based upon future events, which could include, among
other risks, changes in the regulations governing the manner in which we sell our products, changes
in the health care environment and managed care consumption patterns. Our significant accounting
policies are described in Note 2 to the consolidated financial statements included in our Form 10-K
for the year ended December 31, 2008. There were no new significant accounting estimates in the
second quarter of 2009, nor were there any material changes to the critical accounting policies and
estimates discussed in our Form 10-K for the year ended December 31, 2008, other than beginning in
the second quarter of 2009, we began recognizing revenue on our aesthetics products, including
DYSPORTTM, PERLANE® and RESTYLANE®, upon the shipment from our
exclusive distributor to physicians.
Recent Accounting Pronouncements
In April 2009, the FASB issued FSP FAS No. 157-4, Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly, which provides additional guidance for estimating fair value in
accordance with SFAS No. 157, Fair Value Measurements, when the volume and level of activity for
the asset or liability have significantly decreased. This FSP also includes guidance on
identifying circumstances that indicate a transaction is not orderly and applies to all assets and
liabilities within the scope of accounting pronouncements that require or permit fair value
measurements, except in paragraphs 2 and 3 of SFAS No. 157. FSP FAS No. 157-4 is effective for
interim and annual reporting periods ending after June 15, 2009. We adopted FSP FAS No. 157-4 on
April 1, 2009, and it did not have a material impact on our consolidated results of operations and
financial condition.
In April 2009, the FASB issued FSP FAS No. 107-1 and APB No. 28-1, Interim Disclosures about
Fair Value of Financial Instruments, which amends the disclosure requirements of SFAS No. 107 and
APB No. 28 and requires disclosure about the fair value of its financial instruments whenever it
issues summarized financial information for interim reporting periods. FSP FAS No. 107-1 and APB
Opinion No. 28-1 are effective for financial statements issued for interim reporting periods ending
after June 15, 2009. We adopted FSP FAS No. 107-1 and APB Opinion No. 28-1 on April 1, 2009, and
it did not have a material impact on our consolidated results of operations and financial
condition.
45
In June 2009, the FASB issued SFAS No. 167, New Consolidation Guidance for Variable Interest
Entities (VIE), which amends FIN 46 (R), Consolidation of Variable Interest Entities, to address
the elimination of the concept of a qualifying special purpose entity. SFAS No. 167 also replaces
the quantitative-based risks and rewards calculation for determining which enterprise has a
controlling financial interest in a variable interest entity with an approach focused on
identifying which enterprise has the power to direct the activities of variable interest entity,
and the obligation to absorb losses of the entity or the right to receive benefits from the entity.
Additionally, SFAS No. 167 requires any enterprise that holds a variable interest in a variable
interest entity to provide enhanced disclosures that will provide users of financial statements
with more transparent information about an enterprises involvement in a variable interest entity.
SFAS No. 167 is effective for annual reporting periods beginning after November 30, 2009. We are
currently assessing what impact, if any, that SFAS No. 167 will have on our results of operations
and financial condition.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement No. 162.
SFAS No. 168 establishes the FASB Standards Accounting Codification (Codification) as the source
of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to
be applied to nongovernmental entities, and rules and interpretive releases of the SEC as
authoritative GAAP for SEC registrants. The Codification will supersede all the existing non-SEC
accounting and reporting standards upon its effective date and subsequently, the FASB will not
issue new standards in the form of Statements, FSPs or EITF Abstracts. SFAS No. 168 also replaces
FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles but is not
intended to change or alter existing U.S. GAAP. The Codification will change the references of
financial standards within our financial statements. Beginning in the third quarter of 2009, all
references made to U.S. GAAP will use the new Codification numbering system prescribed by the FASB.
SFAS No. 168 will not have any impact on our results of operations and financial condition.
Forward Looking Statements
This Quarterly Report on Form 10-Q and other documents we file with the SEC include
forward-looking statements. These include statements relating to future actions, prospective
products or product approvals, future performance or results of current and anticipated products,
sales and marketing efforts, expenses, the outcome of contingencies, such as legal proceedings, and
financial results. From time to time, we also may make forward-looking statements in press
releases or written statements, or in our communications and discussions with investors and
analysts in the normal course of business through meetings, webcasts, phone calls and conference
calls. All statements other than statements of historical fact are, or may be deemed to be,
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act).
These statements are based on certain assumptions made by us based on our experience and perception
of historical trends, current conditions, expected future developments and other factors we believe
are appropriate in the circumstances. We caution you that actual outcomes and results may differ
materially from what is expressed, implied or forecast by our forward-looking statements. Such
statements are subject to a number of assumptions, risks and uncertainties, many of which are
beyond our control. You can identify these statements by the fact that they do not relate strictly
to historical or current facts. They use words such as anticipate, estimate, expect,
project, intend, plan, believe, will, should, outlook, could, target, and other
words and terms of similar meaning in connection with any discussion of future operations or
financial performance. Among the factors that could cause actual results to differ materially from
our forward-looking statements are the following:
|
|
competitive developments affecting our products, such as the recent FDA approvals of
Evolence®, Prevelle® Silk, Radiesse®, Sculptra®,
Hydrelle, Juvéderm Ultra and Juvéderm Ultra Plus,
competitors to RESTYLANE® and PERLANE®, a generic form of our
DYNACIN® Tablets product, generic forms of our LOPROX® TS and
LOPROX® Cream and LOPROX® Gel products, and potential generic forms of
our LOPROX® Shampoo, TRIAZ®, PLEXION®, SOLODYN® or
VANOS® products; |
|
|
|
increases or decreases in the expected costs to be incurred in connection with the research
and development, clinical trials, regulatory approvals, commercialization and marketing of our
products; |
|
|
|
the success of research and development activities, including the development of additional
forms of SOLODYN®, and our ability to obtain regulatory approvals; |
|
|
|
the speed with which regulatory authorizations and product launches may be achieved; |
|
|
|
changes in the FDAs position on the safety or effectiveness of our products;
|
46
|
|
changes in our product mix; |
|
|
|
the anticipated size of the markets and demand for our products; |
|
|
|
changes in prescription levels; |
|
|
|
the impact of acquisitions, divestitures and other significant corporate transactions,
including our acquisition of LipoSonix; |
|
|
|
the effect of economic changes generally and in hurricane-effected areas; |
|
|
|
manufacturing or supply interruptions; |
|
|
|
importation of other dermal filler or botulinum toxin products, including the unauthorized
distribution of products approved in countries neighboring the U.S.; |
|
|
|
changes in the prescribing or procedural practices of dermatologists, podiatrists and/or
plastic surgeons, including prescription levels; |
|
|
|
the ability to successfully market both new products, including DYSPORTTM, and
existing products; |
|
|
|
difficulties or delays in manufacturing and packaging of our products, including
delays and quality control lapses of third party manufacturers and suppliers of our
products; |
|
|
|
the availability of product supply or changes in the cost of raw materials; |
|
|
|
the ability to compete against generic and other branded products; |
|
|
|
trends toward managed care and health care cost containment; |
|
|
|
inadequate protection of our intellectual property or challenges to the validity or
enforceability of our proprietary rights and our ability to secure patent protection from
filed patent applications for our primary products, including SOLODYN®; |
|
|
|
possible introduction of generic versions of our products, including SOLODYN®; |
|
|
|
possible federal and/or state legislation or regulatory action affecting, among other
things, pharmaceutical pricing and reimbursement, including Medicaid and Medicare and
involuntary approval of prescription medicines for over-the-counter use; |
|
|
|
legal defense costs, insurance expenses, settlement costs and the risk of an adverse
decision or settlement related to product liability, patent protection, government
investigations, and other legal proceedings (see Part II, Item 1, Legal Proceedings); |
|
|
|
changes in U.S. generally accepted accounting principles; |
|
|
|
additional costs related to compliance with changing regulation of corporate
governance and public financial disclosure; |
|
|
|
any changes in business, political and economic conditions due to the threat of future
terrorist activity in the U.S. and other parts of the world; |
|
|
|
access to available and feasible financing on a timely basis; |
|
|
|
the availability of product acquisition or in-licensing opportunities; |
|
|
|
the risks and uncertainties normally incident to the pharmaceutical and medical device
industries, including product liability claims; |
|
|
|
the risks and uncertainties associated with obtaining necessary FDA approvals; |
|
|
|
the inability to obtain required regulatory approvals for any of our pipeline products; |
|
|
|
unexpected costs and expenses, or our ability to limit costs and expenses as our business
continues to grow; |
|
|
|
downturns in general economic conditions that negatively affect our dermal restorative and
branded prescription products, and our ability to accurately forecast our financial
performance as a result; |
|
|
|
failure to comply with our corporate integrity agreement, which could result in substantial
civil or criminal penalties and our being excluded from government health care programs, which
could materially reduce our sales and adversely affect our financial condition and results of
operations; and |
|
|
|
the inability to successfully integrate newly-acquired entities, such as LipoSonix. |
We undertake no obligation to publicly update forward-looking statements, whether as a result
of new information, future events or otherwise. You are advised, however, to review any future
disclosures contained in the reports that we file with the SEC. Our Annual Report on Form 10-K for
the year ended December 31, 2008, and this Quarterly Report contain discussions of various risks
relating to our business that could cause actual results to differ materially from expected and
historical results, which you should review. You should understand that it is not possible to
predict or identify all such risks. Consequently, you should not consider any such list or
discussion to be a complete set of all potential risks or uncertainties.
47
|
|
|
Item 3. |
|
Quantitative and Qualitative Disclosures About Market Risk |
As of June 30, 2009, there were no material changes to the information previously reported
under Item 7A in our Annual Report on Form 10-K for the year ended December 31, 2008.
|
|
|
Item 4. |
|
Controls and Procedures |
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of
the Exchange Act) that are designed to ensure that information required to be disclosed in reports
filed by us under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms and that such information is accumulated and
communicated to management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow for timely decisions regarding required disclosure. Our Chief Executive
Officer and Chief Financial Officer, with the participation of other members of management,
evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2009, and have
concluded that, as of such date, our disclosure controls and procedures were effective to ensure
that the information we are required to disclose in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the SECs rules and forms.
Although the management of the Company, including the Chief Executive Officer and the Chief
Financial Officer, believes that our disclosure controls and internal controls currently provide
reasonable assurance that our desired control objectives have been met, management does not expect
that our disclosure controls or internal controls will prevent all errors and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all control issues and instances of
fraud, if any, within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the controls. The design
of any system of controls is also based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions.
During the three months ended June 30, 2009, there was no change in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
48
Part II. Other Information
|
|
|
Item 1. |
|
Legal Proceedings |
The information set forth under Note 17 in our accompanying condensed consolidated financial
statements, included in Part I, Item I of this Report, is incorporated herein by reference.
We operate in a rapidly changing environment that involves a number of risks. The following
discussion highlights some of these risks and others are discussed elsewhere in this report. These
and other risks could materially and adversely affect our business, financial condition, prospects,
operating results or cash flows. For a detailed discussion of the risk factors that should be
understood by any investor contemplating investment in our stock, please refer to Part I, Item 1A
Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
Other than the additional risk set forth below, there are no material changes from the risk
factors previously disclosed in Part I, Item 1A Risk Factors in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2008.
A third party has requested that the U.S. Patent and Trademark Office (USPTO) conduct an Ex
Parte Reexamination of the 838 patent. The USPTO granted this request. In March 2009, the USPTO
issued a non-final office action in the reexamination of the 838 patent. On May 13, 2009, we
filed our response to the non-final office action with the USPTO. Reexamination can result in
confirmation of the validity of all of a patents claims, the invalidation of all of a patents
claims, or the confirmation of some claims and the invalidation of others. We cannot guarantee the
outcome of the reexamination.
49
|
|
|
Item 4. |
|
Submission of Matters to a Vote of Security Holders |
On May 19, 2009, the Company held its 2009 Annual Meeting of Stockholders (the Annual
Meeting). The holders of 54,832,389 shares of Class A Common Stock were present in person or
represented by proxy at the meeting. The following is a summary of the results of the voting by
the Companys stockholders at the Annual Meeting:
The stockholders elected the following persons to serve as directors of the Company for a term
of three years, or until their successors are duly elected and qualified or until their earlier
resignation or removal. Votes were cast as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Votes |
|
|
|
|
For |
|
Against |
|
Abstain |
Arthur G. Altschul, Jr. |
|
|
38,697,220 |
|
|
|
16,108,759 |
|
|
|
26,410 |
|
Philip S. Schein, M.D. |
|
|
48,855,712 |
|
|
|
5,953,252 |
|
|
|
23,425 |
|
The directors of the Company whose terms of office continued were Mr. Jonah Shacknai, Mr.
Spencer Davidson, Mr. Stuart Diamond, Mr. Peter S. Knight, Esq., Mr. Michael Pietrangelo and Ms.
Lottie Shackelford.
2) |
|
The stockholders approved an amendment to the Medicis 2006 Incentive Award Plan, increasing
the number of shares of common stock reserved for issuance under the plan by 2,000,000 shares.
Votes were cast as follows: |
|
|
|
|
|
|
|
For |
|
Against |
|
Abstain |
|
Broker Non-Vote |
25,311,288
|
|
21,489,553
|
|
25,758
|
|
8,005,790 |
3) |
|
The stockholders approved the appointment of Ernst & Young LLP as independent auditors for
the fiscal year ending December 31, 2009. Votes were cast as follows: |
|
|
|
|
|
For |
|
Against |
|
Abstain |
53,899,703
|
|
917,151
|
|
15,535 |
50
|
|
|
Exhibit 10.1+*
|
|
Second Amendment to the
Collaboration Agreement between Ucyclyd
Pharma, Inc. and Hyperion Therapeutics,
Inc. |
|
|
|
Exhibit 10.2**
|
|
License and Settlement
Agreement, dated April 8, 2009 between
the Company, Perrigo Israel
Pharmaceuticals Ltd. and Perrigo
Company.(1) |
|
|
|
Exhibit 10.3**
|
|
Joint Development
Agreement, dated April 8, 2009 between
the Company and Perrigo Israel
Pharmaceuticals Ltd. (2) |
|
|
|
Exhibit 31.1+
|
|
Certification by the Chief
Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
Exhibit 31.2+
|
|
Certification by the Chief
Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
Exhibit 32.1+
|
|
Certification by the Chief
Executive Officer and the Chief
Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002 |
|
|
|
+ |
|
Filed herewith |
|
* |
|
Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. |
|
** |
|
Confidential treatment has previously been granted by the SEC for certain portions of the
referenced exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. |
|
(1) |
|
Incorporated by reference to Exhibit 10.3 of the Companys Quarterly Report on Form 10-Q for
the quarter ended March 31, 2009 previously filed with the SEC. |
|
(2) |
|
Incorporated by reference to Exhibit 10.4 of the Companys Quarterly Report on Form 10-Q for
the quarter ended March 31, 2009 previously filed with the SEC. |
51
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
MEDICIS PHARMACEUTICAL CORPORATION
|
|
Date: August 10, 2009 |
By: |
/s/ Jonah Shacknai
|
|
|
|
Jonah Shacknai |
|
|
|
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
Date: August 10, 2009 |
By: |
/s/ Richard D. Peterson
|
|
|
|
Richard D. Peterson |
|
|
|
Executive Vice President
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer) |
|
52